Pension Calculator

Pensions are retirement savings plans where employers contribute to a fund on behalf of their employees. These funds are designed to provide financial support after retirement. Once retired, individuals can either draw regular income from this pension fund or convert it into a life annuity—guaranteed payments for life. For detailed calculations related to annuities, visit our Annuity Calculator or Annuity Payout Calculator.

In the United States, pensions offer significant tax advantages. Contributions and investment gains are often tax-deferred, making pensions a smart way to prepare for retirement. Today, the word “pension” is often used interchangeably with “retirement plan,” although there are key differences between the types.

Defined Benefit (DB) Plans

When most people think of pensions, they’re usually referring to Defined Benefit (DB) plans. These plans promise retirees a fixed payout, typically based on salary history, years of service, and age at retirement. The employer is primarily responsible for funding the plan, though some allow employee contributions. Unlike Defined Contribution plans, DB plans do not have contribution limits and offer consistent, predictable benefits.

Even if the company changes ownership or faces financial trouble, retirees still have legal rights to their promised benefits. However, in severe financial downturns, those rights may be difficult to enforce fully.

The benefit amount is calculated using a formula that varies by employer but usually considers:

• Length of employment

• Salary level

• Age at retirement

For example, longer service and higher pay usually result in greater retirement benefits.

Social Security, the most common DB plan in the U.S., provides retirement income to most workers. However, it typically replaces only about 40% of pre-retirement income. To explore your Social Security benefits, use our [Social Security Calculator].

These calculators primarily support Defined Benefit Plan estimations.

Defined Contribution (DC) Plans

Defined Contribution plans work differently. Employers and employees contribute to individual retirement accounts, such as 401(k), IRA, or Roth IRA plans. The final retirement income depends on the total contributions and how the investments perform over time. Unlike DB plans, these don’t guarantee a fixed payout.

Employers often match a percentage of employee contributions. Some plans may base contributions on an employee’s tenure. The investment performance directly affects retirement income, meaning there’s more risk—but also more control.

Employees can typically choose how their funds are invested—commonly into diversified portfolios of stocks, bonds, and other assets. While self-directed investing is allowed, financial guidance is recommended to avoid high-risk decisions with retirement funds.

Another benefit of DC plans is portability. Workers who frequently change jobs can usually roll over their plans to new employers. That said, not all companies accept rollovers, so it’s important to check.

Today, DC plans dominate in the private sector. The most popular types include:

• 401(k)

• IRA

• Roth IRA

To learn more or run your numbers, use our 401(k) Calculator, IRA Calculator, or Roth IRA Calculator.

Although technically still pensions, DC plans are more often referred to by their specific names, such as 401(k) or 457 plans.

The Shift from Defined Benefit to Defined Contribution Plans

Defined Benefit plans are becoming increasingly rare, especially in the private sector. They are still somewhat common in public employment due to the lower risk of institutional failure.

Several challenges have led to the decline of DB plans:

• Unpredictable employee turnover

• Employer bankruptcies

• Rising administrative costs

• Plans becoming “frozen” (no new benefits accrue)

• Longer lifespans and volatile interest rates impacting liabilities

While federal programs like the Pension Benefit Guaranty Corporation exist to insure private pensions, they have limited capacity. As a result, many employees now prefer the flexibility and control offered by DC plans, even if they come with greater investment risk.

Lump Sum vs. Monthly Pension Payments

When retiring under a DB plan, individuals often choose between a lump sum payment or monthly pension benefits. The lump sum, also called the commuted value, represents the current value of all future payments.

Monthly Payments

• Provide steady, reliable income for life

• Are typically unaffected by market fluctuations

• May offer peace of mind for long-term budgeting

Lump Sum Payment

• Offers flexibility in spending or investing

• Can be rolled over into an IRA to preserve tax advantages and allow for beneficiary designation

• May be better for those with shorter life expectancies or specific financial goals

Those prone to overspending may benefit more from monthly payouts. Meanwhile, a lump sum could make sense for people who want investment control or legacy planning options.

Choosing Between Single-Life and Joint-and-Survivor Options

Retirees often choose how pension payments will be distributed:

Single-Life Plans

• Provide monthly payments for the retiree’s lifetime

• Stop after the retiree’s death

• Ideal for those without dependents

• May offer a “guarantee period” (e.g., 5 or 10 years) for beneficiary coverage if the retiree passes early

Joint-and-Survivor Plans

• Cover both the retiree and their spouse

• Payments continue until both have passed

• Monthly benefits are usually lower than single-life plans

• Include a “survivor benefit ratio” (e.g., 50%, 66%, 75%, 100%) defining the amount a surviving spouse receives

Choosing the right option depends on individual circumstances, life expectancy, and financial priorities.

Cost-of-Living Adjustments (COLA)

Inflation gradually erodes purchasing power. The Cost-of-Living Adjustment (COLA) is designed to help retirement payouts keep up with rising costs. While COLAs are standard in Social Security, most private pensions don’t automatically include them.

In rare cases, overfunded pensions may offer COLAs if requested by beneficiaries. However, underfunded plans usually cannot. When calculating pension benefits with our tools, you can enter a custom COLA rate—use “0” if you don’t wish to factor in inflation.