How much will my pension be?
The usual estimate is a simple formula. Multiply your final average salary by your years of service and a multiplier from your plan. For $80,000, 25 years, and 1.5%, that's $30,000 a year.
Yearly pension = final average salary × years of service × multiplier| Years of service | 1% | 1.5% | 2% | 2.5% |
|---|---|---|---|---|
| 15 | $1,000 | $1,500 | $2,000 | $2,500 |
| 20 | $1,333 | $2,000 | $2,667 | $3,333 |
| 25 | $1,667 | $2,500 | $3,333 | $4,167 |
| 30 | $2,000 | $3,000 | $4,000 | $5,000 |
| 35 | $2,333 | $3,500 | $4,667 | $5,833 |
This is only an estimate. Plans define final average pay differently, may cut benefits for starting early, and can have other limits. Your plan's benefit statement overrides this formula, so if you have one, turn on "I know my monthly pension" and use that number.
Pension vs. lump sum: what return does the lump sum need?
The cleanest test is one number: the yearly return your lump sum must earn to pay exactly what the pension pays, running out with the last payment. On $2,500 a month from age 65, $380,000 needs 6.4% if you live to 90. If you can't reasonably count on that after fees, the pension is ahead on these numbers.
| Lump sum | Live to 75 | Live to 80 | Live to 85 | Live to 90 | Live to 95 |
|---|---|---|---|---|---|
| $250,000 | 3.8% | 9.12% | 11.05% | 11.88% | 12.27% |
| $300,000 | None | 5.96% | 8.25% | 9.29% | 9.81% |
| $350,000 | None | 3.54% | 6.13% | 7.35% | 8% |
| $400,000 | None | 1.61% | 4.45% | 5.83% | 6.58% |
| $450,000 | None | None | 3.06% | 4.59% | 5.43% |
| $500,000 | None | None | 1.89% | 3.54% | 4.48% |
Read across a row and you see the real bet. A lump sum looks generous if you die at 75 and weak if you live to 95. PBGC, the federal agency that insures many private pensions, lists the same trade in words: an annuity gives steady income for life but less flexibility, and with a lump sum, you may outlive the money and must manage it yourself.
At what age does the pension overtake the lump sum?
Picture taking the same $2,500 a month from the lump sum instead. The age it runs out is the age the pension has clearly won, since it keeps paying. At 5%, that's 84 and 10 months.
| Return on the lump sum | Runs out at age | With a 2% yearly raise |
|---|---|---|
| 0% | 77 and 8 months | 76 and 5 months |
| 3% | 80 and 11 months | 78 and 9 months |
| 4% | 82 and 7 months | 79 and 9 months |
| 5% | 84 and 10 months | 81 and 1 month |
| 6% | 88 and 2 months | 82 and 9 months |
| 7% | 94 | 84 and 11 months |
| 8% | 114 and 7 months | 88 and 2 months |
Ignoring returns entirely, payments total more than the lump sum at age 77 and 9 months. That's a quick check, but it flatters the pension because it treats the lump sum as if it earned nothing. To test the lump sum with market ups and downs, use the retirement withdrawal calculator.
How a COLA and a survivor option change the math
A cost-of-living raise can matter more than the starting amount. A 2% yearly raise lifts this pension's value at 5% from $432,423 to $527,235. Without a raise, the check at 89 buys what $1,382 buys at the start, at 2.5% inflation. Enter only a raise your plan actually promises.
A survivor option cuts your check so that someone can keep receiving part of it after you die. PBGC's example is a $500 benefit that falls to $450 with a 50% survivor option, leaving $225 for the survivor. The exact cut depends on your plan and both ages, so use the figure in your election papers.
Using that same 10% cut as an example, the pension here falls to $2,250, the survivor would get $1,125, and if the survivor lives 8 years longer, the total value at 5% is $415,532. Compare that with the lump sum, which can also pass to heirs if there's money left. Some forms may require a spouse's consent, so check before you decide.
What a lump sum can cost at tax time
This comparison is before tax, because the right answer depends on what you do with the money. If you take a lump sum as cash, IRS Publication 575 says 20% of an eligible rollover distribution generally gets withheld for federal tax. On $380,000, that's $76,000 gone from the check, and it's only withholding, so you may owe more or less.
Taken as ordinary income in one year, with no other income and the 2026 single standard deduction, $380,000 would owe about $96,134 in federal tax. A direct rollover to an IRA or another plan avoids that withholding and defers the tax. Under age 59½, cash you keep may also face a 10% additional tax, unless an exception applies. Monthly pension payments are generally taxed as you get them, and fully if you made no after-tax contributions.
What if my employer can't pay the pension?
PBGC insures most private-sector defined benefit plans, with limits set by law. Its table for plans ending in 2027 shows a maximum of $8,113.64 a month at age 65 for a straight-life annuity. It's lower for younger ages and with survivor benefits. PBGC benefits don't get cost-of-living raises, and PBGC usually doesn't insure plans from federal, state, or local governments or church groups.
Your plan's Summary Plan Description says whether PBGC covers it, and your plan administrator can answer the rest. A fee-only planner or tax professional can review the numbers before your deadline, since your election may not be changeable later. For how this fits with your other savings, see how much you need to retire.
Common questions
Is it better to take a pension or a lump sum?
It depends on how long you live, what you could earn, and whether someone relies on the income. The return needed is the clearest number here. Consider your health, your other income, and how comfortable you are managing money. PBGC lists those same factors.
How long will a pension last?
A single-life pension pays for your life and then stops. A joint-and-survivor pension continues to your beneficiary at the share you chose. The money doesn't run out the way an account can, which is a key reason to take one.
Can I take part as a lump sum and part as monthly payments?
Some plans allow it, according to PBGC. Check with your plan administrator. You can test a split here by entering each part as its own scenario.
Why is my plan's lump sum different from the value here?
Your plan works out its offer under its own rules and assumptions. This tool uses the return you enter and the age you plan through, so it answers a different question: what the offer is worth to you, on your own assumptions.
What if I leave a job before retirement?
Set the lump sum age to your age now and the pension start age to when payments would begin. The lump sum then has those extra years to grow, which lowers the return it needs.
Sources
- Annuity or lump sum · Pension Benefit Guaranty Corporation
- Benefit options · Pension Benefit Guaranty Corporation
- Understanding your pension and PBGC coverage · Pension Benefit Guaranty Corporation
- Maximum monthly guarantee tables · Pension Benefit Guaranty Corporation
- Publication 575: Pension and Annuity Income · Internal Revenue Service
- Topic no. 410, Pensions and annuities · Internal Revenue Service