Difference between retirement versus pension

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I used to think retirement from work and pension are the same. But I was wrong!

Since both retirement and pension lead to the same result ” Stop working”, we might be mistaken in our thinking that both are the same.

Retirement and pension aren’t the same and they have their dynamics and characteristics & finally leading to a different lifestyle.

This article helps the readers to get a clear understanding of retirement versus pension.

Retirement versus pension

What is retirement?

Retirement refers to the time when an individual quits working or reduces their work hours due to age, health, or personal choice.

This involves prudent financial planning and lifestyle decisions to ensure that retirees can maintain a comfortable standard of living during their retirement years.

This may involve saving for retirement through various retirement plans, such as 401(k) plans, IRAs, or other investment vehicles.

Many people choose to retire early to pursue their interests or to spend more time with family and friends.

Some individuals prefer to work in a part-time or consulting capacity after they retire, while others use their retirement years to travel, volunteer, or pursue hobbies and other activities.

Whatever the plans are, proper retirement planning can help to ensure that they can enjoy their retirement years with financial security and peace of mind.

Read more: The Shockingly simple math behind early retirement

What is a pension?

Pension refers to the age at which an individual becomes eligible to receive a pension or retirement benefits from a government or employer-sponsored retirement plan.

The pension age varies depending on the country, the retirement plan, and other factors such as the individual’s gender, employment history, and marital status.

In some countries, the pension age is fixed, while in others it is gradually increasing due to demographic changes and increasing life expectancies.

For example, in the United States, the full retirement age for Social Security benefits is currently 67 for those born in 1960 or later.

However,  You can start your Social Security retirement benefits as early as age 62, but the benefit amount you receive will be less than your full retirement benefit amount.

But, If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.

Retirement versus Pension table:

retirement versus pension

Types of Jobs offer pension:

Most jobs no longer offer traditional pension plans that promise guaranteed income in their retirement. According to Bureau of labor statistics data only a quarter of civilian workers were offered traditional pensions in 2022.

But Jobs offer pensions tend to be clustered in a few specific fields. Government and union employees are especially likely to have access to pension benefits.


The majority of primary, secondary, and special education teachers who work in schools enjoy access to a traditional pension plan for retirement, according to BLS data. Over half of employees at colleges and universities also have pension coverage.

Teachers who meet the pension requirements can expect to continue to receive a specific portion of their former salary in retirement.

State and Local Government:

Almost all state and local government employees are eligible for pensions. Union government employees are somewhat more likely to have a pension than nonunion workers.

In many cases, part-time government employees don’t qualify for the pension plan.


Utility corporations provide pension coverage to 76% of their employees, according to BLS data.

Some utility companies have closed the pension plan to recent hires, but continue to provide pension benefits to existing workers. M Utility companies are unionized, which contributes to maintaining pension plans.

Utility company employees include electrical power line installers and repairers, electrical engineers, control and value installers and repairers, and meter readers.

Police & Fireman service:

Police officers and firefighters are likely to have access to a traditional defined-benefit pension plan.

Large Companies:

Employees who work at large companies are significantly more likely to have access to a pension plan than those who work at small businesses.


Nurses spend their days caring for others, and registered nurses will eventually receive pension payments in their retirement.

Those who work in hospitals are especially likely to have access to a defined benefit pension.


Service members on active duty or who serve in the reserves or guard for a designated period, often at least 20 years, may qualify for payments in retirement.

The military uses several different methods of calculating retirement payments, but in general, those who serve for longer periods receive more generous payments in retirement.


Construction laborers need a little formal education required to enter their job.

The pay can be higher if you specialize and take on additional training, such as becoming a carpenter or construction equipment operator. Electricians, building inspectors, boilermakers, and elevator and escalator installers tend to earn higher salaries.

If you stick with the job long enough, you might qualify for pension payments in retirement

How is pension calculated?

Your pension calculated is based on a set formula and not how much you paid into the plan.

The formula takes factors like years of service, and pensionable salary into account. Some pension benefits income grows with inflation & you can pass those to your spouse or dependents.

So the longer you contribute to the plan and the higher your salary, the larger your pension will be.

The pension formula typically looks like this:

Years of service x Multiplier X Final average salary

In most states, a final average salary is the average of the last 5 years of work or the last three years. Other states use the three or five highest years of salary, rather than the years at the end of your career.

The “multiplier” in the formula is used to determine the % of the final average salary that will be received as a retirement benefit income.

Years of service are multiplied using this “Multiplier”. That amount becomes a percentage of the final average salary. And the result equals the amount ultimately received as a benefit in retirement. The higher the multiplier, the larger the benefit.

A typical multiplier is 2%

If you work for 30 years and your final average salary is $60,000. Then your pension calculated as follows:

30X 2% X $60,000 = $36,000

That $36,000 will become your guaranteed lifetime income

How to calculate pension tax?

You can start claiming for your pension once hit the retirement age, usually 65.

You can claim your pension in a lump sum when you retire or opt for an ” annuity plan” into monthly payments that will last as long as you live.

Regardless of whether you opt to take your pension income in a lump sum or monthly payments, it’s good to have a tax strategy.

Unless you contributed to your pension, the entirety of your pension income will be taxable at your regular income tax rate.

In other words, if your pension income all comes from the money your employer contributed, with no additional contributions on your part, it’s all fully taxable.

According to IRS, Your pension income can be taxable under following conditions:

  • You didn’t contribute anything for your pension or annuity
  • Your employer didn’t deduct pension contributions from your salary.
  • You received all of your contributions tax-free in prior years.

If you have contributed, after-tax dollars, your pension income is partially taxable. It’s good to take help from authorized financial advisors to calculate pension tax to reduce it overall.

Federal pension taxes by state

In total, there are 50 states in the U.S. Some states don’t have tax on income & pension. But few other states have income tax but no pension tax.

Other category states don’t tax income & pension income but on 401K & social security. There are states which have taxes on income, pension, 401K, and social security.

Every tax collected by these states varies. But I hope the below image gives you some idea.

federal pension taxes by state

Final Conclusion

As a defined contribution plan like 401K replaces the defined benefit income plan, You would be lucky if you have one.

Still, this income is affected by variables like state tax and years of service, etc. It will always be good to take help from experts to protect your hard-earned money.

Thank you for reading!

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