The Number on Your Pension Statement Hides a Bigger Decision
Meet Daniel. He's 58, has spent 30 years at the same employer, and just opened a retirement packet with two numbers staring back at him. One is a monthly pension of $3,750 for the rest of his life. The other is a lump sum of $640,000 he can roll into an IRA. Same pension, two doors, and most people pick based on which number looks bigger on the page.
Here's where that monthly figure comes from. Most defined-benefit pensions run on one formula: years of service × benefit multiplier × final average salary. The multiplier is usually somewhere between 1.5% and 2.5% per year worked. Daniel's plan uses 2%, his final average salary is $75,000, and he has 30 years in. Run it: 30 × 2% × $75,000 = $45,000 a year, or $3,750 a month. That's the annuity offer. It didn't appear out of nowhere; it's three inputs you can check.
Now the trap. The lump sum looks enormous next to a monthly check, and that's exactly the reaction the size of it is meant to produce. But $640,000 has to last as long as Daniel does, and it has to do the job a pension does automatically: pay every month whether the market is up or down, and keep paying if he lives to 95. A common rule of thumb says you can pull roughly 4% a year from a portfolio and not run it dry. Four percent of $640,000 is $25,600 a year versus the pension's $45,000. The monthly annuity is paying him about 76% more income for the same retirement.
That gap doesn't make the annuity automatically right. The lump sum wins on flexibility, on what's left for heirs, and on control if you can invest it well or you have reason to doubt the plan's long-term solvency. If Daniel dies at 70, a single-life annuity stops and the remaining value evaporates, while the lump sum's balance passes to his family. The annuity wins on certainty and on longevity protection: it cannot run out, even if he lives to 95 and draws far more than $640,000 in total. There's also the sequence-of-returns risk no one mentions: a portfolio that drops 30% in the first two years of retirement may never recover the way an untouched annuity would, because every withdrawal during the slump locks in losses.
The point is that you cannot compare a six-figure lump sum to a four-figure monthly check by eyeballing them. You convert one into the other and look at the same unit. That's the entire job of this tool. Enter your service years, your multiplier, and your final salary, and it estimates the monthly and annual benefit, then frames the lump sum beside it so you're comparing income to income instead of a big number to a small one.