Defined Benefit Pension Plan

Defined Benefit Pension Plan

(DB Plan)

Defined Benefit Pension Plans usually have three basic factors in their calculations:

multiplier (employer chooses the factor or unions may negotiate it)

years of service (how long were you employed a member of the retirement plan)

earnings average (usually a final average of 3-5 years of service)

For Example: If your company offers a 2% multiplier, and you retire after 15 years of service at age 65.

The pension calculation is:

.02 multipier
X 15 years
X $30,000 earnings
--------------
$9,000 annually or $750 monthly

Does it sound odd to you that you are multiplying:
(1) a percentage
(2) number of years of service and
(3) earnings?

It did to me too... but that is how DB's are calculated. There are lots of varieties... your multiplier might be 1.5% or 2.2%, or your average could be your last year earnings or a 3 year average. All plans differ a bit, of course...

Either way, think about it -- whatever the multiplier is, the longer you work and the more you earn -- the higher the lifetime pension. If you work a lifetime for one employer with a DB, you'll end up with one larger pension and it's based on the final average earnings (normally your highest rate ever).

In general, you can figure out the percentage of your pension to your earnings like this - you worked 15 years at 2% per year so your pension is 30% of your average.... and yes, $9000 is 30 percent of $30,000. Again, the longer you work, the higher your percentage of earnings is...

Questions? Email me.. I want to help folks determine how to retire. I might be able to help with your pension calculation or explain your options... just ask!