In a final average plan, how is the pension typically calculated?

In a final average plan, the pension is calculated based on the highest five consecutive years of earnings within a specified period, usually the last ten years of employment. This approach ensures that the employee's retirement benefit reflects their peak earning years, allowing for a more substantial pension payout than if it were calculated based on the average of total career earnings. The rationale is that employees often earn higher salaries as they advance in their careers, and by focusing on the top earning years, the calculation aims to provide a fairer estimation of the expected retirement income relative to their earning potential at the end of their careers.

While other options may relate to pension calculations, they do not align with the specific structure of a final average plan. For instance, using the average of total career earnings (the first option) does not take into account the increases in earnings typically seen toward the end of one's career. Similarly, a fixed percentage of contributions (the third option) does not reflect the individual's earnings and may not account for variables such as cost-of-living adjustments. Lastly, focusing on total investments made by the employee (the fourth option) neglects to incorporate salary or earnings, which are critical components in determining pension benefits in a final average plan.