DB vs DC — what’s the difference?

DB promises a formula-based income (multiplier × years × final average salary). DC accumulates contributions and returns; income depends on balance and withdrawal rule.

Does it handle early retirement?

Yes. Enter your plan’s normal retirement age and a per-year early reduction; the benefit is reduced if you retire before NRA.

Is inflation considered?

Yes. Results show nominal and today’s dollars; if your DB plan has COLA, you can indicate that.

Pension Calculator (Defined Benefit & Defined Contribution)

Authoritative Data Source and Methodology

Primary references: OPM FERS/CSRS computation guidance; ASOP No. 27 (assumption selection); Bengen (1994) withdrawal research. These references informed the DB formula patterns, assumption handling, and DC withdrawal framing.

The Formulas Explained

Defined Benefit (DB):

\[ P_{0} = m \times YOS \times FAS \]

\[ P = \begin{cases} P_{0}, & R \ge \text{NRA}\\[4pt] P_{0}\,\big(1 - r_e \cdot (\text{NRA}-R)\big), & R < \text{NRA} \end{cases} \]

Final-average-salary approximation (growth $g$, averaging over $k$ final years, $S_R$ salary in year before retirement):

\[ FAS \approx S_R \cdot \frac{(1+g)\,\big(1-(1+g)^{-k}\big)}{k\,g} \quad (g\ne 0),\quad FAS=S_R \text{ if } g=0. \]

If the pension has no COLA, convert to today’s dollars with inflation $i$ over $n$ years:

\[ P_{\text{real}} = \frac{P}{(1+i)^n}. \]

Defined Contribution (DC):

\[ S_t = S_{t-1}(1+g),\quad C_t = S_t\big(c_e + \min(c_e, c_{cap})\,c_m\big),\quad B_t = (B_{t-1}+C_t)\,(1+r_n),\ r_n \approx r-f. \]

\[ I_{\text{rule}} \approx \text{WR} \times B_n,\quad I_{\text{monthly}} = \frac{I_{\text{rule}}}{12}. \]

Worked Example

Scenario Age 35 → 67 (n=32), salary \$60,000, $g=3\%$, $i=2.5\%$.

DB: $m=1.75\%$, current YOS = 5, include future service, $k=3$, NRA=67, early reduction 6%.

Projected YOS: $5 + 32 = 37$.
$S_R = 60{,}000 \cdot 1.03^{32}$.
$FAS \approx S_R \cdot \frac{1.03\,[1-1.03^{-3}]}{3\cdot 0.03}$.
$P_0 = 0.0175 \times 37 \times FAS$. Monthly = $P_0 / 12$.
$P_{\text{real}} = \frac{P_0}{1.025^{32}}$ (if no COLA).

DC: Balance \$50,000; $c_e=10\%$; match 50% up to 6% ⇒ total 13%; $r=6\%$; fees 0.2% ⇒ $r_n\approx5.8\%$; WR 4%.

Iterate annually for 32 years with growing salary and contributions; compound at $r_n$.
Income ≈ $0.04 \times B_{32}$ (nominal); real values divide by $(1+i)^{32}$.

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Frequently Asked Questions (FAQ)

What is the difference between DB and DC?

DB uses a formula (multiplier × years × final average salary) to promise income; DC builds a balance from contributions and returns, then you pick a withdrawal strategy.

Do results include taxes?

No—outputs are pre-tax; consult local tax rules for after-tax estimates.

How accurate are these estimates?

They follow standard industry formulas/assumptions; actual plan rules and performance may differ.

What about COLA?

If your pension includes COLA, enable the toggle so “real” ≈ “nominal” for the DB income stream.

Full original guide (expanded)

Your original copy (methodology, formulas, glossary, example, and FAQ) is preserved and harmonized above to strengthen E-E-A-T and readability.

Pension Calculator (DB & DC)

Results