Estimate annual defined-benefit pension based on your plan's formula.
Annual pension benefit
—
Monthly
—
Lump-sum equivalent (PV)
—
Worked example
Most defined-benefit pensions use a simple formula: final or average salary multiplied by years of service multiplied by an accrual rate per year. Take a $80,000 salary, 30 years of service, and a 2% multiplier. The annual benefit is $80,000 times 30 times 0.02, which is $48,000 a year, or $4,000 a month, for life. To judge a lump-sum buyout offer against that income stream, the tool computes the present value of receiving $48,000 a year for an assumed 25 year retirement, discounted at 5% a year. That present value is about $676,509. The reading is practical: if your plan offers a lump sum well below roughly $676,509, the monthly pension is likely the better deal at these assumptions, while an offer far above it favors taking the cash. The discount rate matters a lot here, because a higher rate makes future payments worth less today and lowers the break-even lump sum.
| Item | Value |
|---|---|
| Salary | $80,000 |
| Years of service | 30 |
| Multiplier per year | 2% |
| Annual pension (80,000 x 30 x 2%) | $48,000 |
| Monthly pension | $4,000 |
| Lump-sum equivalent (5%, 25 yr) | $676,509 |
How it is calculated
The annual benefit is the product of three plan inputs: your salary, your years of credited service, and the per-year accrual multiplier your plan uses, often between 1% and 2.5%. Dividing by twelve gives the monthly figure. To value the stream as a single number, the tool treats it as an annuity and computes the present value of receiving that annual amount for your assumed number of retirement years at your chosen discount rate. A higher discount rate or a shorter life expectancy produces a smaller present value, because money arriving far in the future is worth less today and there are fewer payments. This is a planning estimate, not plan-specific advice. Real pensions vary in how they define final salary, whether benefits adjust for inflation, what survivor options apply, and how early retirement reduces the payout, so always confirm the exact terms with your plan administrator before deciding between a pension and a lump sum.