How it works
This is the present value of your remaining pension payments — the honest number a buyout offer should be measured against. A higher discount rate lowers the value. If an offer is below this, you're being asked to sell your pension cheap.
Who this is for
Anyone who's received a buyout or commuted-value offer from a pension plan and wants to know if the number on the letter is actually fair, before deciding whether to accept it or fight for more.
Worked example
With the default numbers — an $1,800 monthly pension, 25 years of expected payments, and a 5% discount rate — the pension's present value comes out to roughly $308,000. If your buyout offer is meaningfully below that, the plan is asking you to give up your pension for less than it's worth today; if it's at or above that figure, the offer is reasonable.
Frequently asked questions
Why does a higher discount rate lower the value? A higher rate assumes your money grows faster elsewhere, so less is needed today to replace the same future payments — it's the same math that makes future dollars worth less the higher the assumed return.
What rate should I use? Try the rate the plan itself disclosed, if given, and also your own realistic investment return, often 4-6%, to see the offer from both angles.
Is a below-value offer always a bad idea? Not always — a lump sum still offers flexibility and removes plan risk, but you should know exactly how much of that convenience you're paying for.
Does this include taxes? No — see the pension lump sum tax calculator for the tax side of a buyout.