Pension Calculator Formula
Understand the math behind the pension calculator. Each variable explained with a worked example.
Formulas Used
Annual Pension Benefit
annual_pension = final_salary * years_of_service * multiplier / 100Monthly Pension Benefit
monthly_pension = annual_pension / 12Income Replacement Ratio
replacement_ratio = final_salary > 0 ? annual_pension / final_salary * 100 : 0Variables
| Variable | Description | Default |
|---|---|---|
final_salary | Final Average Salary(USD) | 75000 |
years_of_service | Years of Service(years) | 25 |
multiplier | Plan Multiplier(%) | 2 |
How It Works
How Pension Benefits Are Calculated
Most defined-benefit pensions use this formula:
Annual Benefit = Final Salary × Years of Service × Multiplier
The multiplier is typically 1.5% to 2.5% per year of service. A 2% multiplier with 25 years gives 50% income replacement.
Worked Example
$75,000 salary, 25 years of service, 2% multiplier.
- 01Annual pension = $75,000 × 25 × 2% = $37,500
- 02Monthly pension = $37,500 / 12 = $3,125
- 03Replacement ratio = $37,500 / $75,000 = 50%
Frequently Asked Questions
What is a pension multiplier?
The multiplier (or accrual rate) is the percentage of salary you earn per year of service. A 2% multiplier means each year of work earns you 2% of your final salary as annual pension.
What is final average salary?
Usually the average of your highest 3 or 5 consecutive years of earnings. Some plans use career average instead.
Are pensions taxable?
Yes, pension income is generally taxable as ordinary income at the federal level. Some states exempt pension income from state taxes.
Ready to run the numbers?
Open Pension Calculator