A defined benefit pension pays a fixed monthly income for life calculated from three variables: your years of service, your final average salary, and a benefit multiplier set by the plan. The standard formula is Monthly benefit = Years of service × Final average salary × Benefit multiplier ÷ 12. A teacher with 30 years of service, a $70,000 average salary, and a 2% multiplier receives $3,500 per month for life.
The Pension Benefit Formula
Annual pension = Years of service × Final average salary × Benefit multiplier
Most plans calculate the final average salary as either:
- Final 3-year average — average of your last 3 years of salary
- Final 5-year average — average of your last 5 years of salary (more common in government plans)
- Career average — average of all years (less common, produces lower benefits)
Benefit Multipliers by Sector (2026)
| Sector / Plan | Typical Multiplier Per Year |
|---|---|
| State/local government (average) | 1.5%–2.5% |
| Public school teachers | 1.5%–2.5% |
| Federal FERS (regular) | 1.0% (1.1% if retire at 62+ with 20+ years) |
| Federal CSRS (older federal employees) | 1.5%–2.0% |
| Military (legacy High-36 system) | 2.5% |
| Military (Blended Retirement System) | 2.0% |
| Private sector (where available) | 1.0%–1.5% |
Pension Benefit Calculation Table (2% Multiplier)
| Years of Service | $50,000 Avg Salary | $70,000 Avg Salary | $90,000 Avg Salary |
|---|---|---|---|
| 10 years | $833/mo | $1,167/mo | $1,500/mo |
| 15 years | $1,250/mo | $1,750/mo | $2,250/mo |
| 20 years | $1,667/mo | $2,333/mo | $3,000/mo |
| 25 years | $2,083/mo | $2,917/mo | $3,750/mo |
| 30 years | $2,500/mo | $3,500/mo | $4,500/mo |
| 35 years | $2,917/mo | $4,083/mo | $5,250/mo |
Worked Example: Public School Teacher
Situation: James is a high school teacher in Ohio retiring at age 62. He has 32 years of service, a final 3-year average salary of $74,000, and his state plan uses a 2.2% multiplier.
| Input | Value |
|---|---|
| Years of service | 32 |
| Final average salary | $74,000 |
| Benefit multiplier | 2.2% |
| Annual pension | $74,000 × 32 × 2.2% = $52,096 |
| Monthly pension | $4,341/mo |
James elects a 50% joint-and-survivor annuity to protect his spouse. The plan reduces his benefit by 8%:
- Reduced monthly benefit: $4,341 × 0.92 = $3,994/mo
- Survivor benefit (50% to spouse): $1,997/mo
Survivor Benefit Options
Most pension plans require you to choose a payment option at retirement:
| Option | Your Monthly Benefit | Spouse Gets After Your Death |
|---|---|---|
| Single life annuity | Highest (100%) | Nothing |
| 50% J&S annuity | Typically −5% to −8% | 50% of your benefit |
| 75% J&S annuity | Typically −9% to −12% | 75% of your benefit |
| 100% J&S annuity | Typically −12% to −18% | 100% of your benefit |
| Pop-up option | Slightly less than single life | Nothing (reverts to single life if spouse predeceases) |
The pop-up option: if your spouse dies before you, your benefit jumps back to the full single-life amount. This can be cost-effective if your spouse has their own substantial retirement income.
Lump Sum vs. Annuity: Break-Even Analysis
Many pension plans offer a one-time lump sum at retirement instead of the monthly annuity. To evaluate:
Break-even years = Lump sum ÷ Annual annuity payment
| Lump Sum Offer | Annual Annuity | Break-Even Point |
|---|---|---|
| $600,000 | $36,000/year | 16.7 years |
| $750,000 | $42,000/year | 17.9 years |
| $900,000 | $52,000/year | 17.3 years |
If you live past the break-even point, the annuity wins. Most retirees in good health at retirement should expect to outlive the break-even point in these examples, making the annuity the better choice in most cases — check current actuarial life expectancy tables for your specific age and sex for a precise comparison.
The lump sum wins if:
- You are in poor health with a significantly shorter life expectancy
- You have no surviving spouse to protect
- You are confident you can invest the lump sum to earn more than the implicit pension interest rate
WEP and GPO: Repealed as of January 2025
If you worked for a government employer that did not withhold Social Security taxes, two provisions used to reduce your Social Security income:
Windfall Elimination Provision (WEP) — previously reduced your own Social Security benefit if you had fewer than 30 years of “substantial earnings” in Social Security-covered employment.
Government Pension Offset (GPO) — previously reduced Social Security spousal or survivor benefits by two-thirds of your government pension amount.
Both were repealed by the Social Security Fairness Act (H.R. 82), signed into law in January 2025. The repeal is retroactive, applying to benefit months after December 2023 — meaning WEP and GPO no longer reduce Social Security benefits for people with a non-covered government pension, and the SSA has been processing retroactive adjustments and back payments for those previously affected. If your benefit was reduced in the past, contact the SSA to confirm your adjusted, unreduced benefit amount.
COLA: Does Your Pension Keep Up With Inflation?
Not all pensions include a cost-of-living adjustment:
| Plan Type | Typical COLA |
|---|---|
| Federal FERS | Annual COLA tied to CPI |
| Federal CSRS | Full CPI COLA |
| State/local government | Varies — 0% to 3% cap common |
| Military | Full CPI COLA |
| Private sector DB | Usually none — fixed payment |
A pension with no COLA loses roughly half its purchasing power over 20 years at 3.5% inflation. A $3,500/month pension in 2026 with no COLA is worth approximately $1,780/month in 2046 in today’s dollars.
Related Articles
- How Pensions Work 2026
- Pension Lump Sum vs. Annuity
- Average Pension by Industry
- Social Security Calculator 2026
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