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 the yields on high-quality corporate bonds in a single month, called the lookback month, which the plan picks within limits the Treasury sets.
For a calendar-year plan that uses November rates for the following year, the 2026 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 how far from the valuation date that payment arrives. Payments due in the first 5 years 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.
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 swings are large. In November 2020 (when rates hit historic lows), the three segment rates were 0.53%, 2.31%, and 3.09%. Run a $3,000/month pension starting at 65 through our calculator with the IRS 2026 mortality table, and those rates give a lump sum of about $580,000. The November 2025 rates give about $442,500. Same pension. Same person. The rates moved, and about $138,000 disappeared from the lump sum.
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 and your expected retirement age. Survival probabilities come from the IRS 2026 mortality table (Notice 2025-40), the same table plans must use for the 417(e) minimum, so there's no life expectancy to guess.
The result shows you the IRS-formula present value of your annuity. Compare that to the lump sum your employer is offering. The 417(e) result is the legal minimum. If your employer's lump sum is materially less than what the calculator produces with your plan's lookback month, ask the plan administrator to explain the difference in writing.
One caveat: plenty of plans use a lookback month other than November. The calculator lets you enter custom rates if your plan documents specify a different month.
The break-even question
The other number worth understanding is your break-even age. There are two versions. The simple one ignores investment returns and asks when your total monthly checks add up to the lump sum. For a $3,000 a month pension starting at 65, the 2026 rates give a lump sum of about $442,500, and the checks pass that figure at about age 77. The more useful version assumes you invest the lump sum at 5% a year and draw the same $3,000 a month from it. That money runs out at about age 83.7.
If you expect to live well past 84, the annuity wins on the math. 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
All figures below are the November rates for each year, from the IRS minimum present value table.
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. Holding the 2026 mortality table fixed, a $3,000/month pension starting at 65 was worth about $580,000 as a lump sum at those rates.
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%. For a $3,000/month pension starting at 65, our calculator (holding the 2026 mortality table fixed) gives about $580,000 at November 2020 rates, $433,000 at November 2022 rates and $424,000 at November 2023 rates, a drop of about 27%.
2024-2025: Segment 2 eased to 5.25% in November 2024 and 5.15% in November 2025. That's a bit below the 5.60% and 5.76% of November 2022 and 2023, which is why the same $3,000 pension values at about $442,500 on November 2025 rates against $424,000 on November 2023 rates.
Which lookback month applies to your plan
Pension plans have flexibility in which month's segment rates they use. Under Treas. Reg. 1.417(e)-1(d)(4), a plan picks a stability period (one month, a quarter or a year) and a lookback month, which can be any of the five calendar months before the stability period begins. The choice has to be written into the plan document.
A calendar-year plan with an annual stability period can use any month from August through December of the prior year. A plan with a monthly stability period might use rates from two months earlier and update every month. Your Summary Plan Description or plan administrator can tell you which applies. If your employer offers a lump sum and doesn't say which lookback month it used, ask. Rates can move a fair amount over a few months, and the lump sum moves with them.
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", on the "Minimum Present Value Segment Rates" page) to get the plan-accurate lump sum calculation.
Rates and lump sum restrictions
Higher rates also lower the value a plan puts on what it owes, though funding calculations use averaged rates with a stabilization corridor, so the effect is slower than it is on your lump sum. Funding matters to you for one reason. Under IRC 436(d), a single-employer plan whose adjusted funding target attainment percentage falls below 60% can't pay lump sums at all, and a plan between 60% and 80% can pay only part of a benefit as a lump sum (generally the smaller of half the value or the PBGC guarantee). A better-funded plan has more room to offer a full lump sum or a voluntary window.
Segment rates and pension risk transfer
Some sponsors move pension obligations to an insurer by buying a group annuity contract. That's a pension risk transfer. AT&T moved $8.067 billion of obligations to Athene in 2023, according to its own SEC filings. After a transfer, the insurer pays the annuity and the plan's lump sum option for those people is generally gone, so if your plan is offering a voluntary lump sum window, treat it as possibly the last one. Your employer's 10-K and 8-K filings and your plan administrator are where a transfer would be announced.
What to do if you have a lump sum offer right now
First, check the offer against the IRS formula. Enter your monthly benefit, your age and the rates for your plan's lookback month. The 417(e) result is a floor, so the plan's number shouldn't come in under it. Small gaps can come from the exact payment date and how ages are counted, and our calculator rounds to whole years. A gap of more than a couple of percent deserves a written explanation from the plan administrator.
Second, look at the break-even. For someone starting a pension at 65 on 2026 rates, a lump sum invested at 5% and drawn down by the same monthly payment runs out at about 83.7. At 60 it runs out at about 82, and at 62 at about 82.7. If your health and family history point well past that, the annuity is the stronger bet.
Third, plan the rollover. A lump sum paid to you directly has 20% federal withholding, and you'd have to replace that 20% from other money within 60 days to roll the full amount. A direct rollover to an IRA avoids the withholding.
Where to find the rates
The IRS posts the monthly 417(e) rates on its "Minimum Present Value Segment Rates" page. Look for the month that matches your plan's lookback. Rates are shown to two decimal places.
Don't mix them up with the funding segment rates under IRC 430. Those are 24-month averages, adjusted to stay inside a corridor, and they're used for plan funding, not for your lump sum. The 417(e) rates are monthly spot rates with no averaging. The calculator on this site uses the 417(e) rates.
The mortality table
The IRS specifies both the discount rates and the mortality table that must be used for minimum lump sum calculations. The table sets the probability of being alive for each future payment. Longer projected lifespans mean more payments to discount and a bigger lump sum.
The IRS publishes a new applicable mortality table every year. For distributions in 2026, it's the table in IRS Notice 2025-40, and that's the table our calculator uses. A plan can't pay less than the present value figured with the IRS segment rates and this table. If your plan's offer comes in below the calculator's result, ask the plan administrator which lookback month, mortality table and payment timing they used, and get the answer in writing.
2026 against 2021
On November 2020 rates (the ones many plans used in 2021), the same $3,000 pension at 65 values at about $580,000. Invested at 5%, that lump sum would pay $3,000 a month until about 96. Very few people outlived that, which is why low-rate years made the lump sum look so good. On 2026 rates the invested break-even is back near 84, close to the median age at death the IRS table implies for a 65-year-old (about 87). The annuity has a much better case now than it did five years ago.
Other factors still count. Pension income is steady and needs no managing. A lump sum can go to your heirs, while a single-life annuity stops at death. Most private pensions have no cost-of-living increase. And an annuity depends on the plan and, above certain limits, the PBGC guarantee.
Don't try to time rates
Nobody knows where segment rates go next. If they fall, lump sums rise, and if they rise, lump sums shrink. Make the decision on things you can measure: your health, your other income, your spouse's needs and whether you'd actually invest the money well. Run the numbers at the present value calculator with the rates that apply when you elect.
Questions to ask your plan administrator
Get written answers to four questions. Which lookback month and which three segment rates were used? Which mortality table? What's the payment date, and will the rates change if payment slips into a new stability period? And which survivor options do you give up by taking the lump sum? Once the lump sum is paid, the plan owes you nothing more, so any joint-and-survivor annuity goes with it.
Using this site's calculator
The calculator at the present value calculator takes your monthly benefit, your age and the three segment rates and returns the 417(e) minimum. It defaults to November 2025 rates and the 2026 IRS table. You can override any rate to see what the same pension would have been worth in 2021, or what it'd be worth if Segment 2 dropped a full point. Segment rates change every month, so if you're within a few years of a lump sum decision, rerun it each year.
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.