How Do Pensions Work?


Quick Answer

A pension is a fixed sum of money paid regularly to a retiree. A pension plan is funded by the employee, employer or both. For plans that require employee contributions, money is invested and then used to purchase an annuity, which provides a set income.

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Full Answer

The number of companies offering a pension plan to new employees declined from 60 percent of Fortune 500 companies in 1998 to just 24 percent by the end of 2013. As of 2013, only 7 percent of Fortune 500 companies offered traditional pension plans.

Traditional pension plans typically use a formula to determine the amount of money the retiree receives. This formula is a percentage multiplied by the number of years of service and factoring in the employee's ending salary. The formula varies, but as of 2014, Exxon Mobile offers 1.6 percent times the pension service years times the average last pensionable pay less Social Security deductions. Lockheed Martin, United Parcel Service, Johnson and Johnson, 3M, Bank of America, Wachovia, Coca Cola, Accenture, and Liden Nestle Soled & Associates are companies that still offer a defined benefit, or pension plan, as of 2013. In Nestle's plan, if the employer contributes $200 per month for 30 years, the employee receives $6,000 per month for the rest of his life.

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