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Pension Calculator

Estimate the benefit, compare the lump sum.

One of the advanced-planning tools provided by the firm. Estimate the annual and monthly pension from a defined-benefit formula, then compare a lump-sum offer to the present value of the annuity stream under your assumptions.

A. Estimate the benefit
Estimated annual pension
$45,000
$3,750 per month · replaces 38% of final salary

Standard defined-benefit formula: final salary times years of service times the plan's benefit multiplier. Actual plans may apply age or early-retirement reductions not modeled here.

B. Lump sum vs annuity
Lump sum is worth more
$57,665
Lump sum exceeds the annuity's present value under these assumptions
Annuity PV
$592,335
Lump sum
$650,000
Annual pension
$45,000
Break-even years (undiscounted)
14.4 yrs

Present value assumes an end-of-year annuity paid over the expected collection period. This model does not include COLAs, survivor benefits, or the credit strength of the plan sponsor or PBGC coverage.

Producers contracted through the firm use this tool as an input to case design rather than as a standalone answer. When the number here changes the shape of a case, bring it to the case design desk and we will work it through with you and the client's CPA or attorney. Request a conversation.

The defined-benefit formula

A traditional pension pays a monthly income for life based on a formula, not on an account balance. The classic formula is final average salary times years of service times a benefit multiplier. A 25-year employee at a 1.5 percent multiplier on a $120,000 final average salary earns $45,000 annually (25 * 0.015 * $120,000). Final average salary is usually the highest three or five consecutive earning years. Multipliers commonly range from 1 percent (private sector) to 2 to 2.5 percent (public safety and some union plans). Age and early- retirement reductions can materially cut the accrued benefit for retirees starting before the plan's normal retirement age.

The lump-sum offer

Most corporate plans allow the retiring participant to elect a lump sum in place of the monthly annuity. The lump sum is the plan's calculation of the present value of the annuity stream, discounted at IRS-published segment rates that approximate 30-year Treasury yields. When those rates rise, lump sums fall, sometimes by 10 to 20 percent within a single rate cycle. Retirees eligible to elect a lump sum in a low- rate environment often receive materially larger offers than the same participant six months later. The rate reset schedule is worth knowing before choosing the retirement month.

Present value and the discount rate

Present value translates a stream of future payments into a single number in today's dollars. It answers the question: what lump sum today, invested at rate r, would produce the same payment stream over n years? A higher discount rate produces a lower present value; a longer collection period produces a higher one. The choice of discount rate is where judgment lives. Using the risk-free Treasury rate makes the annuity look large (because a low rate produces a high PV). Using an expected equity-portfolio return makes the lump sum look large. A defensible middle path is a blended rate reflecting the retiree's actual post-tax investment mix.

Longevity risk and survivor structure

The annuity's economic advantage is longevity insurance. Payments continue regardless of how long the retiree lives. A retiree who outlives the mortality assumption wins on the annuity; one who dies early wins on the lump sum (because the balance passes to heirs). Joint-and-survivor elections continue payments to a surviving spouse at 50, 75, or 100 percent of the original amount in exchange for a lower starting payment. Period-certain options guarantee a minimum number of years of payments even if the retiree dies early. Federal law requires spousal consent to waive survivor benefits on ERISA-governed plans.

Inflation and cost-of-living adjustments

Most corporate pensions are nominal: the payment does not adjust for inflation. Over a 25-year retirement, 3 percent annual inflation cuts the purchasing power of a fixed payment roughly in half. Public pensions frequently include cost-of-living adjustments (full or capped), which substantially raise the present value of the annuity stream relative to a nominal one. When comparing a lump sum to an annuity, whether the annuity is COLA-protected is a first-order variable.

Sponsor credit and PBGC coverage

Corporate defined-benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC) up to statutory limits that scale with retirement age. In a plan termination, most participants receive their full benefit; high earners with benefits above the guarantee ceiling can receive less. Public pensions are not PBGC-insured and depend on state or municipal fiscal strength. For a participant in a distressed-plan situation, taking the lump sum removes the sponsor credit risk from the picture entirely.

The rollover path and combining with a SPIA

A lump sum can be rolled directly into an IRA custodian-to- custodian, preserving tax deferral and giving the retiree full investment discretion. From that IRA, a portion can fund a single premium immediate annuity (SPIA) that replicates guaranteed lifetime income at whatever replacement level the retiree wants, while the remainder stays invested for growth and inheritability. This hybrid path is common: annuitize the fraction needed to cover essential expenses, invest the rest. The annuity payout calculator on this site prices the SPIA leg of that strategy.

FAQ
How is a pension calculated?+
A traditional defined-benefit pension uses the formula final average salary times years of service times a benefit multiplier. Final average salary is typically the average of the highest three or five consecutive earning years. The multiplier is set by the plan and usually ranges from 1 percent to 2.5 percent per year of service. A 30-year employee at a 1.5 percent multiplier on a $100,000 final average salary earns an annual pension of $45,000 (30 * 0.015 * $100,000). Actual plan formulas may include age reductions, early-retirement factors, and cost-of-living adjustments not modeled here.
Lump sum or annuity?+
The decision hinges on three variables: the discount rate that translates future payments to today's dollars, expected longevity, and how much survivor income the annuity provides. A lump sum offers control, inheritability, and the option to invest at a rate higher than the plan's implicit discount rate. The annuity offers longevity protection (payments continue regardless of how long you live) and generally has PBGC insurance backing for corporate plans. Retirees in poor health or with a strong bequest motive often prefer the lump sum; retirees expecting long life and no dependents often prefer the annuity.
How is the lump sum value determined?+
Corporate plans typically calculate the lump sum by present-valuing the annuity stream at IRS-published segment rates (30-year Treasury based rates). When those rates rise, lump sums fall (and vice versa) because a higher discount rate produces a lower present value. This creates timing sensitivity: an employee eligible to retire in a low-rate environment often receives a materially larger lump sum than the same employee retiring six months later after rates have risen. Public pension lump sums are less common and often less generous.
Can I roll a pension lump sum into an IRA?+
Yes. A direct rollover from the plan to a traditional IRA preserves the tax deferral. The money moves custodian-to-custodian, no withholding applies, and the participant retains full investment discretion. From that IRA the funds can be invested for growth, used to fund a single premium immediate annuity that replicates or enhances the pension income, converted to a Roth in low-income years, or left invested to preserve inheritance value. This is the most common lump-sum path.
What happens to my pension if I die?+
Under a single-life annuity, payments stop at the retiree's death. Under a joint-and-survivor annuity, payments continue to the surviving spouse (commonly at 50, 75, or 100 percent of the original amount) in exchange for a lower starting payment. Under a period-certain option, payments continue for a minimum guaranteed number of years regardless of death. Federal law requires a spouse's written consent to elect a single-life option on a plan governed by ERISA, because it removes survivor protection.

This is an educational tool, not financial, tax, or legal advice. Results depend on the inputs you provide and the assumptions documented above. Consult a qualified professional before acting.

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