Pension calculations are unique to each defined benefit (DB) plan. There are 3 main formula types, but there can be many variations to them.
3 main formulas
- Final average earnings
- Career average earnings
- Flat benefit
1. Final average earnings
This formula is based on your average earnings in the years leading up to retirement (for example, in the 5 years before retirement).
Sample formula
2% x your average salary in the past 5 years x your years as a plan member
|
|
|---|
| Benefit percentage |
2% |
|---|
| Average salary |
$50,000 |
|---|
| Years of plan membership |
30 |
|---|
| Formula calculation |
$50,000 x 2% x 30 |
|---|
2. Career average earnings
This formula is based on your average earnings during the entire period you were a member of the plan.
Sample formula
2% x your average salary in your career x your years as a plan member
| |
|
|---|
| Benefit percentage |
2% |
|---|
| Average salary |
$30,000 |
|---|
| Years of plan membership |
30 |
|---|
| Formula calculation |
$30,000 x 2% x 30 |
|---|
3. Flat benefit
With this formula, your monthly pension benefit is equal to a fixed dollar amount for each year you are a member of the plan.
Sample formula
$50 x your years as a plan member
| |
|
|---|
| Benefit amount |
$50 |
|---|
| Years of plan membership |
30 |
|---|
| Formula calculation |
$50 x 30 |
|---|
Inflation protection with some plans
Some plans increase pension payments to retirees each year to fully or partially match the rate of inflation. This is a highly valuable benefit because it helps your pension’s buying power keep up with rising prices over time.