Pension Calculator

Understanding your pension

A defined benefit (DB) pension pays you a specific amount every month in retirement, calculated by a formula rather than by how much you contributed. If you have one, it is one of the most valuable financial assets you own. Most pensions today live in the public sector (teachers, police, firefighters, federal workers) and legacy corporate plans.

The pension formula

Almost every DB pension uses the same structure: final average salary times years of service times a benefit multiplier. A 1.5 percent multiplier with 30 years of service replaces 45 percent of your final salary each year in retirement. A 2 percent multiplier with the same service replaces 60 percent. Small changes in the multiplier or your final salary have a huge impact on the check you get for the rest of your life.

Lump sum or monthly pension?

Many plans offer retirees a choice: take the lifetime monthly pension, or take a one-time lump sum. This is one of the most consequential financial decisions you will ever make. There is no universally right answer. It depends on three big factors: how long you will live, how disciplined you are as an investor, and how important guarantees are to you.

Present value in plain English

To compare apples to apples, you can calculate the present value of the monthly pension. Present value asks: what lump sum today, invested at some reasonable rate, would produce this same stream of monthly checks over your expected lifetime? If the plan's lump sum offer is meaningfully larger than the present value, the plan is being generous with the lump sum. If it is smaller, the annuity is the better deal on paper.

Which discount rate to use

The discount rate reflects what you could reasonably earn on similar-risk money. Long-term Treasury yields or a conservative balanced portfolio return in the 4 to 6 percent range are common starting points. A higher rate makes future payments look less valuable and tilts the answer toward the lump sum. A lower rate does the opposite.

Longevity is the wildcard

A monthly pension keeps paying as long as you (and sometimes your spouse) are alive. If you live to 95, the pension might dramatically outperform even a well-invested lump sum. If you die in your 70s, the lump sum would have preserved more wealth for heirs. Family history and health matter here.

Other things to weigh

Pensions are backed by the plan sponsor and (for private plans) the PBGC up to annual limits. Ask about the plan's funded status. Also think about survivor options: providing income for a spouse reduces your check but adds meaningful protection. Coordinate the decision with Social Security, other savings, and any life insurance you already own.

Because the stakes are high and the tradeoffs are personal, this is a great decision to walk through with a fiduciary financial planner before you sign.