Clear Money Guide
Guide and tool overview
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Updated July 30, 2026. Quick answer: You do not need a forecast to start. Divide the annual benefit by the lump sum and you have the payout rate — the return the plan is implicitly paying you, for life, with no market risk. That single ratio, compared against what you could safely produce yourself, does more work than any projection, and both numbers are already on the paperwork the plan sent you.
More on the IRS segment rates: the January 2026 segment rates, the March 2026 segment rates, the June 2026 segment rates and the July 2026 segment rates.
More on public pension systems, topic by topic: Kansas KPERS partial lump-sum option.
Read box by box from the IRS form text: Form 1099-R box 3, Form 1099-R box 8 and Form 1099-R boxes 9a and 9b.
More IRS forms and schedules, read line by line: Form W-4P instructions.
DROP and lump sum rules from more systems’ own documents: Michigan MERS retirement decisions, Colorado FPPA retirement decisions and Connecticut MERS retirement decisions.
DROP and lump sum rules from more systems’ own documents: Ohio Highway Patrol Retirement System decisions, Maryland LEOPS retirement decisions and Louisiana Firefighters Retirement System decisions.
DROP and lump sum rules from more systems’ own documents: Louisiana MPERS retirement decisions, San Antonio Fire and Police pension decisions, Austin Police Retirement System decisions and Pennsylvania PMRS retirement decisions.
Police and fire DROP rules from city systems’ own documents: LAFPP retirement decisions, Houston firefighters retirement decisions and Tampa fire and police pension decisions.
Police and fire DROP rules from two city systems’ own documents: Detroit police and fire retirement decisions and Baltimore fire and police retirement decisions.
A metro pension with a DROP, from its own handbook: Metro Nashville pension decisions.
A city fund with a DROP, from its own sheets: Tampa general employees retirement decisions.
Lump sum and DROP rules in Fort Worth, Jacksonville and Miami: Fort Worth ERF retirement decisions, Jacksonville general employees pension decisions and Miami FIPO retirement decisions.
Lump sum and DROP rules in Fairfax County and Milwaukee: Fairfax County ERS retirement decisions and Milwaukee ERS retirement decisions.
Lump sum, partial lump sum and DROP rules in Houston and Philadelphia: Houston HPOPS retirement decisions and Philadelphia pension retirement decisions.
Lump sum, partial lump sum and Back DROP rules in Austin and Dallas: Austin COAERS retirement decisions and Dallas DPFP retirement decisions.
Estimate a Wisconsin Retirement System benefit from age, service and final average earnings: WRS retirement calculator.
Estimate a CalSTRS benefit from age, service credit and final compensation: CalSTRS retirement calculator.
Estimate a PSERS annuity from class, service and final average salary: PSERS retirement calculator.
More public-system examples of a partial lump sum, DROP or buyout, from Mississippi PERS, Ohio Police & Fire and Illinois SERS: Mississippi PERS retirement decisions, Ohio Police & Fire retirement decisions and Illinois SERS retirement decisions.
More public-system examples of a partial lump sum, from Missouri LAGERS and the School Employees Retirement System of Ohio: Missouri LAGERS retirement decisions and SERS of Ohio retirement decisions.
More public-system examples of a partial lump sum or DROP, from Georgia ERS, Arkansas ATRS and Arizona PSPRS: ERS Georgia retirement decisions, Arkansas ATRS retirement decisions and PSPRS retirement decisions.
Public-system examples of a partial lump sum or cashout, from KPERS, Utah, UCRP and Arkansas: KPERS retirement decisions, Utah Retirement Systems retirement decisions, UCRP retirement decisions and Arkansas APERS retirement decisions.
Public-system examples of a partial lump sum, from TCDRS and ERS of Texas: TCDRS retirement decisions and ERS of Texas retirement decisions.
A municipal-pension example of a partial lump sum, from TMRS: TMRS retirement decisions.
The monthly rates themselves: the monthly IRS segment rates.
Step one: the payout rate
Annual benefit ÷ lump sum = the plan’s payout rate. Use the monthly figure for the annuity form you would actually elect, multiplied by twelve. This ratio is not an estimate and involves no assumption. It is the rate the plan is offering you for the rest of your life, and it already has the plan’s own mortality and interest assumptions baked in, because §417(e)(3) built the lump sum that way.
Now the comparison, and it is a comparison rather than a calculation. A high payout rate means the plan is paying you well to give up the capital. A low one means you are being asked to hand over a large sum for a modest income. What counts as high or low is answered by what the same lifetime income costs elsewhere — which is a quote you can obtain, not a parameter you have to guess.
Step two: what the ratio leaves out, in both directions
| Factor | Which way it pushes | Why the ratio misses it |
|---|---|---|
| How long you live | Toward the annuity, if long | The ratio is an annual rate; longevity is the number of years it runs |
| Whether the benefit is adjusted for inflation | Usually toward the lump sum | A level monthly payment loses purchasing power and the ratio does not show it |
| Survivor need | Toward the annuity | The single-life ratio flatters an option your household may not be able to take |
| Optionality | Toward the lump sum | The annuity cannot be rolled over, so that door closes permanently |
| Plan failure risk | Toward the lump sum, if the cap binds | Usually it does not bind, which most people do not check |
| Your own discipline with a large balance | Honestly, toward the annuity | No arithmetic captures it, and it decides plenty of these |
Why this page states no break-even age. A break-even age is a function of your plan’s conversion factor, your birth date, the annuity form and an assumed return. Publishing one would mean publishing someone else’s pension as though it were yours, next to a decision worth six figures. The method above uses only figures the plan has already put in writing, and it is the same method an adviser would start from.
Step three: the questions that outrank the arithmetic
Run the ratio, then check the gates. Is the plan even permitted to pay a lump sum — §436(d) can bar it or halve it. Will your spouse consent in the form §417(a)(2) requires. If you are between 55 and 59½, does a rollover cost you an exception you already have. And if the money is coming to you rather than going directly to a plan, expect the 20 percent to be held back — that is withholding, not tax, but it is cash you will not have until you file.
The asymmetry that should drive the decision. Take the monthly annuity and you can generally change your mind about how to SPEND it but not about whether to have taken it. Take the lump sum and the monthly benefit is gone. Pension elections are made once, at a stated annuity starting date, and the plan is not obliged to let you unwind one afterwards. That is why the questions worth the most attention are the ones on this page rather than the projected-return arithmetic — the arithmetic can be redone next year, and the election cannot.
A last note on how these offers are framed. A buyout window is usually short, and the shortness is presented as the reason to decide quickly. The rate embedded in the quote is a genuine reason a window exists, and it is also the reason to ask which month it was struck on. Those are two different urgencies, and only one of them is yours.
Figures verified against 26 U.S.C. §§ 72(t), 402(c), 417, 436 and 3405 and the PBGC 2026 maximum guarantee table on September 30, 2026; the statement that most private-sector pensions have no cost-of-living adjustment was not re-checked.
Sources
IRC §417(e)(3), subparagraphs (A)-(D), for the minimum present-value rules; IRC §417(e)(1) and §417(e)(2) for the consent boundary. Retrieved from the United States Code, July 2026.
This states what the cited authority says. It is not tax, legal or investment advice. A pension election turns on your own plan document, your own health and marital situation, and figures your plan must give you in writing — and this site states no conversion factor and no break-even age, because both are specific to your plan and a borrowed number is worse than none. The monthly IRS segment rates are public and are on their own page.
Coordinate this with the rest of your retirement plan
A pension election is usually a one-time choice you cannot revisit, and an adviser can weigh it against your other income, your spouse’s position and how long the money has to last, though that does not replace the numbers in your own plan documents.
Before you start, what actually happens. The form is run by Kapitalwise, our advisor-matching partner. Kapitalwise sends your details to advisers who pay for the introduction, so expect calls and texts. Clear Money Guide is paid when you submit the form, whether or not you ever hire anyone. This is free to you and there is no obligation to hire anyone.
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Related
Guides › Pension and Annuity Decisions
Turn the offer into a hurdle rate
The ratio above tells you the payout rate. This turns the same two numbers into the question you can actually act on: what would the lump sum have to earn, every year, to beat the pension? If that number is higher than you would confidently plan to achieve, the monthly benefit is the better offer — and the arithmetic says so without anyone’s opinion.
Leave the COLA at zero unless you have checked. Most private-sector pensions have no cost-of-living adjustment at all, which is the single most under-explained fact in this decision: a fixed $2,200 a month is worth materially less after twenty years of inflation, and a lump sum you invest at least has the chance to keep up. Public-sector and union plans more often do have one. Your summary plan description says which, and it changes the hurdle rate more than almost any other input.
Two things the number cannot see, and both cut toward the pension: it is paid for life, so living longer than your horizon age is pure upside the arithmetic ignores; and it does not depend on your behaviour in a bad market. Two that cut the other way: a lump sum is inheritable and a single-life pension is not, and a lump sum can be moved if you are worried about the plan itself.
The question underneath all of these: can I retire? — answered as a gap in dollars a year and in working years, on assumptions you set and can see.