Compare pension options and make informed retirement decisions
Expected return on lump sum if invested
Annual increase in monthly pension (use 0 for none)
A pension plan is a retirement plan that provides monthly income after you retire. Unlike 401(k) plans where you manage investments yourself, traditional pension plans (defined benefit plans) provide a guaranteed monthly payment for life based on factors like your salary history and years of service.
Pensions are typically offered by government employers, unions, and some large corporations. They're becoming less common in the private sector, but remain an important retirement income source for millions of retirees.
Most pension formulas use a combination of three factors:
Typically the average of your highest 3-5 years of salary (e.g., $80,000)
Total years working for the employer (e.g., 30 years)
Percentage per year of service (e.g., 2%)
Formula: Final Average Salary × Years of Service × Multiplier
Example: $80,000 × 30 years × 2% = $48,000 per year ($4,000 per month)
Vesting refers to your right to receive pension benefits. Unlike 401(k) contributions (which are yours immediately), pension benefits typically require a minimum period of employment.
You become 100% vested after a certain period (e.g., 5 years). Leave before that, and you receive nothing.
You become vested gradually (e.g., 20% per year over 5 years). Partial benefits if you leave early.
Less common, but some plans vest immediately - you earn benefits from day one.
COLA provisions increase your pension payments annually to help maintain purchasing power against inflation. Not all pensions include COLA, and those that do vary widely in their adjustment formulas.
Starting pension: $3,000/month
Survivor benefits ensure your spouse continues to receive income after you die. The choice between single-life and joint-and-survivor pensions is one of the most important decisions you'll make.
Highest monthly payment, but stops completely when you die. Choose this if: your spouse has their own retirement income, you're significantly younger than your spouse, or you're single.
Reduced monthly payment, but spouse receives 50% after you die. Moderate protection at moderate cost.
Most reduced monthly payment, but spouse receives full amount after you die. Maximum protection, especially if spouse is younger or depends on your income.
Most pension plans allow you to start receiving benefits before normal retirement age (typically 65), but with a permanent reduction in monthly payments. The reduction compensates for the longer period you'll receive benefits.
Reduction is typically 3-7% per year before normal retirement age, and is permanent - it doesn't increase to 100% when you reach 65.
Most private-sector pension plans are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency. However, PBGC guarantees have limits.
As of 2024, PBGC insures up to $79,871 per year for a 65-year-old. If your employer's pension plan fails, PBGC steps in - but you may receive less than promised if your benefit exceeds the limit.
State and local government pensions aren't covered by PBGC. They're backed by the government entity itself, which can raise taxes or cut benefits if underfunded.
Check your pension plan's funding status in the annual report. Well-funded plans (90%+ funded) are more secure. Underfunded plans may face benefit cuts in the future.