If your employer has offered you a pension buyout, or if your plan lets you elect a lump sum instead of monthly payments, the dollar amount they quote you comes from a specific IRS formula. Most people don't know what goes into it. Understanding it takes about ten minutes and can be worth tens of thousands of dollars in negotiating clarity.
Here's what the math actually is.
The three segment rates
The IRS requires pension plans to use corporate bond yields to convert a stream of future payments into a single present value. Three "segment rates" correspond to different time horizons. They come from high-quality corporate bonds in the preceding month of August, October, or November depending on plan year.
For 2026 plan years, the applicable rates (from November 2025) are:
- Segment 1 (payments in years 1-5): 5.03%
- Segment 2 (payments in years 6-20): 5.35%
- Segment 3 (payments in years 21 and beyond): 5.57%
Each payment in your pension stream gets discounted by whichever segment rate applies to when that payment arrives. Payments you'd receive in years 1 through 5 of retirement are discounted at 5.03%. Payments in years 6 through 20 at 5.35%. Everything after year 20 at 5.57%.
Why higher rates produce smaller lump sums
This is counterintuitive to most people. Higher interest rates sound like they should mean more money, not less. But in present-value math, the discount rate runs opposite to the result.
Think of it this way: if I promise to pay you $1,000 in ten years, and the prevailing rate of return is 2%, that promise is worth about $820 today. If the rate is 5%, the same promise is worth about $614 today. You could invest $614 at 5% and have $1,000 in ten years without needing the promise at all.
So when segment rates rise, the present value of your pension's future payments falls. Your monthly checks are the same; the lump sum equivalent shrinks.
The difference is significant. In November 2020 (when rates hit historic lows), the three segment rates were 0.45%, 1.47%, and 2.31%. A $3,000/month pension for a 65-year-old with a 20-year life expectancy was worth roughly $620,000 as a lump sum under those rates. Today, the same pension calculates to around $440,000. Same pension. Same person. The rates moved, and $180,000 disappeared from the lump sum offer.
How to use this calculator
The calculator on this site runs the same math your employer's actuary runs: month by month, payment by payment, segment rate by segment rate. Plug in your monthly benefit, your current age, your expected retirement age, and a life expectancy. We default to 85, which is conservative for a healthy 65-year-old today.
The result shows you the IRS-formula present value of your annuity. Compare that to the lump sum your employer is offering. If they're close, the offer is fair. If your employer's lump sum is materially less than what the calculator produces, you have grounds to ask questions.
One important caveat: some employers use a different lookback month for the segment rates (they're allowed to use August or October instead of November). The calculator lets you enter custom rates if your plan documents specify a different basis.
The break-even question
The other number worth understanding is your break-even age: the point at which the cumulative value of your monthly annuity payments overtakes the lump sum. For most people retiring at 65 with current segment rates, that break-even lands between ages 80 and 83.
If you expect to live past 83, the annuity mathematically wins. If you have serious health concerns, or if you want flexibility to invest the money yourself, the lump sum has a case.
Neither answer is universally right. But the math is the math, and you should know what it says before you sign anything.