Pension
An employer-funded retirement plan that pays a defined monthly benefit for life.
What is Pension?
A pension — formally called a defined benefit (DB) plan — is a retirement plan in which an employer promises to pay a specific monthly benefit to retirees for the rest of their lives, based on a formula typically using years of service and final average salary. Unlike 401(k)s (defined contribution plans), the investment and longevity risk rests with the employer, not the employee. Pensions are most common in government, military, and unionized sectors. Funding levels — the ratio of assets to promised benefits — are a critical financial health metric; underfunded pensions pose significant risks to future retirees.
Example
A state employee retires after 30 years of service with a final salary of $70,000. Their pension formula: 2.5% × years of service × final salary = 2.5% × 30 × $70,000 = $52,500/year ($4,375/month) for life.