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
- Pension Plan
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.
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.
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.
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.
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.
- "Personal Finance At Your Fingertips"; Ken Little; 2007
- Photo Credit Making a financial plan image by Allen Stoner from Fotolia.com
How to Calculate a Government Pension
Calculating your government pension can seem like a daunting task, ... The formula will contain a pension multiplier and retirement age: 2...
How to Calculate Pension Benefits
Divide the annual pension amount by 12 to get the monthly pre-tax amount: ... How to Calculate Pension Age. Retirement planning inevitably...
How to Calculate Pension Annuity
The future value of a pension annuity involves calculating a set amount of contributions over a period of time that earn a...
How to Figure Out Retirement Benefits
How to Figure Out Retirement Benefits. ... has a balance of $245,000 and your Roth IRA account has a balance of $15,000,...
How to Calculate Your CalPERS Pension Benefit
When you get your annual statement from CalPERS, it tells you how much your pension is worth if you cashed it out....
What Is a Pension & How Is It Calculated?
Many employers fund pension plans for employees as part of their benefit packages. If your employer provides you with a pension plan,...
How to Calculate Pension Age
Retirement planning inevitably brings up the question, when can I retire? Calculating your pension age gives you the opportunity to plan for...
How to Calculate NHS Pension
The National Health Care Services (NHS) Pension Scheme is the pension system for employees of the NHS, a special health authority of...
How to Calculate Tax on a Pension
The entire formula is as follows: taxpayer cost basis divided by the number of monthly payments equals the monthly tax free portion....
How to Calculate a USAF Military Pension
Enter information on your retirement. Each calculator is slightly different; ... Estimating taxes on retirement pension income requires some patience and calculation,...
How to Calculate CPP Retirement
The Canada Pension Plan is a retirement savings system that all Canadian workers must contribute to -- with the exception of workers...
How Do I Calculate the Pension Benefits for an Employee?
Pension benefits refer to a variety of retirement benefits that are payable to an employee by an employer. Calculating pension benefits for...
Early Lump Sum Withdrawal From a Pension Plan
Early lump sum withdraws from a pension plan come with significant consequences. ... How to Calculate Pension Lump Sum. Can I Take...