Private-sector defined benefit plans calculate a lump sum pension using three interest rates, called segment rates, that the IRS publishes each month based on investment-grade corporate bond yields. Each rate applies to a different slice of your projected future payments. For January 2026, those rates were 4.03% for the first five years, 5.20% for years six through twenty, and 6.12% for anything beyond year twenty. 1Internal Revenue Service. Minimum Present Value Segment Rates Combined with an IRS mortality table, these rates set the legal floor for the lump sum your plan must offer in place of monthly checks for life.
The Three Segment Rates
Federal tax law splits your future pension payment stream into three time windows, each discounted back to present value at its own rate. 2Office of the Law Revision Counsel. 26 USC 417 – Definitions and Special Rules for Purposes of Minimum Survivor Annuity Requirements The rates come from the corporate bond yield curve, averaging monthly returns on bonds in the top three quality tiers. 3Office of the Law Revision Counsel. 26 USC 430 – Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans
- The first segment rate applies to payments expected during the first five years after your annuity starting date, drawn from bonds maturing within that same five-year window.
- The second segment rate applies to payments in years six through twenty, drawn from bonds maturing in that fifteen-year range.
- The third segment rate applies to all payments expected beyond year twenty, using longer-term bond yields.
The first segment rate is usually the lowest because short-duration bonds carry less uncertainty, and the third is usually the highest because lenders demand a premium for tying up money over longer horizons. The rates published by the IRS for minimum present value calculations are distinct from the “funding segment rates” plans use for contribution math; the two look similar but do different jobs.
Why Higher Rates Shrink Your Lump Sum
The relationship runs in opposite directions, and it moves more money than most people expect. When segment rates rise, your lump sum falls. When they drop, your lump sum grows.
A lump sum is the amount that, invested today at the assumed interest rate, would grow enough to fund all your future monthly payments. When the assumed rate is high, each dollar is projected to grow faster, so less cash today can cover the same stream. When the rate is low, slower assumed growth forces the plan to hand over more money up front to cover the same obligation.
The sensitivity is real. A pension of $5,000 per month over twenty years could have a present value near $815,000 at a 4% discount rate but only about $688,000 at 6%, a roughly 16% drop from a two-percentage-point shift. Exact impact depends on your age, which segment rate moves, and how your payments distribute across the three windows. A useful rough guide: each one-percentage-point rise in the blended rate tends to cut a typical lump sum by somewhere in the range of 7% to 10%.
Which Month’s Rates Actually Apply to You
Segment rates change every month, but your plan does not necessarily use the rates from the month you retire. Two rules in your plan document determine which month’s numbers control your calculation.
The stability period is the window during which one set of rates applies to every participant starting benefits. A plan can define it as a calendar month, a calendar quarter, or a full calendar year. If the plan uses a one-year stability period, everyone retiring in 2026 sees lump sums calculated with the same rates, whether they leave in March or November. 4eCFR. 26 CFR 1.417(e)-1 – Restrictions and Valuations of Distributions From Plans Subject to Sections 401(a)(11) and 417
The lookback month tells the plan which published month to pull. Federal regulations allow the lookback to fall anywhere from the first through the fifth full calendar month before the stability period begins. A plan with a calendar-year stability period and a four-month lookback uses the segment rates published for the preceding September to calculate every lump sum distributed during the following year.
This is where planning gets tactical. Once you know your plan’s lookback month, you can watch the IRS rate publications in advance and see whether rates are trending up or down before your distribution window opens. If rates spike right as your plan locks in a new stability period, the offer can drop by a five- or six-figure amount compared to a few months earlier. A rate dip at the right moment does the opposite.
The Mortality Table Is the Other Half
Interest rates draw attention, but the IRS mortality table drives the number of monthly payments the lump sum has to replace. The table estimates how many more years someone your age is statistically expected to live.
For lump sum calculations, plans must use a single unisex table rather than separate tables for men and women. The IRS updates it annually. The version applicable to distributions with annuity starting dates during stability periods beginning in 2026 was published in IRS Notice 2025-40. 5Internal Revenue Service. Notice 2025-40 – Updated Static Mortality Tables for Defined Benefit Pension Plans for 2026
The effect is straightforward. A younger retiree has more projected years of payments ahead, which pushes the lump sum higher. An older retiree has fewer projected payments and a smaller lump sum. Two coworkers with identical monthly benefits can get very different lump sum offers because one retires at 55 and the other at 65. Waiting a year or two can noticeably change your number even if rates hold still.
When PBGC Rates Apply Instead
If your employer’s plan is shutting down, a different framework kicks in. The Pension Benefit Guaranty Corporation, the federal agency that insures private-sector pensions, uses its own interest assumptions to value benefits in plans it takes over or that terminate in a standard process. 6eCFR. 29 CFR Part 4044 – Allocation of Assets in Single-Employer Plans
The PBGC methodology uses a yield curve with maturity points spanning thirty years rather than three flat segment rates. The curve is adjusted by quarterly spreads reflecting insurance and annuity market conditions, and the PBGC applies different assumptions to participants already eligible for immediate benefits versus those whose benefits are deferred.
Some older plan documents still reference PBGC interest rates as the basis for lump sum calculations even while the plan is ongoing. In those cases, the administrator typically calculates the lump sum under both the IRS segment rate method and the PBGC method and pays whichever is higher. If your plan was established before the Pension Protection Act of 2006, confirm which methodology your plan document actually requires.
Federal Employees Are a Different System
If you work for the federal government under the Federal Employees Retirement System, none of this applies to your pension. FERS is a defined benefit plan, but it does not generally offer the kind of lump sum buyout private-sector plans do. Former federal employees who leave before reaching retirement eligibility can request a refund of their own retirement contributions, with interest at the rate paid on government securities. 7U.S. Office of Personnel Management. FERS Information – Former Employees That refund returns your deposits; it is not a present-value conversion of your full pension. State and local government pensions each follow their own statutes, which vary widely.
How to Find the Rates Your Plan Actually Uses
The IRS segment rates set the legal minimum, but your actual lump sum depends on details your plan controls. Three steps pin down the numbers that apply to you.
Start with your Summary Plan Description. Your employer is required to provide it. The document identifies whether your plan uses IRS segment rates or PBGC rates, the length of the stability period, and the lookback month. Those three items determine which published rates feed your calculation. If you cannot locate the SPD, request a copy from your plan administrator.
Then request a benefit statement. Federal law entitles participants in a defined benefit plan to a written statement of accrued benefits on request, though you are limited to one request per twelve-month period. 8Office of the Law Revision Counsel. 29 USC 1025 – Reporting of Participant’s Benefit Rights Ask for it about six months before your planned retirement date, so you have time to evaluate the offer and consider whether adjusting your timing would improve it.
Finally, monitor the IRS segment rate page. The IRS posts new minimum present value segment rates every month at irs.gov. 1Internal Revenue Service. Minimum Present Value Segment Rates Once you know your lookback month, you can watch the relevant publication and estimate whether your lump sum is moving up or down before you commit to a retirement date.
A formal estimate from your plan administrator is the only way to see the exact number, because the calculation combines your specific accrued benefit with the applicable segment rates and mortality assumptions in ways that are difficult to replicate precisely on your own. Knowing which interest rates drive that number, and how the timing rules interact with them, is what puts you in position to choose the moment.