Pension
Definition
A pension is a retirement plan that provides a guaranteed regular income, typically based on salary history and years of service, paid by an employer.
Explanation
Pensions are defined-benefit plans where the employer guarantees a specific monthly payment in retirement. The traditional pension has become less common in the private sector, replaced by 401(k)-style defined-contribution plans. Pensions remain common in government, education, and unionized jobs.
The payout formula typically uses years of service × a percentage × average salary. Some pensions offer cost-of-living adjustments (COLAs) to protect against inflation.
Example
A teacher retiring after 30 years with a final salary of $80,000 and a 2% multiplier receives $48,000 per year in pension income ($80,000 × 30 × 2%).