Calculator
Pension calculator
Your plan’s formula, an early-retirement reduction, and the value of the payments compared with a lump-sum offer.
Monthly pension$2,050$24,600 a year · 30.8% of final average pay
| 1.5% × 25 years × $80,000 | $30,000 |
|---|---|
| Early retirement (3 years × 6%) | −18% |
| Annual pension | $24,600 |
| Value of 23 years of payments at 5% | $340,739 |
| Lump sum offered | $350,000 |
| Return the lump sum must earn to match | 4.70% a year |
Payments assumed for 23 years. A pension pays for life however long you live; the lump sum must be invested to match it. Plans set lump sums with IRS section 417(e) interest rates and mortality tables, so actual offers move with interest rates.
The link keeps your inputs, so you can save or share this scenario.
How the pension calculator works
Most traditional (defined-benefit) pensions pay a percentage of your pay for each year of service: multiplier × years of service × final average pay. Your plan document defines each piece. The pension calculator then:
- applies the early-retirement reduction your plan uses for each year you start before its normal retirement age (the default 6% is only an example: check your plan's table);
- values the stream of payments: each monthly payment, rising by any COLA, discounted at the rate you enter, for the number of years you choose;
- if you enter a lump-sum offer, finds the yearly return that makes the lump sum exactly equal to those payments.
For the number of years, the IRS Single Life Expectancy Table is a neutral reference: 25.4 years at 62, 22.9 at 65 and 18.8 at 70[p590b]. Anyone who outlives that average gets more from a lifetime pension than the valuation shows.
Lump sum vs monthly pension
A lump sum is worth more than the pension only if you can earn more than the implied rate on it, after costs, for as long as you live. In the default example the pension pays $2,050 a month from 62. Valued over 23 years at 5%, those payments are worth $340,739. Here is the return each lump-sum offer would need:
| Lump sum offered | Return needed to match | Value of payments at 5% |
|---|---|---|
| $250,000 | 8.83% | $340,739 |
| $300,000 | 6.49% | $340,739 |
| $350,000 | 4.70% | $340,739 |
| $400,000 | 3.28% | $340,739 |
| $450,000 | 2.10% | $340,739 |
Private plans must compute lump sums with IRS minimum present value segment rates and mortality tables under section 417(e), published monthly[pbgc417]. When interest rates rise, lump-sum offers fall, and the reverse.
Worked example: 1.5% × 25 years
- Formula: 1.5% × 25 × $80,000 = $30,000 a year at the normal retirement age of 65.
- Starting at 62 is 3 years early: 3 × 6% = 18% less, so $30,000 × 0.82 = $24,600 a year, or $2,050 a month. That replaces 30.8% of final average pay.
- A $350,000 lump sum would need to earn 4.70% a year to pay $2,050 a month for 23 years and then run out.
Defined-benefit limits for 2026 and 2027
Federal law caps the annual benefit a qualified defined-benefit plan can pay at $290,000 for 2026 and $300,000 for 2027[n2567][n2667]. Pay above the compensation limit does not count in the formula:
| Limit | 2025 | 2026 | 2027 |
|---|---|---|---|
| Maximum annual benefit (415(b)) | $280,000 | $290,000 | $300,000 |
| Compensation counted (401(a)(17)) | $350,000 | $360,000 | $375,000 |
Pension payments are taxable income to the extent they exceed any after-tax contributions you made[p575].
Common mistakes
- Comparing the lump sum with the total of all payments. $2,050 × 12 × 23 = $565,800, but money paid in 20 years is worth less than money today; compare present values or the implied return.
- Forgetting the survivor option. A joint-and-survivor pension pays less each month but continues to a spouse; the calculator's amount is a single-life figure.
- Ignoring the COLA. A 2% yearly increase adds a lot of value over 25 years; enter it if your plan has one.
- Leaving out Social Security. Most retirees combine a pension with Social Security; see the Social Security calculator. Federal employees should use the FERS retirement calculator, which applies the FERS formula.
Related toolsTo see what a lump sum pays if you invest it and draw it down yourself, use the annuity calculator. To weigh when to start Social Security alongside a pension, see the break-even calculator.
Frequently asked questions
How is a pension calculated?
Usually multiplier × years of service × final average pay. For example, 1.5% × 25 years × $80,000 = $30,000 a year. Starting before the plan's normal retirement age reduces it by a percentage set in the plan for each year early.
Should I take a lump sum or a monthly pension?
That depends on your health, other income, the survivor option and what return you could earn. The pension calculator shows the return the lump sum would need to match the payments; if that is higher than you can reasonably earn, the monthly payments are worth more.
How much is a $2,000 a month pension worth as a lump sum?
Paid for 23 years with no COLA and valued at 5% a year, about $332,428; at 4%, about $364,243. Plans compute actual offers with IRS section 417(e) rates.
What is the maximum pension benefit for 2026?
A qualified defined-benefit plan can pay at most $290,000 a year in 2026, rising to $300,000 in 2027.
Sources
- IRC § 417(e) lump-sum interest rates and mortality (minimum present value)
- Notice 2025-67, 2026 Amounts Relating to Retirement Plans and IRAs
- Notice 2026-66, 2027 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
- Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs)
- Publication 575 (2025), Pension and Annuity Income