Pension Calculator
Estimate your defined-benefit pension using the standard formula — years of service × multiplier × Final Average Salary — model an early-retirement reduction (your own adjustable assumption, not a fixed federal rule), and compare a lump-sum offer to the annuity's present value.
$48,000 estimated annual pension
Formula: 30 years × 2% × $80,000 FAS = $48,000 gross annual pension. No early-retirement reduction applies at the plan's normal retirement age. That's $4,000/month.
Present value of the annuity (20 years at a 5% discount rate — estimate 4.5%-5.5%): $598,186.
Formula and typical ranges: Equable Institute, retrieved 2026-07-17. The early-retirement reduction and discount rate are adjustable estimates you control — no single federal figure exists for either; your plan's actual factors may differ significantly. Discount rate default reflects a general 2025-2026 range, not the IRS's monthly IRC 417(e)(3) segment rates (which we don't fetch live). Educational estimate, not financial or pension advice. How we calculate →
The defined-benefit pension formula
A traditional defined-benefit (DB) pension pays: Years of service × Multiplier % × Final Average Salary (FAS). The multiplier typically runs 1%-3% per year of service — around 2% is common in the public sector, 1.5% in what's left of private-sector DB plans, per the Equable Institute. Worked example: 30 years of service at a 2% multiplier and an $80,000 FAS = 30 × 0.02 × $80,000 = $48,000/year before any early-retirement reduction.
What "Final Average Salary" means
FAS (sometimes FAC, Final Average Compensation) is the average of your highest-earning years, usually your final 3 or 5 years of service — but the exact convention is set by your specific plan, not by federal law. Enter your own FAS directly (calculated from your actual salary history) and just flag which averaging basis your plan uses for reference; the calculation itself only needs the final averaged number, not each individual year.
Early-retirement reduction is a hypothesis, not a fixed rule
Retiring before your plan's normal (unreduced) retirement age typically cuts your pension by some percentage per year early — commonly cited in the 3%-6%/year range by pension practitioners (Equable, NASRA), but there is no single federal figure. Every plan sets its own actuarial reduction factor, and some use a non-linear formula past a certain threshold instead of a flat percentage per year. Worked example: retiring 3 years before the plan's normal age, at a 5%/year assumption, cuts a $48,000 pension by 15% to $40,800/year — but check your plan's actual summary plan description for the real factor before making a decision.
Lump sum vs. annuity: comparing present value
If your plan offers a lump-sum buyout instead of monthly payments, the fair comparison is the annuity's present value — what a stream of future payments is worth today, discounted at an interest rate. Federal (IRC 417(e)(3)) minimum present value segment rates are published monthly by the IRS and change constantly; no single fixed value exists for any given month, and we did not fetch a live figure for July 2026. This calculator uses an adjustable discount rate you set yourself, labeled as an estimate (a estimate 4.5%-5.5% range is a reasonable starting point reflecting recent corporate-bond-based yields) — never treat the number it shows as your plan's official 417(e) rate. For a real lump-sum decision, ask your plan administrator for the actual segment rates that apply to your payout.
Pension vs. 401(k): the core difference
A defined-benefit pension promises a specific formula-based payout for life, funded and invested by your employer (or the pension fund) — the investment risk sits with the plan, not you. A defined-contribution plan like a 401(k) instead promises a contribution level (yours plus any match), and your eventual balance depends entirely on markets and your own choices — you carry the investment risk. If you're weighing a pension against a 401(k)-style balance, see our retirement calculator to project 401(k)/IRA growth on the same page.
What this calculator doesn't model
This is an educational estimate, not your plan's official benefit statement. It doesn't model plan-specific vesting schedules, survivor/joint-and-100%-survivor benefit reductions, disability or death benefits, Social Security offsets (common in some public plans), or non-linear actuarial reduction tables. The early-retirement reduction and discount rate are both estimates you control, not your plan's actual published factors. Request an official benefit estimate from your pension administrator before making any retirement decision.
Frequently asked questions
How is a defined-benefit pension calculated?
Years of service × multiplier % × Final Average Salary (FAS). Example: 30 years × 2% × $80,000 FAS = $48,000/year, before any early-retirement reduction. The multiplier is usually 1.5%-2.5%, set by your specific plan.
How much does retiring early reduce my pension?
Commonly 3%-6% per year before your plan's normal retirement age, but this varies by plan and is NOT a federal rule — treat any percentage as a hypothesis until you check your plan's actual factor. Example: 3 years early at 5%/year cuts a $48,000 pension by 15% to $40,800/year.
What discount rate should I use to compare a lump sum to my pension?
There's no single official rate you can look up instantly — the IRS publishes IRC 417(e)(3) segment rates monthly and they change. A 4.5%-5.5% range reflects a recent general estimate, but for an actual lump-sum decision, request your plan's real segment rates from the administrator.
What is Final Average Salary (FAS)?
The average of your highest-earning years of service, usually the final 3 or 5 years — the exact convention (3-year vs. 5-year) is set by your specific plan, not federal law.
Is a pension better than a 401(k)?
It depends on your plan's formula, how long you'll live in retirement, and whether you value guaranteed lifetime income over market-linked growth potential. A pension shifts investment risk to the employer; a 401(k) shifts it to you. Compare your pension's present value to a projected 401(k)/IRA balance using our retirement calculator.
Should I take the lump sum or the monthly annuity?
Compare the lump-sum offer to the annuity's present value at a realistic discount rate — if the lump sum is meaningfully higher, it may be worth considering (with the tradeoff of losing guaranteed lifetime income and taking on investment risk yourself). This calculator gives you a starting comparison, not a recommendation; talk to a fee-only financial advisor for a decision this size.
Researched & verified by the Calcuris Data & Research Team. How we build and check our tools →