Pension Calculator

With the defaults, an $800,000 lump sum invested at 5% could pay the same $5,000 a month as the pension, rising 3.5% a year, until about age 80. A retiree who expects to live past that age would collect more from the pension; one with a shorter life expectancy, or who wants to leave money to heirs, would do better with the lump sum. In the joint-and-survivor example, the $5,000 single-life pension paid for 12 years is worth about $648,700 at retirement, slightly more than the $3,000 survivor pension paid for 20 years at about $613,800, so the answer is close and would flip if the spouse lived a few years longer. In the work-longer example, waiting five years for a pension of $3,800 instead of $2,500 a month pays off only for someone who lives past about 86.

Pensions

A pension is a retirement plan in which an employer, and sometimes the employee, sets money aside during the working years to provide income after retirement. In everyday speech the word usually means a traditional defined-benefit plan that pays a monthly check for life, though it is sometimes used for any employer retirement plan. Pensions are most common today in federal, state and local government jobs, the military, teaching, unionized trades and some large established companies. Public pensions such as Social Security serve a similar role at the national level.

Defined-Benefit Plan

A defined-benefit plan promises a specific income in retirement, set by a formula rather than by investment results. A typical formula multiplies years of service by a percentage, often 1% to 2.5%, and by final or highest average salary. An employee with 30 years of service, a 1.5% multiplier and a $90,000 final average salary would receive 30 × 1.5% × $90,000 = $40,500 a year.

The employer funds the plan, invests the money and bears the risk that returns fall short, and actuaries calculate the contributions needed to meet future promises. Employees usually need to work a minimum number of years to vest. Private-sector defined-benefit plans are governed by ERISA and most are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency that pays guaranteed benefits, up to a legal maximum, if a plan fails. Government plans are not covered by the PBGC but are backed by their sponsoring governments.

Defined-benefit plans offer something individual savings cannot easily replicate: guaranteed lifetime income that does not depend on markets or on how long you live. Their drawbacks are less portability, since benefits often accrue most heavily in the final years at one employer, and the risk that an underfunded plan cuts future accruals or freezes.

Defined-Contribution Plan

A defined-contribution plan specifies only what goes in, not what comes out. The employee, the employer or both contribute to an individual account, the employee chooses investments from a menu, and the balance at retirement depends on contributions, returns and fees. The 401(k) is the best-known example; others include 403(b) plans for schools and nonprofits, 457(b) plans for state and local governments, the federal Thrift Savings Plan, and profit-sharing and money-purchase plans.

Contributions are usually made before tax, lowering current taxable income, and grow tax-deferred until withdrawal; many plans also offer a Roth option. Employers often match part of employee contributions. Accounts are portable: the balance follows the worker from job to job through rollovers. For 2026, employees can defer up to $24,500 into a 401(k), with catch-up contributions for those 50 and older.

The defining feature is the shift of risk. With a defined-contribution plan, the employee carries investment risk, the risk of saving too little and the risk of outliving the money. There is no guaranteed lifetime check unless the retiree buys an annuity. That makes decisions about contribution rates, investment mix and withdrawal rates far more important for the individual than under a traditional pension.

Some employers offer hybrid plans, such as cash balance plans, which are legally defined-benefit plans but express benefits as a hypothetical account that grows with pay credits and interest credits. They are easier for employees to understand and more portable than traditional pensions while keeping the employer responsible for investment results.

The Fall of Defined-Benefit Plans and the Rise of Defined-Contribution Plans

In the decades after World War II, traditional pensions were a standard benefit at large American companies. The picture began to change after the Revenue Act of 1978 created section 401(k), and IRS rules issued in 1981 allowed employees to defer salary into such plans. Employers quickly saw that 401(k)s were cheaper, more predictable and easier to manage than pensions.

Several forces drove the shift. Longer life expectancies made lifetime promises more expensive. Stricter funding and accounting rules, including requirements to show pension shortfalls on corporate balance sheets, made pension costs volatile. Rising PBGC premiums added to the expense. A mobile workforce valued portable accounts over benefits that rewarded decades with one employer. High-profile failures, especially in the steel and airline industries in the early 2000s, showed how much was at stake.

The result has been a steady decline. Many companies froze their pension plans, stopping new accruals while continuing to pay benefits already earned, and replaced them with 401(k)s. Today only a small share of private-sector workers participate in a defined-benefit plan, while a majority of those with workplace retirement plans have only a defined-contribution plan. Public-sector workers are the main exception, and most state and local government employees are still covered by pensions, although many states have trimmed benefits for new hires or added defined-contribution components.

The trade-off for workers is more control and portability in exchange for more responsibility and risk. Laws such as the Pension Protection Act of 2006 and the SECURE Acts of 2019 and 2022 responded by encouraging automatic enrollment, automatic escalation and lifetime income options inside 401(k) plans.

Lump Sum vs. Monthly Benefit Payout

Many pension plans, and some employers that are closing or de-risking their plans, offer retirees a choice: a single lump sum now or a monthly annuity for life. The lump sum is calculated from the present value of the monthly payments using interest rates and mortality tables set by IRS rules, which is why lump sums shrink when interest rates rise.

The monthly pension offers guaranteed income for life, protection against outliving savings and against poor investment decisions, and, for private plans, PBGC insurance. It suits people in good health with long-lived families, those without other guaranteed income beyond Social Security and those who prefer not to manage investments.

The lump sum offers control and flexibility. It can be rolled into an IRA to keep its tax deferral, invested for potentially higher returns, drawn on for large expenses and left to heirs. It suits people with shorter life expectancies, those with other secure income, disciplined investors and anyone worried about the financial health of the plan sponsor. Taken in cash rather than rolled over, the whole amount is taxable in one year, often at a high rate.

The main calculator compares the two by asking how long the lump sum would last if it paid the same income as the pension. If that age is beyond your realistic life expectancy, the lump sum is likely the better deal on paper. Remember that the pension's guarantee has value beyond the arithmetic: it removes market and longevity risk.

Single-Life or Joint-and-Survivor Plans?

A single-life pension pays the highest monthly amount but stops when the retiree dies, leaving nothing for a surviving spouse. A joint-and-survivor pension pays a lower amount for as long as either spouse is alive. Plans usually offer several survivor levels, such as 50%, 75% or 100% of the original payment continuing to the survivor; the higher the survivor percentage, the lower the starting payment.

Federal law protects spouses in private plans: a married participant receives a joint-and-survivor annuity of at least 50% by default, and choosing a single-life pension requires the spouse's written, notarized consent.

The right choice depends on both spouses' ages and health, the survivor's other income, and how much the household depends on the pension. Joint-and-survivor coverage is usually valuable when the spouse is younger or healthier, has little pension or Social Security of their own, or would struggle without the income. A single-life pension can make sense when the spouse has substantial independent income, is significantly older or in poor health.

Some retirees take the single-life option and buy life insurance to protect the spouse, a strategy sometimes called pension maximization. It can work, but only if the insurance is affordable and stays in force, and the costs should be compared carefully. Some plans also include a pop-up feature that restores the single-life amount if the spouse dies first.

The calculator compares the two options by valuing each stream of payments at your retirement date, using both life expectancies, your investment return and the cost-of-living adjustment.

1. Cost-of-Living Adjustment

A cost-of-living adjustment (COLA) raises pension payments over time to offset inflation. Social Security applies one every year based on the CPI for urban wage earners; the increase for 2026 was 2.8%. Federal civil service and military retirement pay also include COLAs, as do many state and local government pensions, though some cap the adjustment, apply it only in good years or base it on a fixed percentage.

Most private-sector pensions do not include automatic COLAs, which means their real value falls steadily. At 3% inflation, a fixed pension loses about a quarter of its buying power in ten years and nearly half in twenty. When comparing a pension with a lump sum, a COLA makes the pension considerably more valuable; enter 0 in the calculator if your plan pays a fixed amount. A pension with a COLA is also worth more as a survivor benefit, because the survivor may receive it for decades.

Frequently asked questions

Sources

• Pension Benefit Guaranty Corporation
• U.S. Department of Labor – Retirement Plans
• Social Security Administration – Cost-of-Living Adjustment