How to use the pension calculator
The calculator has three tools.
Pension pot growth is for a defined contribution pension, often called a pension pot: an account whose value depends on what you pay in and how it is invested.
- Current pot and salary. Your balance today and your current pay.
- Contributions from you and your employer, as percentages of salary. Your payslip or plan documents show them.
- Salary growth, return and fees. The return is before fees and inflation; fees are the yearly charges on the pot.
- Years until retirement and inflation. Inflation converts the final pot into today’s dollars.
Pot to income turns a pot into a regular income. Either enter an interest rate and a payout period, or enter an annuity rate quoted by an insurer.
Defined benefit estimates a pension promised by an employer from your salary, your plan’s accrual rate and your years of service, and what you would get for exchanging part of it for a lump sum.
How the calculations work
For the pot, each year’s growth is added, the fee is charged on the balance, and the year’s contributions are paid in:
Salaryyear y = Salary × (1 + g)y − 1
Pot in today's dollars = Pot ÷ (1 + inflation)yearsr is the investment return, f the annual fee, e and c your and your employer's contribution rates, and g salary growth.
Spreading a pot over n years uses the annuity formula, with payments made monthly and rising by a fixed percentage once a year:
q = (1 + esc) ÷ (1 + i), a = [1 − (1 + j)−12] ÷ j, j = (1 + i)1/12 − 1i is the annual interest rate and esc the yearly increase. With a quoted annuity rate, the monthly income is simply Pot × rate ÷ 12.
Lump sum = Pension given up × Commutation factor
A worked example
Growth. You have a $50,000 pot and earn $60,000. You pay in 5% and your employer 5%, or $6,000 in the first year. With pay rising 3% a year, a 6% return and a 0.5% fee, the pot reaches $600,476 in 25 years, worth $323,891 in today’s dollars at 2.5% inflation.
Income. A $500,000 pot paid out over 25 years at 4.5% gives $2,753.62 a month, or $33,043 a year. Over the full period you receive $826,085.
Defined benefit. 30 years of service at an accrual rate of 1/60 on a salary of $70,000 earns a pension of $35,000 a year, 50.0% of salary. Exchanging 20% of it at a factor of 12 pays a lump sum of $84,000 and leaves $28,000 a year.
Fees and employer contributions
Two inputs in the growth tool deserve more attention than they usually get. The fee is charged on the whole pot every year, so it compounds against you just as returns compound for you:
| Change from the example | Pot at retirement | In today’s dollars |
|---|---|---|
| No fees | $654,212 | $352,876 |
| 0.5% fee (example) | $600,476 | $323,891 |
| 1% fee | $551,822 | $297,648 |
| Employer pays 8% instead of 5% | $723,823 | $390,423 |
A fee that looks small in a single year takes 8.2% of the final pot in the example, and twice the fee takes about twice as much. Employer contributions work the other way: a match adds money the moment you contribute, a return no investment reliably offers.
Turning a pot into income
There are two broad ways to draw an income from a pot. The first is to keep it invested and withdraw from it (drawdown, in UK terms). The interest-rate mode models this: the result is the income that empties the pot exactly at the end of the payout period you choose, so that period matters a lot:
| Payout period | Monthly income | Total paid |
|---|---|---|
| 20 years | $3,138.95 | $753,347 |
| 25 years | $2,753.62 | $826,085 |
| 30 years | $2,506.69 | $902,409 |
The risk is that you live longer than the period you planned for. The second way removes that risk: buy a lifetime annuity from an insurer, which pays until you die however long that is. In the quoted-rate mode, a 6.5% rate on $500,000 pays $32,500 a year. If you live 25 years, that works out to a return of 4.33% a year on the money handed over; the payments repay the original pot after 15.4 years. A short life makes it a poor deal and a long one a good deal: it is insurance against living longer than your money.
Inflation is the other trade-off. A level income loses buying power every year. Choosing a 2.5% yearly increase in the interest-rate mode lowers the first payment to $2,131.42 a month but raises it to $3,855.16 by the final year.
Defined benefit versus defined contribution
A defined benefit pension promises an income set by a formula; the employer carries the investment risk and the risk that you live a long time. With a defined contribution pot you carry both risks, but you own the pot and can usually pass on what is left.
The accrual rate is the heart of a defined benefit plan. At 1/60, each year of service adds $1,167 of yearly pension at the example salary. Your plan documents state the rate, which salary counts and how pensions rise once paid.
Many plans let you exchange part of the pension for cash at retirement: a factor of 12 pays 12 dollars for each dollar of yearly pension given up. If the pension would rise with inflation, the income you surrender is worth more than the factor suggests. US plans that offer a lump sum usually calculate it from interest rates and mortality tables set by regulation rather than a fixed factor, so check the figure your plan quotes.
What this calculator does not include
- Taxes. Contributions, growth, income and lump sums are taxed differently from country to country, and some lump sums are partly tax-free. All figures here are before tax.
- Contribution limits and tax relief. US 401(k) and IRA limits and UK annual allowances cap what can go in each year.
- Investment swings. The tools use a steady return; real returns vary, and falls near retirement matter most.
- Annuity pricing. Real rates depend on your age, health, interest rates and options such as a spouse’s pension.
- Plan-specific rules for defined benefit pensions, such as early-retirement reductions, caps and survivor benefits.