Pension (Defined Benefit Plan)
A pension is a defined benefit (DB) retirement plan that pays a guaranteed monthly income for life, based on your years of service and salary history. The employer bears the investment risk, unlike a 401(k) where the employee does.
30 years × 2% × $65,000 = $39,000/year guaranteed for life.
Pensions are increasingly rare in the private sector but still common for government and military employees. The monthly benefit is typically calculated as: Years of service × Benefit multiplier × Final average salary.
A teacher with 30 years of service at a 2% multiplier and a $70,000 final salary would receive 30 × 2% × $70,000 = $42,000/year ($3,500/month), often adjusted for inflation (COLA).
Compared to a 401(k), pensions provide longevity protection — you can't outlive them — but you give up flexibility and portability. Most pensions have vesting periods of 5–10 years: if you leave before vesting, you may forfeit part or all of your benefit.
Put this into practice with our free calculator:
Open calculator →Related terms
- Vesting
- Vesting is the process by which an employee earns the right to keep employer-contributed retirement benefits over time. Before you are fully vested, leaving your job means forfeiting unvested employer contributions. Your own contributions always vest immediately.
- Social Security
- Social Security is a US federal program that provides retirement income, disability benefits, and survivors benefits. Benefits are funded by FICA payroll taxes. The amount you receive in retirement depends on your 35 highest earning years and the age you claim.
- 401(k)
- A 401(k) is a US employer-sponsored retirement savings account. Contributions are pre-tax (traditional) or post-tax (Roth), grow tax-deferred or tax-free, and benefit from compound growth over decades.
- Safe Withdrawal Rate (SWR)
- The safe withdrawal rate is the maximum percentage of a retirement portfolio you can withdraw annually without running out of money over a given time horizon. The 4% rule is the most widely cited guideline.