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  • Writer's pictureMarcus P. Miller, CFP®, MBA

Measure the Value of Your Pension By Using Annuity Quotes

When it comes to retirement planning, one of the most crucial decisions you may face is whether to keep the pension you have earned from your employer or government agency. Typically, pensions give an option to take a lump sum or accept a series of payments. But, what if you could take your pension and compare it to an annuity on the open market? This exercise can provide valuable insights into the value and benefits of your retirement plan.

Four young people meeting at a table

Understanding Pensions

A pension, also known as a defined benefit plan, is a retirement plan offered by employers that guarantees a fixed income stream for life. These plans are typically funded by the employer, and the amount of the pension benefit is based on factors such as salary, years of service, and a predetermined formula. Some pensions come with additional benefits, such as cost-of-living adjustments to protect against inflation. Many provide many options, such as those listed below:

  • Life: Also known as Life Only or Straight Life, this option provides a fixed monthly payment for the remainder of your life, with no benefits paid to a beneficiary after your death.

  • Life with 50% Survivor: With this option, you receive a payout during your lifetime. After your death, your chosen beneficiary (usually your spouse) continues to receive 50% of your pension payment for the remainder of their life.

  • Joint and Survivor 100%: This option provides a slightly lower monthly payout during your lifetime, but after your death, your beneficiary continues to receive the same pension payment for the rest of their life.

  • Life with Period Certain: This option provides a fixed monthly payment for your lifetime along with a provision to pay out benefits to a beneficiary for a certain period (usually 10, 15, or 20 years) if you pass away before the end of that period.

  • Lump Sum: This option allows you to take the entire value of your pension as a one-time payment when you retire.

  • Deferred: With this option, payments are postponed until a later date, allowing the pension fund to grow over time.

Remember, different pension plans offer different payout options, and the best choice depends on your circumstances, financial needs, and life expectancy. However, the underlying value of the annuity tends to be stable across the available choices.

To assess the value of these options, we can compare the purchasing power of the lump sum in the annuity market. But first, let's review what an annuity is.

Exploring Annuities

An annuity is a financial product offered by insurance companies that provides a steady stream of income in exchange for either a lump sum or periodic payments. Annuities are often used as part of retirement planning because they can provide guaranteed income for life, similar to a pension. However, annuities on the open market may offer different features and benefits compared to your pension. It's important to review the details of the annuity before using it to measure the value of your pension. Some key factors to consider when evaluating annuities include:

  • Type of annuity: Fixed, variable, or indexed

  • Length of the payout period: Lifetime or for a specified period

  • Death benefit options: Do payments stop after death, continue to a beneficiary at a reduced amount, or offer full benefits?

  • Fees and expenses associated with the annuity

Keep in mind that annuities can also come with potential risks, such as inflation and market fluctuations.

Comparing Pensions vs. Annuities

Now that we understand the basics of pensions and annuities, let's explore how we can use annuity rates as a benchmark for evaluating the value of a pension. Annuity rates reflect the cost of purchasing a stream of income from an insurance company, so they can give us an idea of how much it would cost to buy an annuity that provides similar benefits to the pension. By comparing these numbers, we can determine whether the pension offers a good deal in terms of its value and potential benefits.

For example, imagine a pension benefit that offers the following options:

Lump sum: $250,000

Life only: $1,678/mo

Life w/ 10 year certain: $1,690/mo

Life with 50% survivor: $1,650/mo

Life with 100% survivor: $1,500/mo

To keep things simple, let's assume that this pension offers no inflation adjustment. However, inflation adjustments are typically worth A LOT in terms of the value of a pension or annuity. Therefore, when using annuities to measure the value of a pension it is important to compare apples to apples. If the pension has a 3% inflation adjustment, the annuity comparison should also have a 3% inflation adjustment.

Next, we compare the $250,000 lump sum to what a fixed annuity would purchase given a $250,000 purchase amount. It's important to note that the start date of the annuity and the start date of the pension should be as close as possible.

Here are some hypothetical quotes for what a $250,000 purchase may get.

Life only: $1,700/mo

Life w/ 10 year certain: $1,685/mo

Life with 50% survivor: $1,607/mo

Life with 100% survivor: $1,449/mo

By comparing the annuity quotes to the pension payment calculations we can see that the pension has very competitive rates built into the plan. This is because the payouts for the pension are comparable, and in the case we needed a survivor benefit, slightly better than the annuity comparison.

However, imagine a scenario where the pension payments were 70% or less of the payments that would be received from an annuity on the open market. This would communicate that the pension plan was using less favorable formulas in the calculation of the benefit. In this event, we would start to evaluate the pros and cons of taking the lump sum and what to do with that money. But that is beyond the scope of this article.

Next, imagine a scenario where the pension paid a benefit 30% higher than the annuity comparison. This would communicate that the pension plan has more favorable formulas built into the calculation of their benefit and may offer a better deal overall. In this case, we would give significant thought to keeping the pension benefit instead of taking the lump sum.

There are many websites that provide real-time annuity quotes to complete an analysis like the one above. I prefer to use It should be noted that we have no affiliation with, and do not receive any compensation from this company. I merely appreciate their transparency and ability to use their site for quotes free of charge. In the insurance world, there are few good actors.

Take Action Now!

As you can see, understanding the different payout options and comparing them to annuity rates can help you determine the value of your pension. This is just a starting point for deciding what to do with it! If you need further assistance, contact us at Mainstay Capital to discuss your pension and retirement planning needs. We specialize in helping individuals make the best decisions for their financial future, and we would love to help you too.

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The opinions expressed in this website are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. We cannot provide financial advice if we do not know your specific financial situation. Please talk to your financial advisor or do your own research before making financial decisions. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Any indices referenced for comparison are unmanaged and cannot be invested into directly. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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