Weigh the big pension decisions: lump sum or monthly income, single-life or joint-and-survivor payout, and retiring sooner or working longer.
The most common pension is a defined-benefit plan, where your employer promises a set income in retirement based on your pay and years of service. Most plans let you take that promise in one of two forms: a one-time lump sum, sometimes called the commuted value, or a stream of monthly payments that lasts for life. This calculator helps with three decisions that usually cannot be undone once you make them.
A monthly pension is guaranteed income, and it cannot run out the way a pile of savings can. A lump sum is flexible: you can invest it, spend it as you like and leave what remains to heirs. To compare them, the calculator adds up the pension payments you would collect up to each possible life expectancy, lets them grow with the cost-of-living adjustment, and discounts every year back to your retirement age at your investment return. The break-even age is the first age at which the pension is worth at least as much as the lump sum. Live past it and the pension comes out ahead.
A single-life pension pays the most each month but stops when you die. A joint-and-survivor pension pays less, and keeps paying your spouse afterwards. The calculator looks at it two ways. The insurance view works out the lump sum that would replace your spouse's survivor income if you died at retirement, and the monthly premium you could pay for term life cover and still break even. The investment view assumes you take the larger single-life check and invest the difference, then compares what you would have saved at your life expectancy with the survivor payments you would have given up.
Many plans pay a bigger pension if you retire later. Entering the monthly pension at each age shows how long you need to live for the larger check to make up for the years of smaller payments you gave up. Both pensions are valued at the earlier retirement age so they can be compared fairly. The result leaves out the salary you would earn by working longer, which for many people is the bigger part of the story.
It depends mostly on how long you expect to live and what you could earn on the lump sum. The calculator finds the break-even age: if you live beyond it, the monthly pension is worth more, and if not, the lump sum is. A monthly pension is guaranteed income for life, while a lump sum gives flexibility and can be left to heirs.
A joint-and-survivor pension keeps paying your spouse after you die, usually at a set share of the original amount such as 50%, 66%, 75% or 100%. In return, the monthly payment while you are both alive is lower than a single-life pension, which stops when you die.
The cost-of-living adjustment, or COLA, raises the pension each year to keep up with rising prices. The calculator applies it from the second year of payments. Most private pensions do not rise with inflation, so enter 0 if yours does not.
Pension payments arrive over many years, so each one is discounted back to today at your investment return. A higher return makes future payments worth less now, which favors the lump sum, while a lower return favors the monthly pension.
No. The figures are before tax. The lump sum comparison assumes the money is rolled into a tax-deferred account such as an IRA. If your lump sum would be taxed, enter the after-tax amount instead.
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