This pension calculator estimates your benefit from a defined benefit (final salary) pension and helps you decide between a monthly pension and a lump-sum buyout by comparing their value in today’s money.
How a defined benefit pension is calculated
Annual pension = final average salary × years of service × benefit multiplier
The multiplier is set by your plan, often between 1% and 2.5% per year of service. Final average salary is usually the average of your highest-paid three or five years. Check your plan’s summary plan description for the exact formula.
Worked example
With a final average salary of $80,000, 25 years of service and a 1.5% multiplier, the pension is $80,000 × 25 × 1.5% = $30,000 a year ($2,500 a month), replacing 37.5% of salary. Paid for 25 years and valued at a 5% return, that stream is worth about $444,000 today, so it beats a $400,000 lump-sum offer.
Lump sum or monthly pension?
| Monthly pension | Lump sum |
|---|---|
| Guaranteed income for life | Full control over investments |
| No investment risk for you | Can leave remaining money to heirs |
| Protects you if you live a long time | Risk of running out if returns are poor |
| Often includes a survivor option | Can be rolled into an IRA to defer tax |
The calculator also shows the return a lump sum must earn to match the pension. If that rate is higher than you could safely earn, the pension is usually the better deal.
Frequently asked questions
How is my pension calculated?
Most defined benefit plans multiply your final average salary by your years of service and a benefit multiplier, such as 1.5%.
Should I take a lump sum or a monthly pension?
It depends on your health, other income, need for flexibility and how well you can invest. The pension is often better if you expect a long retirement or want guaranteed income.
Is my US private pension insured?
Most private-sector defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC), up to legal limits, if the plan fails.
What happens if I retire early?
Many plans reduce the benefit for each year you retire before the normal retirement age. Check your plan’s early retirement factors.
Is a pension taxable?
In the US, pension payments are generally taxed as ordinary income. A lump sum rolled directly into an IRA is not taxed until withdrawn.
Related calculators
Sources
- Pension Benefit Guaranty Corporation (PBGC)
- US Department of Labor: Employee Benefits Security Administration
Last reviewed: October 2026. This calculator is for education only and is not financial, tax or legal advice.