The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 6. Will You Get a Pension?

SOME OF TODAY'S retirees—at least a few—enjoy rich pension benefits from corporate plans, many of which were set up after World War II to attract workers and to retain them in a booming economy. These plans are called defined benefit plans because they define the annual pension benefit you receive. The employer foots the bill for the entire plan, putting the money aside, investing it, and taking the responsibility for making certain it is available to pay out benefits.

Defined benefit plans were designed to reward loyal employees who spent their entire careers with one company. The benefit is heavily weighted toward the later working years, when the employee's salary is highest. A good plan should replace about 50 percent of income for an employee with thirty years of service.

But few Americans at mid-career today have spent their working lives with a single employer. Instead, young workers typically change jobs frequently to gain broad experience. Many forty-five-year-olds are not vested in any pension plan at all.

The benefit from a traditional pension is calculated as a percent of your final salary times years of service with the company. A typical defined benefit plan might provide 1.2 percent to 1.5 percent of the average of your final three years of compensation times your years of service as an annual pension. Suppose your average salary over your last three years of work is $100,000 a year. In that case, 1.5 percent is $1,500. If you have ...