Pension vs lump sum calculator

A pension (a life annuity) is a stream of monthly payments for life; a lump sum is a pile of money now. To compare them you need a return, a horizon, and the pension's own increases, if any. This calculator values the pension at the return you expect, finds the return the lump sum would have to earn to be worth the same, and runs the lump sum forward paying the pension's amounts to see when it would be exhausted.

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How the comparison works

1. Present value. Every monthly payment from the start age through the end of the horizon age, paid at the end of its month, is discounted back to your age now at the monthly equivalent of the expected return — (1 + r)^1/12 − 1, not r ÷ 12. A pension with a cost-of-living increase has each year's payments raised by it on the anniversary of the start; a pension already in payment is valued at its current amount.
2. Required return. The rate at which the present value equals the lump sum — the return you would have to earn, every year, for the lump sum to buy the same income. If the lump sum is larger than the undiscounted total, no positive return is needed; if it is very small, no plausible return will do.
3. Lump sum paying the pension. Invest the lump sum at the expected return and withdraw the pension's amount each month: the age at which it runs out, or the balance left at the horizon.

What the number does not capture

• One rate doing two jobs. The return you enter is used twice: to grow the lump sum, and to discount the pension. A higher return always makes the pension worth less here, and the two are not equally certain: a pension owed by a funded plan is closer to a bond than to a stock portfolio, so at the return you hope a portfolio earns it comes out smaller than at the yield of the safe investments it resembles. The present value is a comparison under your assumption, not a risk-adjusted valuation. The figure that does not depend on the rate you enter is the required return — it depends instead on how long the payments last, which is what the table by age shows, and it is a hurdle the lump sum would have to clear, not a return anyone promises. Compare it with a rate of the same kind: the yield on Treasuries of about the pension's length, nominal against a fixed pension and inflation-protected against one that rises with prices. An insurer's quote is a price, not a rate: compare it with the lump sum, for an annuity with the same start date, the same increases and the same survivor option.
• Longevity. The pension pays as long as you live; the table by horizon shows how much its value depends on that. A pension is insurance against living long, which the lump sum does not provide.
• Survivor options. A joint-and-survivor pension continues, in part or in full, to a spouse; the single-life amount is higher. Enter the option you are actually offered.
• Credit risk and the PBGC. Most private-sector defined benefit pensions are insured by the Pension Benefit Guaranty Corporation up to a legal maximum (for plans failing in 2026, $7,789.77 a month at 65 as a single-life annuity, less at younger ages); government plans are outside the PBGC, and church plans and very small professional-practice plans are usually exempt.
• Taxes. Both are taxed as ordinary income when received, apart from any after-tax contributions you made; a lump sum rolled directly into an IRA is not taxed until withdrawn, and one taken in cash before 59½ can also owe the 10% additional tax (a 72(t) series is one way around it). The withdrawal calculator models the drawdown with taxes.
• Inflation. A fixed pension loses purchasing power every year. Either work in nominal terms, entering 0 for its increase and a nominal return, or work in real terms throughout, entering a real return and setting the increase to the amount the pension beats inflation by. That second figure is negative for a fixed pension, and it is (1 + increase) ÷ (1 + inflation) − 1 rather than one minus the other: a fixed pension against 2.5% inflation is −2.44%, not −2.5%.

This is arithmetic, not advice. For a decision of this size, a fee-only adviser who can read the plan's actuarial assumptions is worth the fee.

Related

• Retirement withdrawal calculator

  Put the pension — or the lump sum added to savings — into a full plan: how long the money lasts with inflation-adjusted spending, Social Security and federal tax.

• Social Security break-even calculator

  The other lifetime-income decision: the benefit at each claiming age from 62 to 70 and where two claiming ages break even.

• How the pension comparison is computed

  The month-by-month present value, the required-return solution and the lump-sum drawdown, with the pension-increase convention.