Pension Calculator
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Results
30 years × 1.5% × $80,000 gives a pension of $36,000 a year ($3,000.00 a month)
| Years of service | Yearly | Monthly | Share of final average |
|---|---|---|---|
| 10 | $12,000 | $1,000.00 | 15% |
| 15 | $18,000 | $1,500.00 | 22.5% |
| 20 | $24,000 | $2,000.00 | 30% |
| 25 | $30,000 | $2,500.00 | 37.5% |
| 30 | $36,000 | $3,000.00 | 45% |
| 35 | $42,000 | $3,500.00 | 52.5% |
| 40 | $48,000 | $4,000.00 | 60% |
Plans differ: some cap the years counted, use a different salary definition, integrate with Social Security or reduce benefits for early retirement. Your plan’s benefit statement is the authority.
How to use the pension calculator
- Choose the calculation: your pension from the plan formula, or a comparison of a lump sum offer with a monthly pension.
- For the formula, enter your years of service and the multiplier from your plan document. Enter your final average salary, or let the calculator estimate it from your current salary, raises and the averaging period your plan uses.
- For the comparison, enter both offers, the age payments start, a life expectancy and a discount rate: the return you think you could earn if you took the lump sum.
Pension formulas
Present value = Σ P × (1 + c)⌊j/12⌋ ÷ (1 + i)j, j = 0 … n − 1
i = (1 + d)1/12 − 1
A defined-benefit (final salary) plan pays a share of your pay for each year you work. The multiplier is that share, for example 1.5%, and the final average salary is usually the average of your highest or last three to five years. For the comparison, P is the monthly pension, paid at the start of each month for n months until the life expectancy, c the yearly cost-of-living increase and d the discount rate. The present value is the lump sum that, invested at d, would pay exactly the same income and run out at the life expectancy. The break-even age is when the discounted payments add up to the lump sum; the simple break-even ignores interest.
Worked examples
Plan formula. You earn $60,000, expect 3% raises and retire in 10 years with 25 years of service. Your plan pays 2% a year on the average of your last three years' salary. That average is $76,028, so the pension is 25 × 2% × $76,028 = $38,014 a year, or $3,167.85 a month.
Lump sum or pension. You are offered $300,000 now or $1,800 a month for life from 65. Assuming a 5% return and a life expectancy of 85, the 240 payments are worth $276,420 today, so the lump sum is worth $23,580 more. The payments add up to the lump sum at about 78, and the discounted payments do so at about 88. The pension is equivalent to earning 3.99% a year to 85. If you live to 90, the pension comes out ahead by $12,613.
Value of a $1,000 monthly pension
The lump sum equal to $1,000 a month paid at the start of each month, with no cost-of-living increase. Scale it to your pension: $2,000 a month is twice the figure.
| Discount rate | 20 years of payments | 25 years of payments | 30 years of payments |
|---|---|---|---|
| 3% | $181,418 | $212,338 | $239,010 |
| 4% | $166,596 | $191,502 | $211,973 |
| 5% | $153,567 | $173,674 | $189,428 |
| 6% | $142,073 | $158,341 | $170,498 |
| 7% | $131,899 | $145,091 | $154,496 |
Higher discount rates and shorter lives make the pension worth less as a lump sum, which is why the choice depends so much on your assumptions.
Things to weigh beyond the numbers
- Longevity insurance. A pension keeps paying however long you live. A lump sum can run out, especially if markets fall early in retirement.
- Survivor benefits. A joint-and-survivor pension pays less each month but continues for your spouse. Compare the offer you would actually choose.
- Inflation. Most private pensions have no cost-of-living increase, so their buying power falls every year. Add a COLA only if your plan promises one.
- Taxes. Pension payments are usually taxed as income. A lump sum is taxable too unless you roll it into an IRA or another plan.
- Plan the rest of your income. Enter the pension as other income in the retirement calculator, see what a lump sum could pay with the annuity payout calculator, and check your Social Security options.
Frequently asked questions
How is a defined-benefit pension calculated?
Most plans multiply your years of service by a multiplier and your final average salary. With 30 years of service, a 1.5% multiplier and an $80,000 final average salary, the pension is 30 × 1.5% × $80,000 = $36,000 a year, or $3,000 a month.
Should I take the lump sum or the monthly pension?
Compare the lump sum with the present value of the payments. A $1,800 monthly pension from 65 to 85 is worth about $276,420 at an assumed 5% return, so a $300,000 lump sum is worth more on those assumptions. If you live to 90, the pension is worth about $12,613 more.
What is the pension break-even age?
It is the age at which the payments you have received equal the lump sum. $1,800 a month adds up to $300,000 at about age 78, but once you allow for the 5% the lump sum could earn, break-even moves out to about 88.
What discount rate should I use?
Use the return you could realistically earn on the lump sum after fees, at a similar level of risk. A pension is a guaranteed income, so comparing it with a risky investment return can flatter the lump sum. Try several rates.
What does "rate the pension pays" mean?
It is the return the lump sum would have to earn to pay the same income until your life expectancy. For $300,000 against $1,800 a month to age 85, it is about 3.99% a year. If you expect to earn more than that, the lump sum looks better.