Pension Calculator
Retirement plans differ from one employer to another. Since choices made before you stop working often cannot be undone, it's wise to think them through. The calculators below let you compare three typical scenarios.
Lump sum payout or monthly pension income?
There are mainly two options regarding how to receive income from a pension plan: either take it out as a lump sum payment or have it distributed in a stream of periodic payments until the retiree passes away (or in some cases, until both the retiree and their spouse passes away).
Single-life or joint-and-survivor pension payout?
With a single‑life annuity the company continues payments only while the retiree lives, offering a larger monthly amount but ending when the retiree passes, leaving a surviving spouse without benefits. A joint‑and‑survivor option reduces the monthly sum, yet guarantees that the spouse will keep receiving payments after the first partner’s death.
Should you work longer for a better pension?
Some workers choose to delay taking retirement benefits for a few years to boost future payouts. Use the tool below to see which timing works best for you.
Pensions
Historically, employers set aside money as a pension fund for their staff. When you retire, you can either withdraw from that pool or sell it to an insurer who will turn it into a life‑annuity that pays out until you pass away. Check our Annuity Calculator or Annuity Payout Calculator for details. In the United States, pensions are attractive because contributions and any investment earnings enjoy preferential tax treatment. Nowadays the word “pension” is often used as a synonym for “retirement plan.”p>
Defined-Benefit Plan
When people mention a “pension plan,” they usually refer to a Defined‑Benefit (DB) arrangement. In a DB plan the employer promises a specific benefit amount at retirement, independent of how the underlying investments perform, and often includes tax advantages. While the employer is the primary funder, many plans also allow employee contributions, and there is no statutory cap on contributions in the U.S.
Consequently, the employer bears the full obligation to honor those future payouts, even if the business is sold, merged, or goes bankrupt; employees retain legal claims to their share of the DB plan. However, those rights can become largely symbolic if the company experiences severe financial distress.
The amount you receive in retirement typically depends on several personal factors – your age, salary history, and length of service – and the specific formula used can differ from one firm to another.
Generally speaking, the longer an employee works for a company or the higher their salary, the higher their projected benefits in retirement.
In the United States, Social Security functions as the most widespread DB scheme. Most workers become eligible for benefits after they stop working, but the program is designed to cover only about 40 % of pre‑retirement earnings, so relying solely on it is generally unrealistic. For more details or to run your own Social Security projection, visit the Social Security Calculator.
The three calculators above are mainly designed for the Defined-Benefit Plan.
Defined-Contribution Plan
In a defined‑contribution (DC) setup, employers may fund each employee’s tax‑favoured retirement account. The most common method is a matching contribution up to a set percentage of the employee’s salary, while a less frequent approach ties contributions to years of service. Benefit amounts at retirement stem from the accumulated employee and employer deposits plus any investment gains or losses. Unlike DB plans, payouts are not guaranteed because they rely heavily on how the investments perform. As a result, factors such as seniority or age have far less influence on the eventual benefit in a DC plan.
DC participants enjoy greater control over how their money is invested. Individuals can allocate contributions among diversified, professionally managed portfolios of stocks, bonds and other assets, or, if they prefer, take a hands‑on approach and pick individual securities—though using retirement funds for high‑risk trading is generally discouraged. Moreover, DC plans are portable: an employee who changes employers can often keep the same account by transferring it, provided the new employer supports rollovers (not all do, especially for 401(k) plans).
DC plans are now the most popular pension plans in the U.S., especially in the private sector. In the U.S., the most popular defined-contribution (DC) plans are the 401(k), IRA, and Roth IRA plans. For more information or to do calculations involving each of them, please visit the 401(k) Calculator, IRA Calculator, or Roth IRA Calculator.
In the U.S., today very rarely is the term "DC plan" used to refer to pension plans. They are more likely to be referred to by their programs, such as "401(k)," the "457 plan," or IRA, etc.
The Fall of Defined-Benefit Plans and the Rise of Defined-Contribution Plans
In the U.S., DB plans have been heavily scrutinized recently, and their use has declined in favor of their counterpart, the DC plan. While the public sector still houses most of the DB plans in existence today, the golden age of the DB plans seems to be long gone.
There are several reasons why they have mostly fallen out of favor. To begin with, too much of the success of DB plans depends on several volatile factors. The first is whether employees quit for whatever reason or get fired, which are generally unpredictable events. The second is whether the company goes belly up; although there is a Pension Benefit Guaranty Corporation as insurance for these situations in case private pensions fail, they only have so much money to hand out. In turn, this can explain why it is still common for the public sector to offer DB plans since it is unlikely for them to go under. If such a thing were to happen, employees may not get their guaranteed benefits, but may instead receive partial benefits, or none at all for the less fortunate. People closer to retirement may have a better sense of their company's ability to stay in good financial health, while folks who aren't scheduled to retire for 30 to 40 years may have a foggier view of the future of the company and the safety of their pension. In order to realize the biggest benefits of these plans, an employee would have to stay with their company for a long period of time, such as 25 years, which is increasingly uncommon today. Also, plans are subject to becoming "frozen" for a variety of reasons. That is, some or all employees covered under a DB plan will stop earning some or all of the benefits from the point that plans are frozen. This can happen due to many different reasons, which may include rising healthcare costs due to increased lifespans or unfavorable interest rates. Last but not least, DB plans tend to require more administrative costs than DC plans.
Lump Sum vs. Monthly Benefit Payout
Most DB plans offer the option of a one-time lump sum payment or monthly benefit payouts. In the context of pensions, the former is sometimes called the commuted value, which is the present value of a future series of cash flows required to fulfill a pension obligation.
The major advantage of a monthly pension benefit is that it can quite possibly be guaranteed income for life. While anyone can take the immediate lump sum and spend it all in a short period of time, this wouldn't be possible with the monthly benefit payout option. Also, because these monthly benefits are the obligation of employers, they are not subject to any external influences that may affect their value, such as any volatility in the stock market.
One notable advantage to the lump sum option is that it can offer a lot of flexibility. The money can be spent, saved, or invested in whatever ways desired. For some people though, particularly those who habitually spend or don't have a financial advisor, this may be a bad thing. An option to consider is to roll the lump sum over into an IRA, which can legally have beneficiaries. In general, remaining pension payments cannot be left to heirs (outside of a spouse if married and under a joint-and-survivor option). In the case of the death of the primary account holder, any money remaining inside the IRA can be passed onto their heirs. In addition, by rolling it into an IRA, the tax-deferred nature of the money is preserved. Also, lump sums tend to make more sense for people with shorter life expectancies. If they are forecasted not to live long enough to realize the financial benefits of a schedule of cash flows, due to serious disease or otherwise, simply taking the lump sum instead can result in more income.
Single-Life or Joint-and-Survivor Plans?
Upon retirement, pensions generally provide two methods of distributing benefits. Single-life plans pay a monthly benefit for the remainder of the beneficiary's life, but as soon as they pass away, pension payments halt. A drawback to this is that surviving spouses will be left without a major source of income. Unsurprisingly, this option is most commonly used by retirees without spouses or dependents. However, there are exceptions for single-life pensions that have guarantee periods; if the retiree passes away within the guarantee period (usually five or ten years), dependents are eligible to receive income until it ends. Monthly benefits for plans with guarantee periods tend to be lower than for those without a guarantee period.
On the other hand, joint-and-survivor plans have the retiree's spouse as an additional beneficiary for a total of two, and monthly benefits will last until both beneficiaries pass away. Essentially, a larger monthly benefit is given up for the peace of mind that comes with ensuring the financial security of a spouse or domestic partner even after the death of the main beneficiary. Because the benefits from a joint-and-survivor plan must try to outlive two beneficiaries, they generally contain lower monthly benefits than those of a single-life pension. Upon the death of the first spouse, the surviving member will receive a certain percentage of the original payout, and this is called the survivor benefit ratio. This is determined at the beginning of the payout phase. Common survivor benefit ratios are 50%, 66%, 75%, and 100%, the last of which is the same payout as if both members are surviving. As an example, given two retired spouses who receive $1,000 from a joint-and-survivor plan with a 50% survivor benefit ratio, if one of them passes away, the survivor will begin to receive $500 (50%) payouts from then on.
Both have their pros and cons, and it is up to each individual (and maybe their spouses also) to determine which is right for them. In general, single-life plans tend to pay out the highest monthly benefit, followed closely by single-life plans with a period guarantee.
1. Cost-of-Living Adjustment
Inflation inevitably pushes up the cost of everyday items, so a cost‑of‑living adjustment (COLA) is used to preserve retirees’ purchasing power. Though COLA is most commonly linked to the U.S. Social Security system—a public pension—it also affects many private plans. In practice, pension administrators tend to raise monthly benefits in line with the COLA, yet the majority of private schemes do not apply such increases. Well‑funded pensions, where assets exceed liabilities, can often adopt a COLA if participants successfully lobby for it; under‑funded funds usually cannot. All three calculators let you enter a custom COLA rate – enter "0" if you prefer no adjustment.