Pensions

# Calculating a defined benefit pension: Winnie and Winston's story Add to ...

Winnie and Winston each worked 40 years before they retired. They both made the same income in their final year: \$70,000. But their defined benefit pension plans used different formulas. Who gets the bigger pension?

Winnie’s plan:

1. Takes the average of her best three years of earnings with the company: \$65,000
2. Multiplies it by 1.2% (the plan formula): \$65,000 x 0.012 = \$780
3. Multiplies that number by the total number of years with the company: \$780 x 40 years = \$31,200.

The result: Winnie's payment from her pension will be \$31,200 a year, or \$2,600 per month (before taxes). That comes to almost half of her final income when she retired.

Winston’s plan:

1. Takes the average of his last 10 years of earnings with the company: \$60,000
2. Multiplies it by 1.2% (the plan formula): \$60,000 x 0.012 = \$720
3. Multiplies that number by the total number of years with the company: \$720 x 40 years = \$28,800.

The result:
Winston's payment from his company pension plan will be \$28,800 a year, or \$2,400 a month (before taxes). That's much less than half of his final income before he retired.

Lesson learned:
The formula a defined benefit plan uses can have a big effect on your income when you retire. This is important to know when you compare different plans.

Note: These examples are for simple illustration only. They do not reflect any tax savings or the impact of inflation and salary increases.

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