Retirement
Pension Lump Sum vs Annuity Calculator
A pension buyout asks you to price a lifetime of monthly cheques against a single sum today. The honest test is the implied return: the rate the pension pays on that lump sum. If you cannot reliably beat it with the cash, the pension is the better deal.
Tested against worked examplesHow we verify
Roughly your life expectancy at retirement — longer favours the pension.
A safe rate you could reliably earn — this is what you compare the pension against.
Many private pensions have none, which inflation erodes.
The pension is worth more: $7,382
The pension is worth more
$7,382
The pension implies a 5.15% return on the lump sum.
This pension has no cost-of-living adjustment, so inflation erodes every payment — in 25 years at 3% inflation, the cheque buys less than half what it does today. That is the strongest argument for taking the lump sum and investing for growth, if you have the discipline to do it.
- Present value of the pension
- $507,382
- Lump-sum offer
- $500,000
- Return the pension implies
- 5.15%
- Monthly the lump sum could pay
- $3,222
- Total the pension pays (nominal)
- $900,000
Beat this reliably with the cash and the lump sum wins.
Drawing it down over the same years at your investment return.
Compare scenariosTry three values of one input
| Lump-sum offer | |||
|---|---|---|---|
| The pension is worth more | $57,382 | $7,382−$50,000 | $42,618−$14,764 |
| Lump-sum offer | $450,000 | $500,000+$50,000 | $550,000+$100,000 |
| Return the pension implies | 6.24% | 5.15%−1.09% | 4.21%−2.03% |
| Monthly the lump sum could pay | $2,899 | $3,222+$322 | $3,544+$644 |
Every other input stays at the value you set above — currently $500,000 for lump-sum offer. Differences are measured against the first column.
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How this calculator works
The pension's present value discounts each year's payment — growing by any cost-of-living adjustment — back to today at the discount rate. The implied return is found by solving for the rate at which that present value equals the lump sum. The sustainable monthly figure is the level payment the lump sum supports over the same horizon at your investment return.
A fixed horizon stands in for an uncertain lifespan; living longer favours the pension, shorter the lump sum. Taxes are not modelled, and both options are generally taxed as income when received. Survivor benefits, the plan's financial health, and PBGC coverage limits are real factors this arithmetic does not capture.
What this assumes
- The lump sum is compared against the pension using the discount rate and life expectancy you enter — both assumptions do enormous work here.
- The pension is assumed paid for life. Whether it is inflation-adjusted changes the comparison profoundly and must be entered as such.
- Pension benefit guaranty protection has limits, and a lump sum rolled to an IRA carries market risk instead. Neither risk is priced here.
What changes this number
- Whether the pension rises with inflation
- A level pension loses roughly half its purchasing power over 25 years at 3%. An indexed one is a far more valuable product.
- Discount rate assumed
- The single most sensitive input. A higher rate flatters the lump sum, and it is a judgement rather than a market quote.
- Survivor election
- A joint-life pension pays less and protects a spouse for life — a trade-off the lump-sum comparison cannot capture.
A worked example
Take the $500k vs $3,000/mo for 25 years scenario. These figures are produced by the calculator above, not written alongside it, so they always match what the tool returns.
What you enter
- Lump-sum offer
- $500,000
- Monthly pension
- $3,000
- Years of payments expected
- 25 years
- Discount rate
- 5%
What it returns
- The pension is worth more
- $7,382
- Present value of the pension
- $507,382
- Lump-sum offer
- $500,000
- Return the pension implies
- 5.15%
- Monthly the lump sum could pay
- $3,222
This pension has no cost-of-living adjustment, so inflation erodes every payment — in 25 years at 3% inflation, the cheque buys less than half what it does today. That is the strongest argument for taking the lump sum and investing for growth, if you have the discipline to do it.
Try an example
Frequently asked questions
Should I take a pension lump sum or monthly payments?
Compare the return the pension implies on the lump sum against what you could safely earn on the cash. If the pension's implied return is 5–6% and you would invest conservatively, the pension usually wins. If it is low, or the plan lacks a cost-of-living adjustment, the lump sum can be better — provided you invest it.
What is the implied return of a pension?
The interest rate at which the lump sum, invested and drawn down, would exactly reproduce the pension's payments over your life expectancy. It lets you compare the offer to an investment. A pension implying 6% is hard to beat safely; one implying 3% is easier to top.
How does inflation affect the decision?
Enormously, when the pension has no cost-of-living adjustment — which most private pensions do not. A fixed $3,000 cheque loses roughly half its purchasing power over 25 years at 3% inflation. A lump sum invested for growth can keep pace; a level pension cannot.
Is my pension safe if I keep it?
Private pensions are insured by the Pension Benefit Guaranty Corporation up to federal limits, so even if the employer fails you likely receive most of the benefit. A lump sum removes that dependency entirely but hands you the investment and longevity risk instead. Weigh the sponsor's financial health.
What is longevity risk?
The risk of outliving your money. A pension eliminates it — the cheque arrives however long you live. A lump sum does not; live longer than planned and you can run out. This is why break-even maths alone understates a pension's value for anyone in good health with a family history of long life.
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Disclaimer: DayCents provides this calculator for educational purposes only. Results are estimates based on your inputs and the stated assumptions — they are not financial advice, a quote, or an offer of credit. Consult a qualified financial professional before making major money decisions.