Retirement income decision guide
Compare guaranteed pension income with an investable lump sum
A pension offer trades liquidity and estate value for income that can continue as long as the elected life or joint-and-survivor form requires. A lump sum transfers investment, withdrawal, longevity, and behavioral risk to the retiree.
Flat discount-rate calculators miss two central facts: a fixed private pension loses purchasing power to inflation, and a joint-and-survivor election can keep paying after the retiree dies. This model builds the payment stream month by month before calculating present value and the return hurdle.
How to use this tool
Match the exact plan option
Enter the monthly benefit for the selected single-life or joint-and-survivor election, not the plan’s highest headline amount.
Test more than one longevity case
Run expected, long-life, and early-death scenarios for both spouses rather than relying on a single average.
Use a realistic net return
Subtract advisory, fund, and account fees and avoid treating a volatile market average as a guarantee.
Compare taxes on the same basis
This model is pre-tax. A direct eligible rollover can preserve tax deferral, while a cash distribution can create current tax and withholding.
What the return hurdle means
The hurdle is the annual investment return that makes the lump sum exactly sufficient to reproduce every modeled pension payment. A hurdle above the return you can reasonably earn after fees supports the annuity’s financial value; a low hurdle strengthens the lump-sum case but does not remove market and longevity risk.
Why survivor elections matter
- Single-life benefits often pay more while the retiree is alive and stop at death
- Joint-and-survivor options reduce the starting check in exchange for continued spouse income
- A younger or longer-lived spouse can materially increase the present value of survivor payments
- Compare the actual monthly amount attached to each survivor percentage
Inflation and fixed pensions
A fixed pension keeps the same nominal check while purchasing power declines. The final real-payment metric expresses the last modeled check in today’s dollars. A plan COLA changes the stream directly; it should not be confused with an informal possibility of future increases.
Pension elections are often irrevocable. Verify the plan’s survivor form, guarantees, COLA, start date, early-retirement reduction, lump-sum rollover eligibility, plan funding, PBGC or governmental protections, and health-benefit consequences before choosing.
Sources and further reading
- PBGC annuity or lump sum overview — Lifetime and joint-survivor annuity considerations.
- IRS Publication 575 — Tax treatment of pension, annuity, lump-sum, survivor, and rollover payments.
- IRS types of retirement plan benefits — Defined-benefit annuity and joint-life forms.
Frequently asked questions
What discount rate should I use for a pension?
Use multiple rates. A lower rate places more value on guaranteed future payments; a higher rate places more value on the lump sum. Compare the hurdle with realistic net returns and with low-risk assets of similar duration rather than only a stock-market average.
Does the calculator use actuarial mortality probabilities?
It uses the specific ages at death you enter, so it is a scenario model rather than a probability-weighted actuarial valuation. Run several life spans and consult plan-specific actuarial information for a formal valuation.
Are pension payments and lump sums taxed the same?
Tax timing can differ. IRS guidance says eligible lump sums may generally be rolled directly to another qualified plan or traditional IRA without current tax, while periodic taxable pension payments are included as received. Plan basis and rollover eligibility can change the details.
What if the pension has no COLA?
Enter zero. The nominal check stays fixed, while the real-payment metric shows the purchasing-power effect of the entered inflation rate.