How the lump sum comparison works
The calculator values the monthly pension as the amount you'd need today, invested at your discount rate, to pay the same checks (rising with any COLA) until your plan-to age. If that value is higher than the lump sum offer, the plan is paying you less in the lump sum than the checks are worth, and vice versa.
It also runs it the other way: how much income the lump sum could produce over the same years, and at what age it would run dry if you tried to pay yourself the full pension from it.
Things the maths can't see
- Longevity. A pension pays for life. A lump sum can run out if you live much longer than planned.
- Plan health. Private pensions are insured by the PBGC up to a yearly limit; public pensions depend on the state or city.
- Heirs. A lump sum can be left to heirs; a single-life pension stops at death.
- Behaviour. A lump sum is easy to spend early. Rolling it into an IRA keeps it tax-deferred.
Want guaranteed income from a lump sum you already have? The annuity calculator shows what it might buy.
Questions people ask
How is a pension calculated?
Most defined-benefit pensions use a formula: years of service × a multiplier (often 1% to 2.5%) × your final average salary (for example, the average of your highest three or five years). 30 years × 1.5% × $80,000 = $36,000 a year. Check your plan's summary plan description for its exact formula.
Should I take a lump sum or monthly pension?
Compare the lump sum with what it would cost to buy the same income. If the lump sum, invested at a realistic return, can't pay the monthly amount until your life expectancy, the monthly pension is the better deal. Monthly payments also protect you against living a very long time.
What discount rate should I use?
Plans set lump sums using corporate bond rates (IRS 417(e) rates), usually 4% to 6% recently. Use a rate close to what you could safely earn. A higher assumed return makes the lump sum look better, but comes with market risk.
Does my pension have a cost-of-living adjustment?
Many public pensions do; most private pensions don't. Without a COLA, a pension loses buying power over time: at 2.5% inflation, $1,000 a month is worth about $610 in today's money after 20 years.
What is a survivor option?
Choosing a joint-and-survivor payout (such as 50% or 100%) lowers your monthly check but keeps paying your spouse after you die. It is often worth it if your spouse relies on the income.