pension
A defined benefit retirement plan in which an employer guarantees a fixed monthly income for retired employees based on salary history and years of service.
Example
“The retired teacher received a pension of $3,200 per month for the rest of her life, guaranteed by the state.”
Memory Tip
PENSION = employer PAYS you monthly in retirement. Old-school guaranteed income.
Why It Matters
Pensions represent a significant source of retirement income for many workers and retirees. Understanding how your pension is calculated and what benefits you will receive is crucial for retirement planning, as it directly affects your financial security and lifestyle after you stop working.
Common Misconception
Many people believe that pensions are guaranteed to be paid forever without any changes, but in reality, some pensions can be affected by company bankruptcy, plan terminations, or benefit reductions. Additionally, not all employers offer pensions anymore, as many have shifted to defined contribution plans like 401(k)s where employees bear the investment risk.
In Practice
Consider an employee who worked for a company for 30 years with an average salary of 60,000 dollars. If the pension formula is 2 percent per year of service, the employee would receive 36,000 dollars annually in retirement (30 years times 2 percent times 60,000). This fixed monthly income of 3,000 dollars would typically continue for the employee's lifetime, providing stable retirement income regardless of market conditions.
Etymology
From Latin 'pensio' (payment, rent) — a regular PAYMENT for past service.
Common Misspellings
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Related Terms
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See Also
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