How Do You Calculate a Pension Lump Sum?
To calculate a lump sum pension benefit, determine the present value of your plan. Enter the monthly pension payment, assumed interest rate and assumed number of payments into a present value calculator. The lump sum payment is then derived from the present value of the plan.
The payment option a beneficiary chooses determines the monthly benefit. For example, a lifetime payment option is larger than a plan that provides a spousal survivor payment. Based upon the payment option you select – lifetime or lifetime plus survivor – you can calculate the present value of the pension. The present value calculation is not exact. While you may know the monthly benefit amount, you must estimate or assume an interest rate and the total number of payments.
By inputting the known and assumed data into the financial calculator, you arrive at the present value of the pension plan. Generally companies offer retirees the option of accepting a traditional lifetime monthly payment or a lump sum settlement. By implementing the present value calculation, you can determine the most suitable option. Likewise, a company may reduce its pension liability by offering a lump sum payment below the assumed present value. Of course, if the lump sum offer is well below the assumed present value, the beneficiary may reject the offer. On the other hand, if the retiree is in poor health or in financial trouble, he may determine the lump sum is the best available option.