A pension is a defined benefit retirement plan where an employer promises to pay a specified monthly benefit upon retirement, typically based on salary history and years of service. Unlike 401(k) plans where the employee bears investment risk, pension plans place the investment risk on the employer. Pensions have become less common in the private sector but remain prevalent in government and military employment.
Pension
Definition
A pension is a defined benefit retirement plan where an employer promises to pay a specified monthly benefit upon retirement, typically based on salary history and years of service. Unlike 401(k) plans where the employee bears investment risk, pension plans place the investment risk on the employer. Pensions have become less common in the private sector but remain prevalent in government and military employment.
Example
A teacher with 30 years of service and a final average salary of $70,000 under a pension formula of 2% per year of service would receive $42,000 annually (2% × 30 × $70,000) in retirement.
Key Points
- 1Employer-funded defined benefit plan
- 2Monthly payments based on salary and years of service
- 3Investment risk borne by the employer
- 4More common in government than private sector
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