Pension COLA Break-Even Calculator

How the pension COLA comparison is calculated

This calculator compares two pension payment streams that begin at the same retirement age. It does not estimate survival probability. Instead, it asks how the two options compare if payments are received through the comparison age you choose.

Let M be the starting monthly pension, c the annual COLA, i expected inflation, d the discount rate, and t the payment year counted from zero. For a compounded COLA, the payment factor is F(t) = (1 + c)^t. For a simple COLA, the factor is F(t) = 1 + t x c. The annual pension payment is P(t) = 12 x M x F(t).

Present value is calculated at the retirement date, with each annual payment treated as an end-of-year total: PV(t) = P(t) / (1 + d)^(t + 1). The option present value is the sum of those discounted payments. Lifetime payments are the same annual payments added without discounting.

Purchasing power uses the inflation assumption instead of the discount rate. The final monthly amount in today's retirement-date dollars is M x F(N - 1) / (1 + i)^(N - 1), where N is the number of projected payment years. A pension can rise in dollars and still lose purchasing power when the COLA is below inflation.

How the break-even age is found

The calculator adds each option's discounted payments year by year. After the first projected payment year, it identifies the option with the lower cumulative present value. The discounted break-even age is the first later age where that initially lower cumulative value equals or exceeds the other option. If that never happens before the comparison age, the result says there is no break-even within the horizon.

What moves the result most

The starting payment gap and the COLA gap usually drive the answer. A lower starting pension with a meaningful compounded COLA may catch a higher fixed pension if the comparison horizon is long enough. A high discount rate makes distant COLA increases count less in present value. Higher inflation does not change the nominal pension payments, but it lowers the displayed purchasing power of later checks.

What this calculator leaves out

The model assumes a constant annual COLA and one payment timing convention. It does not model taxes, survivor elections, guarantee periods, benefit reductions, plan default risk, personal life expectancy, or plan-specific COLA rules such as caps, banks, delayed eligibility, ad hoc increases, or index formulas. Use the result as a structured comparison, then check the plan documents for the actual adjustment rule.

Worked example

Suppose payments begin at age 65 and are compared through age 95. Option A starts at $3,000 per month with no COLA. Option B starts at $2,600 per month with a compounded 2% annual COLA. Inflation is 2.5% and the nominal discount rate is 4.5%.

The first annual payments are $36,000 for Option A and $31,200 for Option B. Option B's annual payment exceeds Option A's later, and its cumulative discounted value catches up at age 83. Through age 95, Option A has a present value of about $586,400 and Option B has a present value of about $644,425, so Option B is higher by about $58,025.

Nominal lifetime payments are $1,080,000 for Option A and about $1,265,724 for Option B. In final-year purchasing power, Option A's monthly check is about $1,466 and Option B's is about $2,256 in retirement-date dollars.