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): 4.07%
- Segment 2 (payments in years 6-20): 5.15%
- Segment 3 (payments in years 21 and beyond): 6.01%
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 4.07%. Payments in years 6 through 20 at 5.15%. Everything after year 20 at 6.01%.
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 0.53%, 2.31%, and 3.09%. 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.
Segment rate history: 2019 to 2026
Understanding where rates have been helps calibrate how unusual the current rate environment is and what the direction of change might mean for upcoming lump sum offers.
2019: Segment 1 was 3.43%, Segment 2 was 4.46%, Segment 3 was 4.88% (from November 2018 lookback). These were moderate rates producing moderate lump sums.
2020-2021: Rates fell dramatically with Federal Reserve zero interest rate policy in response to the pandemic. By November 2020, Segment 1 was 0.53%, Segment 2 was 2.31%, Segment 3 was 3.09%. Lump sums at these rates were at their highest level in decades. A $3,000/month pension for a 65-year-old was worth approximately $600,000 to $640,000 as a lump sum. Many employers who offered voluntary windows in late 2021 and 2022 did so precisely because rates were elevated enough from their 2020 lows to reduce the cost of offering a window.
2022-2023: The Federal Reserve raised rates aggressively to combat inflation, with 11 rate increases between March 2022 and July 2023. Segment rates followed. By November 2022, Segment 2 was 5.60%, and by November 2023 it was 5.76%. Lump sums fell by $150,000 to $200,000 per $3,000/month of pension benefit compared to the 2020-2021 lows. Employees who delayed making a lump sum election from 2021 to 2023 typically saw their lump sum offer fall by 20 to 30% in dollar terms.
2024-2025: Rates stabilized in the 5.0 to 5.6% range on Segment 2, as the Fed paused its rate cycle. The segment rates used for 2026 plan years are from November 2025 and reflect this stabilized-high-rate environment. Segment 2 at 5.15% in 2026 is the highest sustained level since before the 2008 financial crisis.
Which lookback month applies to your plan
Pension plans have flexibility in which month's segment rates they use. The default is the November rates applied to plan years beginning in the following calendar year. But plans can elect to use August or October rates instead, as long as the election is documented in the plan document. The month a plan uses is called its "lookback month."
A plan with an August lookback uses rates from August of the prior year for its current plan year. A plan that begins its plan year in July uses rates from August of the same calendar year for that plan year. The specific lookback election is disclosed in the Summary Plan Description (SPD) and in the plan's Annual Report (Form 5500). If your employer offers a lump sum and does not disclose which lookback month is being used, ask. The difference between August, October, and November rates in any given year can be $5,000 to $15,000 on a $500,000 lump sum.
The calculator on this site defaults to November rates but allows you to enter any custom rates. If your plan uses August rates, enter the August segment rates from the IRS's monthly publication (available at irs.gov under "Retirement Plans" -- "Required Minimum Distributions") to get the plan-accurate lump sum calculation.
How the current rates affect plan funding and lump sum availability
The same segment rate increase that reduced lump sum values by $150,000 to $200,000 per case since 2021 simultaneously improved pension plan funded status dramatically. When segment rates rise, the present value of all future pension obligations falls using those rates in the actuarial liability calculation. A plan that was 75% funded in 2021 at low rates may now show 100% or above funded status using the 2026 segment rates for its actuarial valuation.
This has practical implications for the availability of lump sum windows. ERISA at-risk funding rules restrict certain plan benefits and accelerated distributions when plan funding falls below specified thresholds (80% for some restrictions, 60% for others). In 2021, when lump sums were at their highest, some plans were also at their lowest funding ratios, creating regulatory constraints on offering voluntary windows at exactly the moment participants would have benefited most from them.
In 2026, improved funded status means fewer plans face distribution restrictions. A plan at 95% funded has regulatory room to offer voluntary lump sum windows that it might not have had in 2021. The cost to the employer of offering a window is also lower at current rates, because each departing participant's lump sum is smaller. These two factors -- regulatory capacity and lower per-participant cost -- suggest that voluntary lump sum windows may become more common in 2026 and 2027 even as individual lump sum amounts remain lower than 2021 peaks.
Segment rates and pension risk transfer timing
Large corporations that have been considering pension risk transfers (PRTs) -- transferring pension liabilities to insurance companies in group annuity transactions -- find the current rate environment favorable for execution. When segment rates are high, the accounting liability on the corporate balance sheet is lower, making the cost of the PRT transaction (paying the insurer a premium to assume the liability) more attractive relative to carrying the pension on the balance sheet.
For participants in frozen defined benefit plans at large employers, the elevated segment rate environment increases the probability of a PRT announcement. Corporate sponsors in manufacturing, aerospace, defense, and financial services have been the most active PRT buyers. If you are a deferred vested participant in a frozen plan at a company in these sectors, it is worth checking whether any PRT has been announced and whether your benefit was included. The PBGC's and your plan administrator's websites are the authoritative sources for PRT announcements affecting your benefit.
Once a PRT executes, participants can no longer elect a lump sum from the original plan. Insurance group annuities do not include individual commutation rights. If your plan has offered or is currently offering a voluntary lump sum election, and you believe a PRT is likely, treating the open window as potentially the last voluntary lump sum election opportunity is financially prudent. The annuity terms from the original plan may be more favorable than commercial annuity pricing available in the open market after a PRT.
What to do with this information if you have a lump sum offer right now
If you currently have a lump sum offer from your employer, use the IRS segment rate math and this calculator to do three things before responding.
First: verify the offered lump sum against the IRS formula. Enter your monthly benefit, retirement age, and the plan's lookback-month rates into the calculator. If the offered amount is within 2 to 3% of the calculator's result, the offer is actuarially fair. If it is materially below, ask your plan administrator to provide the actuarial basis for the offer. Plans occasionally use slightly different mortality tables or payment timing assumptions that produce different results than the IRS standard table. Get the explanation in writing.
Second: calculate your break-even age. At current rates, the break-even for most participants ages 60 to 65 falls between ages 80 and 84. If your family health history and current health status suggest you are likely to live past 83, the annuity wins on expected lifetime value. If you have health conditions that shorten your life expectancy, the lump sum wins.
Third: run the investment scenario. Take the offered lump sum amount, subtract 20% for the mandatory withholding you will need to cover if you do not direct rollover, and project the remaining balance at 6% and 5% annual return over 20 and 25 years. Compare the annual income that balance generates at a 4% withdrawal rate to the pension annuity you are giving up. If the investment income is meaningfully less than the pension, the annuity is the mathematically stronger choice regardless of the break-even age calculation.
How to read the IRS Notice publication each month
The IRS publishes segment rates monthly in a Revenue Ruling or Internal Revenue Bulletin notice. The relevant publication for pension plan calculations is typically titled "Applicable Federal Rates" and is available through IRS.gov under the "Tax Exempt and Government Entities" or "Retirement Plans" sections. The notice reports Segment 1, Segment 2, and Segment 3 rates, along with the 30-year Treasury rate and 30-year corporate bond rate that are used in some older plan valuation methods.
Reading the notice for your specific purpose: if you are calculating what your pension's lump sum should be under IRS rules, locate the Segment 1, Segment 2, and Segment 3 columns. The rates are expressed as percentages to two decimal places (e.g., 5.13%). Use the month corresponding to your plan's lookback month. If your plan uses a November lookback and you want to know the rates for the current plan year, look for the November notice from the prior calendar year.
One common confusion: the IRS publishes both the corporate bond segment rates (used for most pension plan calculations under Section 417(e)) and the minimum present value segment rates (used for some other plan valuations under Section 430). These are different numbers. The 417(e) rates are used for single-employer defined benefit plan lump sum calculations. If you are trying to verify an employer-provided lump sum quote, you want the 417(e) segment rates, not the 430 rates. The calculator on this site uses 417(e) rates.
The mortality table assumption: IRS Mortality Table 2024 and its effect on lump sums
The IRS specifies both the discount rates (segment rates) and the mortality table that must be used for minimum lump sum calculations. The mortality table determines the probability of survival at each age from the pension start date to the end of the projection period. A retiree with a longer projected lifespan produces a higher lump sum under the IRS formula because there are more projected annuity payments to discount.
The IRS updated its standard mortality table from the RP-2000 table to the Pri-2012 mortality table, applied with mortality improvement scale MP-2021 and subsequent updates. The Pri-2012 table reflects longer life expectancies than RP-2000, which means the actuarial lump sum values are slightly higher under the newer table. Plans that have not updated their mortality table election may be using a table that produces a different result than the IRS minimum calculation. If your plan's offered lump sum is 3 to 5% lower than the calculator's result, the discrepancy may be a mortality table difference rather than a segment rate difference. Ask the plan administrator to confirm which mortality table they are using.
Lump sum versus annuity: the full comparison at current rates
At 2026 segment rates, the mathematical break-even between taking a lump sum and keeping the annuity falls at approximately age 82 to 84 for most participants ages 60 to 65. This means: if you live past 84, the annuity produces more lifetime income than the lump sum invested at typical returns. If you die before 82, the lump sum leaves more to your estate or heirs.
The decision factors beyond the break-even calculation include: income stability preference (annuities provide guaranteed monthly income; lump sums require self-management), estate planning goals (lump sums are inheritable; pension annuities typically die with the participant unless a survivor option is elected), inflation protection (most private pensions have no COLA; government pension COLAs vary by plan), and concentration risk (a pension annuity is only as secure as the plan's funding and the PBGC backstop; a lump sum invested in a diversified portfolio eliminates that concentration).
At 2021's low rates, the break-even age was approximately 88 to 92 years -- so only participants with unusually long life expectancies justified taking the annuity. The higher lump sums available in 2021 made the math strongly favor taking the cash. At 2026 rates, the break-even has moved back to a more historically normal range of 82 to 84, and the annuity is a stronger choice for healthy participants than it was 5 years ago. This shift in the mathematical calculus is one reason the current environment rewards a careful calculation rather than a simple "rates are high, take the lump sum" heuristic.
Rate environment context: 2026 in historical perspective
Current 417(e) segment rates are elevated by any 20-year comparison. The last time Segment 2 was consistently above 5% for multiple consecutive years was 2006 to 2008, before the financial crisis pushed the Federal Reserve to near-zero rates that persisted through 2015. Participants who had voluntary lump sum elections available in 2006 and declined them, expecting rates to continue rising, instead watched rates fall dramatically -- a pattern that trapped many in lower lump sum offers for the following decade.
The current environment may or may not continue. The Federal Reserve's rate trajectory, inflation trends, and global bond market conditions all affect the segment rates that will apply to 2027 and 2028 plan years. If rates fall from 2026 levels -- either through a Fed rate-cutting cycle or economic slowdown -- lump sum values will rise from current levels, and employees who waited will be rewarded. If rates remain elevated or rise further, lump sums will stay at current levels or continue declining.
The practical implication: do not make a voluntary lump sum election based primarily on predictions about where segment rates are going. Make it based on your specific financial situation -- your break-even age, your investment capacity, your income needs in retirement, and your survivor benefit obligations. Rate direction is unknowable; your own financial circumstances are measurable. The calculation is always available at the present value calculator with whatever rates apply at the time of your election decision.
Key questions to ask your plan administrator before a lump sum election
Before accepting or declining a voluntary lump sum offer, ask your plan administrator or HR benefits team for written answers to four questions. First: what are the specific segment rates and lookback month being used to calculate this offer? The answer should be a specific month and three specific rate percentages. Second: what mortality table is being used in the calculation? The answer should identify the specific IRS table. Third: what is the payment date, and will the rates change if the payment is delayed? Some plans recalculate if the plan year changes between election and payment. Fourth: are there any survivor benefit options available with the annuity that are not available with the lump sum? Most plans eliminate survivor annuity elections once you elect the lump sum.
Getting these answers in writing creates a verifiable basis for comparing the plan's offer against the IRS-standard calculation. It also creates a record if the calculation is later disputed. Employees who verify their lump sum calculations before accepting are far better positioned than those who accept at face value -- and occasionally find a discrepancy that is worth tens of thousands of dollars once corrected.
Using this site's calculator with current 417(e) rates
The IRS 417(e) segment rate calculator at the present value calculator allows you to enter your monthly pension benefit, your age at the calculation date, and the three current segment rates to compute the minimum lump sum value under IRS rules. The calculator defaults to the current plan year's November lookback rates and uses the IRS-mandated mortality table. You can override any rate to model different scenarios: what would your lump sum have been in 2021 (low rates), what is it now at 2026 rates, and what would it be if Segment 2 fell by 100 basis points from today's level.
For participants who are within 5 years of pension eligibility and expect a lump sum option at retirement, running this calculation annually tells you whether the trend in your potential lump sum is favorable or unfavorable. A retiree who can elect a lump sum at any age from 55 to 65 benefits from knowing which year in that window produces the highest lump sum value given the current and likely future rate environment -- even if the answer is that the difference is modest enough to make the decision on other factors. The 417(e) calculator makes that comparison straightforward without requiring actuarial expertise. Anyone with a defined benefit pension -- whether at a Fortune 500 company, a mid-size manufacturer, a utility, or a government contractor -- who has a lump sum option either at retirement or through a voluntary window should run this calculation at least annually in the 5 years before their planned retirement date. The segment rates change every month. The lump sum amount changes with them. Staying current on what your benefit is worth in present-value terms is the most basic form of pension income planning, and the calculator makes it a 5-minute exercise rather than an actuarial engagement. For employees who have received a specific lump sum offer and want to verify it, enter the offer amount alongside the IRS-formula result and check the percentage difference. A difference of more than 3% is worth a written explanation from the plan administrator. A difference of more than 10% is worth a formal inquiry before the election deadline. Your employer's calculation must meet the IRS minimum -- the calculator tells you whether it does. Use that result in any negotiation or formal inquiry about a discrepancy.
Use the lump sum vs. annuity calculator to model the break-even age at different discount rates -- the segment rate environment determines the lump sum, but the annuity's value comes from longevity, and both sides of that comparison are calculable. Use the pension income tax calculator to model the federal and state tax treatment of the annuity income versus a lump sum rollover, since the after-tax comparison often differs from the pre-tax one.