Pension.
In plain English
A pension, more precisely a defined benefit pension, is a workplace retirement plan in which the employer promises a specific monthly payment once you retire. The amount is set by a formula, typically combining your years of service, your final or average salary, and a multiplier. The employer, not you, is responsible for funding and investing the money to keep that promise. Pensions were once common in private industry but are now mostly found in government and union jobs. Many come with options to take a one-time lump sum instead of the lifetime monthly checks.
01Why it matters
A pension is one of the few sources of guaranteed lifetime income besides Social Security, so if you have one, understanding its formula and your payout options can be worth tens of thousands of dollars over retirement.
02The math, step by step
A common formula multiplies years of service by a percentage by your final average salary. With 30 years of service, a 1.5 percent multiplier, and a $70,000 final average salary, the yearly pension is 30 times 0.015 times $70,000, which equals $31,500 a year, or $2,625 a month for life.
03What this is NOT
It is not a 401(k). A pension promises a defined monthly payout the employer must fund. A 401(k) is a defined contribution account where you and your employer add money, you choose investments, and the final balance, not a fixed payment, is what you live on.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice