Definition
A traditional pension: the employer promises a specific retirement income, typically based on salary and years of service, and bears the investment risk of funding it. Increasingly rare in the private sector, still common in government jobs.
Why it matters
A pension is guaranteed income you do not have to manage, effectively an employer-funded annuity. Having one changes how much you personally need to save and how hard your own portfolio must work.
Example
A plan pays 1.5% of final average salary per year of service. After 30 years ending at an $80,000 average salary, the pension pays $36,000 a year for life (1.5% x 30 x $80,000), alongside Social Security.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.