How the comparison works
A monthly pension is a stream of payments, so it is compared with a lump sum by discounting each payment to the start date: PV = Σ P × (1 + COLA)^year ÷ (1 + j)^k, where j = (1 + r)^(1/12) − 1 is the monthly version of your annual discount rate r and k counts the months. Payments are assumed at the end of each month and stop at the life expectancy you enter.
The discount rate is what you believe you could earn on the lump sum at similar risk. A higher rate makes the lump sum look better; a lower rate favours the pension. The calculator also reports the implied return, the discount rate at which both options are worth the same.
Worked example
A plan offers 250,000 now or 1,500 a month from age 65. With a 5% discount rate and payments to age 85 (240 months), the pension's present value is 229,415.16, about 20,585 less than the lump sum. Undiscounted, you would collect 250,000 in pension payments after 167 months, at age 78 years 11 months. With 5% discounting, break-even comes at age 88 years 4 months, later than the assumed life expectancy.
For a joint-and-survivor option paying 1,350 a month, with 50% (675 a month) continuing for 5 years after your death, the present value is 219,990.92, compared with 229,415.16 for single life.
What this leaves out
Taxes, the sponsor's funding and any PBGC insurance limits, mortality tables, and investment risk on the lump sum are not modeled. Life expectancy is your own estimate. Treat the result as one input to a decision you check against your plan's official figures.