Pension Lump Sum vs Annuity Calculator
Compare a pension lump-sum offer against the lifetime annuity by discounting the monthly payments to their present value.
How to use this tool
- Enter the monthly pension payment you would otherwise receive.
- Estimate how many years you expect to collect it (your life expectancy in retirement).
- Set a discount rate equal to the return you could earn on the lump sum.
- Enter the lump-sum offer and compare it against the pension's present value.
Should you take the pension's monthly checks or the one-time lump sum? Discount the payments to today's dollars and compare. Enter your numbers below.
Formula
Annual pension = Monthly payment × 12.
Present value of the annuity = Annual × [1 − (1 + d)−n] ÷ d, where d is the discount rate and n the number of years of payments. (When d = 0 this collapses to Annual × n.)
Lump-sum advantage = Lump-sum offer − Present value. If the offer exceeds the present value, the lump sum is the richer choice on a pure dollar basis; if it falls short, the pension stream is worth more.
How it works
A pension buyout asks a simple question with a slippery answer: is a pile of cash today worth more than a stream of monthly checks for life? The honest way to compare them is to discount the future payments to their present value using the return you could realistically earn on the lump sum, then set that against the offer.
This calculator treats the pension as a level annuity over the number of years you expect to collect and discounts it at your chosen rate. A higher discount rate (or a shorter expected lifespan) lowers the present value and tilts the decision toward the lump sum; a lower rate or longer horizon favors keeping the annuity. The break-even discount rate is where the two values meet.
This is a deterministic, dollars-only comparison. It does not model inflation indexing, survivor benefits, the credit risk of the pension sponsor, taxes, or the behavioral value of guaranteed income you cannot outlive. Weigh those alongside the math. Reviewed by the AbraCalc Retirement Desk against standard present-value annuity methods. This calculator provides general information, not financial advice; consult a qualified professional for decisions about your own situation.
Worked example
$2,000/month for 25 years, 5% discount, $300,000 offer
- Annual pension = $2,000 × 12 = $24,000.
- Annuity factor = [1 − (1.05)−25] ÷ 0.05 = 14.093945.
- Present value = $24,000 × 14.093945 = $338,254.67.
- Lump-sum advantage = $300,000 − $338,254.67 = −$38,254.67.
- The offer is below the pension's present value, so the annuity wins.
Present value of the pension: $338,254.67 — the $300,000 offer trails by $38,254.67, so the annuity is better.
Present value of $2,000/month for 25 years by discount rate
| Discount rate | Annuity factor (25 yrs) | Present value |
|---|---|---|
| 3% | 17.413148 | $417,915.54 |
| 4% | 15.622080 | $374,929.92 |
| 5% | 14.093945 | $338,254.67 |
| 6% | 12.783356 | $306,800.55 |
| 7% | 11.653583 | $279,686.00 |
| 8% | 10.674776 | $256,194.63 |
Key terms
- Present value
- What a stream of future payments is worth today once discounted for the time value of money.
- Discount rate
- The annual return assumed on money you have today; it is the rate used to shrink future pension payments back to present value.
- Annuity
- A series of equal periodic payments, such as a monthly pension paid for life.
- Break-even rate
- The discount rate at which the lump-sum offer exactly equals the present value of the pension stream.
Frequently asked questions
- How do I compare a lump sum to a pension?
- Discount the pension's future monthly payments to their present value using a realistic investment return, then compare that figure to the lump-sum offer. Whichever is larger is the better deal on pure dollars.
- What discount rate should I use?
- Use the long-run return you could reasonably earn on the lump sum if you invested it — often 4–6% for a balanced portfolio. A higher rate makes the lump sum look better; a lower one favors the pension.
- Does a higher discount rate favor the lump sum?
- Yes. A higher discount rate shrinks the present value of the future payments, so the fixed lump-sum offer wins more easily. A lower rate raises the pension's value.
- What does this calculator leave out?
- It ignores inflation adjustments, survivor benefits, taxes, and the credit risk of the pension provider. Guaranteed lifetime income also has value beyond the math, especially if you live longer than expected.