Pension Buyout Calculator: How to Use It

What this calculator does

The pension buyout calculator computes the present value of your monthly pension stream and compares it to your employer's lump sum offer. It finds the break-even age: the point at which cumulative pension payments catch up to the future value of the invested lump sum. It also shows your monthly income comparison at a 4% withdrawal rate from the lump sum versus the fixed monthly pension, and models the opportunity cost at age 80, 85, and 90.

The calculator works for any private-sector defined benefit pension buyout. It doesn't apply to public pension buyouts, which have different rules and aren't covered by PBGC insurance.

What each input means

Lump sum offer amount

The dollar figure your employer has offered. This comes from your buyout offer letter. If you've received multiple offer amounts tied to different payment start dates or survivor options, use the one that corresponds to the monthly pension amount you're comparing. Most offer letters present both a single-life amount and a joint-and-survivor amount; make sure the lump sum and monthly pension you enter are from the same option.

Monthly pension amount

The monthly benefit you would receive if you keep the pension. Again, make sure this matches the option your lump sum corresponds to. Using the single-life monthly amount alongside the lump sum calculated on joint-and-survivor terms (or vice versa) produces a misleading comparison. If you have a surviving spouse and were planning to elect joint-and-survivor coverage, use the joint-and-survivor monthly amount.

Your current age and pension start age

The calculator needs your current age to project investment growth on the lump sum and to find the break-even age in your lifetime. The pension start age is when payments would begin. For most retirees already collecting, this is the same as current age. For deferred vested employees who have left the company but aren't yet collecting, the pension might not start until 65. That deferral period matters: the lump sum gets more time to compound before pension payments begin.

Assumed investment return

The annual rate you expect to earn on the lump sum if you roll it to an IRA and invest it. This is the most important input and the one most subject to honest disagreement. Historical S&P 500 returns since 1926 average around 10% nominal, roughly 7% after inflation. A diversified 60/40 portfolio has averaged 5 to 6% real. The calculator default of 5% is deliberately conservative. If you raise it to 7%, the break-even age rises and the lump sum looks better. If you lower it to 3%, the break-even comes earlier and the pension looks better. Run it at multiple rates before deciding.

COLA rate

Whether your pension has a cost-of-living adjustment, and if so, what percentage. Most private-sector pensions offer no COLA. If yours does, enter the annual percentage. A 2% annual COLA on a $2,000 monthly pension is worth roughly $240,000 more in present value over a 25-year retirement compared to a flat $2,000 payment, assuming 3% inflation. COLAs dramatically shift the analysis toward keeping the pension.

Understanding the outputs

The present value comparison shows whether your lump sum offer is above or below the actuarially fair value of your pension at your assumed return rate. An offer below present value doesn't automatically mean you should reject it. The pension still has risks (employer insolvency, benefit changes) that the lump sum eliminates. An offer above present value doesn't automatically mean you should take it. You might not live long enough to benefit from the arbitrage, or you might lack the investment discipline the comparison assumes.

The break-even age is the most useful single number. If you break even at 81 and your parents both lived to 90, that's a very different calculation than if you break even at 81 and have significant health concerns at 62.

The monthly income comparison shows what $X per month the lump sum would generate at a 4% withdrawal rate versus what the pension pays. This is useful for cash flow planning. The lump sum income is not guaranteed and depletes over time. The pension income is fixed (or COLA-adjusted) and continues for life regardless of how long you live.

How employers calculate the offer: IRS 417(e) segment rates

Your employer didn't pick the lump sum number arbitrarily. ERISA requires private-sector pension plans to calculate minimum lump sum values using IRS 417(e) segment rates, which are published monthly and tied to investment-grade corporate bond yields. There are three segment rates corresponding to three time periods: payments within 5 years, payments from years 5 to 20, and payments beyond 20 years.

When these rates are high (as they have been in 2023 through 2025), the discount applied to future pension payments is steep, and lump sum values are lower. When rates were near zero (2020 to 2022), lump sum values were at historic highs. An employee who received a buyout offer in 2021 and an identical employee receiving one in 2024 could see lump sum differences of 20 to 30% on the same underlying pension, purely because of segment rate changes.

The practical implication: if you received an offer during a high-rate period and segment rates fall before your decision deadline (or before a future offer), the lump sum value would rise. Employers typically lock in the rate at the time of the offer. If you can wait and your plan allows rolling offers, rate movements can matter.

PBGC insurance and employer risk

The Pension Benefit Guaranty Corporation insures most private-sector defined benefit pensions. If your employer's plan fails, the PBGC takes over payments up to a cap. For plans terminating in 2026, the PBGC maximum monthly guarantee for a 65-year-old is approximately $7,285 ($87,420 per year). The cap scales down for younger retirees.

For most employees whose pension falls well under that ceiling, PBGC coverage makes the pension quite safe even if the employer runs into trouble. The risk is more relevant for executives with large benefits above the cap, or for employees whose plan is already significantly underfunded. You can find your plan's funded percentage in the annual funding notice your employer must provide. A plan funded at 70% of its obligations is a different risk profile than one at 95%.

The lump sum removes all of this. Roll it to an IRA, and the balance is yours regardless of what happens to your former employer. That's a real benefit of the buyout that doesn't show up in the present value math.

The healthy person discount

People in above-average health consistently underestimate their own life expectancy when evaluating buyouts. It's counterintuitive: healthy people feel confident they'll live long, yet they often focus on break-even ages in the late 70s without anchoring to their actual probable lifespan.

A 62-year-old man in excellent health with no chronic conditions and parents who lived into their mid-80s has a life expectancy around 87 or 88. A break-even age of 80 means the pension wins with 7 to 8 years of cushion. A break-even of 84 means the margin is tighter but the pension still wins by expected value. The annuity is essentially longevity insurance, and healthy people with good family history get the most value from insurance against living a long time.

The buyout wins more cleanly when health is genuinely compromised, when there's a family history of early death, or when the financial need for a large immediate sum outweighs the actuarial math.

The rollover process: what to get right

If you take the buyout, always request a direct trustee-to-trustee transfer to your IRA. Never accept a check made out to you. If your plan sends you a check, it must withhold 20% for federal taxes. You then have 60 days to deposit the full original amount (including that withheld 20%, which you'd have to cover from other funds) into an IRA to avoid owing income tax and the 10% early withdrawal penalty on the entire distribution. The direct rollover avoids all of this: no withholding, no 60-day clock, no penalty risk.