How to Calculate a Retirement Pension

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Pension funds are retirement plans funded by employers as a way to offer a monthly benefit to their employees for the rest of their lives upon retirement. Pension funds fall under two basic types of plans: more traditional defined benefit plans and a newer type of pension called the cash balance plan. While these two types of pension plans share many similarities, there are slight differences involved when calculating benefit amounts depending on which retirement plan you are under.

Things You'll Need

  • Pen
  • Paper
  • Calculator
  • Pension Plan

Instructions

  1. Figure your highest average annual base salary amount. Most companies figure this using the highest set number of consecutive months of pay over the last number of months prior to retirement. An example would be the highest 60 consecutive months over 120 months before retirement. For this sample formula we are using $60,000 as a final average annual compensation amount.

  2. Write down your total years of service. For example, if you retired at age 65 and have been employed at the company since age 35, you would be credited as having 30 years of service.

  3. Note the percentage multiplier used in your pension plan formula. Companies reward years of service with a percent multiplier.This multiplier represents a percentage designated by number of years of service. This percentage would increase as the years go up. For this example the percentage multiplier for years 1-4 of service used is 1.3 %. For years 5-9 it goes up to 1.4 % and then to 1.6 % for years 10-35.

  4. Multiple your percent multiplier by your final average compensation and then multiple that number by total number of service years. For example an employee with an average compensation of $60,000 for 30 years of service and a percent multiplier of 1.3 for the first 4 years of service the pension amount would be figured as such: $60,000 x .013 = $780 x 4 = $3,120. For years 5 - 9: $60,000 x .014(higher multiplier) = $840 x 4 = $3,360. For years 10 - 30: $60,000 x .016 = $960 x 21 = $20,160.

  5. Add your compensation amounts for each service level together to get your total annual pension amount. For this example: $3,120 + $3,360 + $20,160 = $26,640.

Tips & Warnings

  • The sample formula provided here represents a defined benefit plan. A cash balance plan does not reward longevity for employees so the percentage multiplier would remain constant throughout the entire formula.
  • Another main difference is that a cash balance plan is "portable," meaning employees can take the plan with them if they change employment.

References

  • "Personal Finance At Your Fingertips"; Ken Little; 2007

Comments

  • Photo Credit Making a financial plan image by Allen Stoner from Fotolia.com

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