A traditional pension is a workplace retirement plan that promises a benefit calculated under the plan's formula, rather than simply giving you an investment account balance.
What it means
A traditional pension is also called a defined benefit plan. Its formula may use years of service, age, and a measure of pay to calculate a monthly benefit.
The plan may offer a lifetime monthly payment, a payment that continues partly to a surviving spouse, or sometimes a lump sum. The available choices, vesting rules, inflation adjustments, and taxes depend on the plan.
A simple example
A plan uses a formula of 1.5% times years of service times average covered pay. With 25 years of service and $80,000 of average covered pay, the formula produces $30,000 a year: 1.5% × 25 × $80,000.
That equals $2,500 a month before tax under this simplified example. The actual plan may reduce the amount for an earlier start or for a survivor option, and it may define service and covered pay differently. The worker requests an official estimate for each start date and payment form instead of treating $2,500 as guaranteed.
What people often miss
A pension formula is not the same as an account balance. The employer plan document and benefit statement control the calculation and available payment forms.
Some pensions rise with inflation and others do not. A single-life payment can also leave less or nothing to a surviving spouse, depending on the plan and election.
Three questions worth asking
- What pay and service does the formula count?
- How does the amount change by start date and survivor choice?
- Does the payment have an inflation adjustment?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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