Defined Benefit Pension

A defined benefit pension is an employer promise to pay a formula-driven benefit for life, typically years of service multiplied by an accrual rate multiplied by final average salary. The employer funds and manages the investments; the participant receives the paycheck regardless of market outcomes. The benefit is insured by the PBGC up to a ceiling, just over $90,000 a year at 65 in 2025.

The design dominated private America in 1980, when roughly 38% of private workers carried one; today the share is low single digits, with the 401(k) having replaced it. Public-sector plans for teachers, firefighters, and government employees remain common and carry their own funding politics. At retirement the plan forces one large decision: annuitize the benefit or take the lump sum.

The formula computes a lifetime annuity. A worker with 30 years of service, a 1.5% accrual rate, and a $90,000 final average salary earns 30 times 1.5%, or 45% of $90,000: $40,500 a year for life. Vesting runs on the same 3-year cliff or graded schedules as 401(k) employer money, and service beyond the formula's cap typically adds nothing. Actuaries fund the promise on the employer's balance sheet, which is why underfunded plans became political fights in states like Illinois and New Jersey.

The election is where participants win or lose. A $600,000 lump sum at a 4% withdrawal rate produces $24,000 a year; the same plan's annuity may pay $40,500, nearly double, because the annuity carries the mortality credit and the employer's guarantee. The discount rate the plan uses to price the lump sum decides the split, and low discount rates make lumps look artificially small. Survivor options reprice the annuity: a 50% joint-and-survivor election cuts the single-life check by roughly 8-12% in exchange for the spouse's continued income. Federal law requires spousal consent for a single-life election, which tells you how often the default would have stranded the surviving spouse.

If you have one, it is the rare guaranteed income that sits next to Social Security and can cover basics outright, which changes every other decision in the plan: the 401(k) becomes the flex account, not the floor. Public-sector workers are the main remaining carriers, and their plans are often the difference between retiring at 55 and 65.

I watched a colleague named Brent (yes, that Brent) take the lump sum from a $600,000 pension election because lump sums feel like money and annuities feel like paperwork, then draw 5% a year because it felt conservative. The annuity he declined paid nearly double his draw for life. His spreadsheet stopped at the balance; the contract had a mortality table.

The highest-leverage thing most pension participants can do is price the annuity against a 4% draw before electing, and price the survivor option against the household's needs. Model the annuity with the annuity calculator and the lump-sum draw with the retirement income calculator. The election is one-way; the pricing takes an afternoon.