defined benefit plan
A retirement plan in which an employer guarantees a specific monthly benefit at retirement based on salary and years of service, regardless of investment performance.
Example
“Under his defined benefit plan, the teacher would receive 2% of his final salary for every year of service — 30 years meant 60% of salary.”
Memory Tip
Defined BENEFIT = the BENEFIT (income) is DEFINED (guaranteed) by your employer.
Why It Matters
Defined benefit plans are crucial for retirement planning because they provide predictable income you can rely on for life, unlike investment-dependent plans where your retirement income fluctuates with market performance. Understanding this guaranteed income helps you assess whether you have sufficient retirement security and plan your other savings accordingly.
Common Misconception
Many people assume that if they leave a job early, they lose all pension benefits, but most plans provide vested benefits after a certain period of employment. Additionally, some believe the benefit amount never changes, when in reality it is calculated at retirement based on your final salary and service years at that time.
In Practice
Consider an employee who worked at a company for 30 years with an average final salary of 60,000 dollars and a plan that pays 2 percent per year of service. At retirement, they would receive a guaranteed monthly benefit of 3,000 dollars (60,000 multiplied by 30 years multiplied by 0.02 divided by 12), paid for life regardless of whether markets rise or fall after they retire.
Etymology
DEFINED (predetermined, specified) BENEFIT (payment received). The BENEFIT is DEFINED in advance.
Common Misspellings
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