Pension Lump Sum vs Annuity Calculator

How it works

Pension present value = monthly × (1 − (1 + i)^−n) ÷ i, with i = rate ÷ 12 and n = years × 12 · Payout rate = annual pension ÷ lump sum

To compare a lump sum with a stream of pension payments, put both in today’s dollars. The pension’s present value is what that monthly income is worth now, given a discount rate equal to what you could earn on the lump sum. A higher discount rate or a shorter life expectancy favors taking the lump sum; a longer life or a low-return environment favors the guaranteed pension. Living longer than expected is the pension’s biggest advantage — it never runs out.

Worked example

Choosing between $300,000 now and $1,700 a month for 25 years, discounted at 5%: the pension’s present value is 1,700 × (1 − 1.004167^−300) ÷ 0.004167 ≈ $291,000 — just under the lump sum, so at this discount rate the lump sum edges ahead. The pension’s payout rate is 20,400 ÷ 300,000 = 6.8% a year.

Frequently asked questions