How is a defined benefit pension calculated?

The standard formula is: Annual pension = Years of service × Final average salary × Benefit multiplier. Example: 30 years × $75,000 × 2% = $45,000/year ($3,750/month). The multiplier varies by plan — public school teachers often use 2%–2.5%, government employees 1.5%–2%, private plans often 1%–1.5%.

What is the difference between a pension and a 401k?

A pension (defined benefit plan) guarantees a fixed monthly income in retirement, calculated by a formula. The employer bears the investment risk. A 401(k) (defined contribution plan) depends on how much you contribute and how well your investments perform. You bear the investment risk. Pensions are increasingly rare in private sector; still common in government and military.

Should I take a lump sum or monthly pension payments?

This depends on your health, investment ability, and need for guaranteed income. Monthly payments are safer if you expect to live a long time and want predictable income. A lump sum is better if you're in poor health, have a spouse who doesn't need survivor income, or are confident in your ability to invest. Most financial advisors favor monthly payments unless the lump sum is unusually large.

What is a pension multiplier?

The benefit multiplier (or accrual rate) is the percentage of final salary credited per year of service. A 2% multiplier with 30 years of service = 60% of final salary. Common multipliers: 1.25%–1.5% (private plans), 2%–2.5% (state/local government teachers), up to 2.5%–3% (military, some police/fire plans).

Pension Calculator 2026

Last updated: September 2026 · 2026 IRS & state tax rates

Calculate your defined benefit pension monthly income. Compare single-life vs joint-and-survivor options, and monthly income vs lump sum.

Final Average Salary

Typically average of final 3–5 years

Years of Service

Benefit Multiplier

Per year of service. Teachers: 2–2.5%. Govt: 1.5–2%. Private: 1–1.5%.

Annual COLA Increase

Retirement Age

$3,750

Monthly Pension (single life)

30 yrs × $75K × 2.0%

$45,000

Annual Benefit

60%

Replacement Rate

$675,000

Lump Sum Equiv.

Final Avg. Salary$75,000

Years of Service30

Benefit Multiplier2.0%

Annual Benefit$45,000

Monthly — Single Life$3,750

Monthly — 100% Survivor (est.)$3,188

Monthly — 50% Survivor (est.)$3,450

Lump Sum Equivalent (15× annual)$675,000

Pension Benefit Formula and Calculation

Annual pension = Final average salary × Years of service × Benefit multiplier

On a 2% multiplier: 30 years of service = 60% income replacement. 40 years = 80% replacement. Most financial planners target 70%–80% income replacement in retirement (from pension + Social Security combined).

Pension Benefit Multipliers by Plan Type

The benefit multiplier (also called the accrual rate) varies significantly depending on your employer type:

Federal employees (FERS): 1.0% per year (1.1% if retiring at 62+ with 20+ years)
Federal employees (CSRS): 1.5% for years 1–5, 1.75% for years 6–10, 2.0% for years 11+
State and local government teachers: Typically 1.5%–2.5% per year
Police and fire (many states): 2.5%–3.0% per year, often with earlier retirement ages
Military (REDUX/High-3): 2.5% per year after 20 years (High-3 plan)
Private sector plans (rare): Typically 1.0%–1.5% per year
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How Final Average Salary Is Calculated

Most pension plans use either a "final average salary" (FAS) or "high-X" formula, not your last year's salary alone:

High-3: Average of the 36 highest consecutive months of base pay (used by federal FERS, CSRS, military)
High-5: Average of the 60 highest consecutive months — common in state/local government
Career Average: Average of all years worked, typically adjusted for inflation (less common)

Example (teacher, High-3, 2% multiplier, 30 years):
Final 3-year average salary: $72,000
Annual pension: $72,000 × 30 × 2% = $43,200/year ($3,600/month)

Single Life vs Survivor Benefits

A single-life annuity pays the highest monthly amount but stops at your death — your spouse receives nothing. A joint-and-survivor annuity reduces your monthly payment by 5%–20% but continues paying your spouse (at 50%–100% of your benefit) after you die. The "pop-up" option, available in some plans, restores your benefit to the single-life amount if your spouse predeceases you.

Pension Lump Sum vs Monthly Payments: Which Is Better?

The pension lump sum is typically calculated as the present value of all future monthly payments, discounted by an interest rate (often the IRS Segment Rates for private plans). At current rates, most lump sums equal roughly 15–20× the annual pension benefit.

Monthly payments are usually better when:

You are in good health and expect to live a long time (lump sums "break even" around age 80–85)
You want guaranteed inflation-protected income (especially government pensions with COLAs)
Your spouse would benefit from survivor income
You are not confident in your ability to manage a large investment

Lump sum may be better when:

You have significant health issues and may not live to the break-even age
Your pension has no COLA and inflation erodes monthly payments over time
You have other guaranteed income sources (Social Security, rental income)
The lump sum offer is unusually large relative to monthly benefit