Retirement
Defined-benefit pension: Definition, Formula and Example
A defined-benefit pension promises a retirement benefit determined by a plan formula, rather than merely the value of an individual investment account.
Scope: General pension concept; plan terminology and the cited regulatory context are U.S.-based.
Other names and related labels: Traditional pension; Formula-based retirement benefit.
How it works
A formula may use credited service, eligible salary and an accrual percentage. Retirement age, vesting, survivor coverage, payment form and cost-of-living provisions can change the payable benefit. A stated pension amount is not the same thing as a cash account available for withdrawal.
Illustrative annual pension = credited years × benefit accrual rate × eligible average annual salary
This is one possible formula, not a universal pension rule. Apply the actual plan’s definitions and reductions.
30 years of service with a 1.5% accrual rate
Assume eligible average salary is $60,000.
- Annual pension: 30 × 0.015 × $60,000 = $27,000.
- Monthly amount: $27,000 / 12 = $2,250.
The hypothetical formula produces $27,000 a year, or $2,250 a month.
No early-retirement reduction, survivor reduction, inflation increase or tax; fully vested.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
A lump sum and lifetime income need more than a face-value comparison
Present value depends on timing, discount rate and longevity. Survivor protection and inflation terms also matter. A simple discounted-value calculator does not independently verify the plan’s funding, guarantees or your benefit entitlement.
Explore with a calculator
- Pension Calculator
Compare entered lump-sum and pension-income options, not employer eligibility rules.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms