Annuity vs Lump Sum Calculator
Compare taking a pension or lottery as a lump sum versus lifetime annuity payments by discounting the payments to today’s value.
How it works
Annuity present value = payment × [1 − (1 + r)^−n] ÷ r · Compare against the lump-sum offer
A lump sum and a stream of payments are only comparable once both are stated in today’s dollars. Discounting the payments at the rate you could realistically earn converts the annuity into a present value; if that beats the lump-sum offer, the payments are the better deal. A higher discount rate favours the lump sum (your own investing looks more attractive), while living longer than expected favours the annuity — which is why longevity and health matter as much as the math.
Worked example
Twenty-five annual payments of $30,000 discounted at 5% have a present value of about $422,818. Against a $500,000 lump sum, the lump sum wins by roughly $77,000 at that discount rate — though a lower rate or a longer life could flip the answer.
Frequently asked questions
What discount rate should I use?
Use a rate close to what you could safely earn on the lump sum — often the yield on high-quality bonds. A higher rate makes the lump sum look better; a lower, more conservative rate favours the guaranteed annuity.
Does this account for taxes or inflation?
No. Both options may be taxed differently, and fixed annuity payments lose purchasing power to inflation over time. Factor those in before deciding, especially for payments lasting decades.
Why would anyone take the annuity if the lump sum is bigger?
An annuity removes longevity and market risk — it pays for life regardless of how long you live or how markets perform. That guarantee has real value that a raw present-value comparison does not fully capture.
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Educational estimate, not financial advice.