How to Figure a Pension Based on Salary and Years

by Clayton Browne

Although relatively few new jobs include a pension anymore, many Americans still rely on a pension for most of their retirement funds. It is important to begin the retirement planning process at least a couple of decades before your actual retirement, and understanding how much you might expect from your pension is a critical part of that process. The formula for determining an employee's pension benefit can seem complex and daunting at first glance, but the calculation usually involves just a few relatively simple steps. If you are still working, keep in mind that this calculation is only an estimate.

Step 1

Review the details of your pension plan to determine the formula for calculating your pension. This information should be available as a part of your employee benefits documentation, or you can contact your human resources office for detailed information on your pension plan.

Step 2

Determine the salary figure that is used as the basis of your pension benefit calculation. Some plans use your final year salary as the basis of the pension calculation; others use an average of your salaries for the last three to five years.

Step 3

Calculate your total years of service for the purpose of pension benefit calculation. If you worked at company for 25 years, but the first five were part-time, you might qualify for only 22 or 23 years of total service. Some companies allow employees to convert some percentage of accrued, unused vacation or sick leave as years of service.

Step 4

Determine the amount of your pension by plugging the salary and years of service figures you calculated into the pension benefit formula and multiplying them by the pension factor. The pension factor is 1 percent to 1.5 percent for most employees in defined-benefit pension plans. Example: For an employee whose eligible annual salary was \$80,000 with 20 years of service and a pension factor of 1.5 percent, multiply 80,000 x 20 x .015, to end up with an annual pension of \$24,000.

Tip

• Keep in mind that pension calculations are just estimates unless you have officially retired and the figures on which your pension is based are finalized and approved.