Defined Benefit Calculation

A defined benefit calculation is performed using a standard formula. A defined benefit calculation is simple. Below is an example of a defined benefit calculation.

Example of a defined benefit calculation

The defined benefit calculation starts with the final average earnings per month. The final average earnings is the average earnings of the five consecutive years that the employee earns the most. This is usually the latest five years. Multiply this final average earnings figure by 1.5% and then by the years of service equals monthly benefit due.

The formula for defined benefit calculation

Monthly retirement benefit = Final average earnings per month x 1.5% x years of service

For example, for an employee who has been in service for 25 years with the final average earnings of $54,000 a year. His or her final average earnings per month would be $54,000 / 12 = $4,500. The monthly retirement benefit according to the defined benefit calculation is:

$4,500 x 1.5% x 25 = $1,687.50

How to receive maximum defined benefit or pension?

For most companies, to receive maximum defined benefit or pension, the employee must have worked at the company for 30years or more and wait until the full retirement age. The full retirement age is usually 62 or 65. The rule of how to receive maximum retirement benefits varies from companies to companies so it is best that your familiarize yourself with your company policy of defined benefit plan or other retirement plan types. But generally, the longer you stay with the same company and the later you retire, the more your retirement benefits. Usually early retirement means reduced retirement benefits.

Factoring inflation into defined benefit calculation

Inflation is a considerable risk when you have a defined benefit pension plan. Inflation will probably erode your defined benefits throughout the years to retirement. Most defined benefit plans do not adjust for inflation which means you have to have your own plan for defined benefit calculation that figures in the risk and effect of inflation on your retirement income.