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.

  1. Annual pension: 30 × 0.015 × $60,000 = $27,000.
  2. 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

Calculation methodology and review status · All glossary terms