Question

Al works for Company J which has a Defined Benefit pension plan. The formula in the plan is 2.5% X number of years of service X average of three highest year's salary. Al has worked for 30 years and his 3 highest years salary were $98,000, $94,000, and $96,000. What will his annual pension benefit be?

a.) $72,000
b.) $96,000
c.) $75,000
d.) $57,000

Answer 1

Using the provided formula for a Defined Benefit pension plan, Al's annual pension benefit is calculated by taking 2.5% of the average of his three highest years' salaries, multiplied by his 30 years of service. The correct answer is approximately $71,750, which corresponds to the closest given answer choice of (a) $72,000.

Step-by-step explanation:

The student asked about calculating the annual pension benefit for an individual named Al who works for Company J, which offers a Defined Benefit pension plan. The formula provided is 2.5% multiplied by the number of years of service, multiplied again by the average of the three highest years' salary. To find Al's annual pension benefit, one would first calculate the average of his three highest years' salaries, which are $98,000, $94,000, and $96,000. This average comes out to be:

(98000 + 94000 + 96000) / 3 = 95666.67

Next, utilizing the pension formula, the calculation would look like this:

2.5% X 30 years X $95,666.67 = 0.025 X 30 X 95666.67 = $71,750

Thus, Al's annual pension benefit would be approximately $71,750, which suggests the nearest answer choice would be (a) $72,000.