Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A pension offers a lifetime income against a lump sum, and the two can be compared by present value. A $2,800 monthly pension over 25 years discounted at 4 percent is worth about $530,467, more than a $450,000 lump sum. The simple break-even, 13.4 years, is how long the pension takes to pay out the lump sum. The right choice also weighs survivor benefits, the health of the plan and the risk of outliving a lump sum.
Before you rely on it
What to check
Ask what happens to the pension if you die early, and whether a spouse continues to be paid. Those terms can change the value a lot.
The common error
Where people go wrong with pension lump sum vs. annuity calculator
Choosing the lump sum for the number alone. Managing it well for decades takes discipline and carries market risk that a pension does not.
Sensitivity evidence
How monthly pension changes the present value of pension
| Monthly pension | Present value of pension | Simple break-even age in years |
|---|---|---|
| $2,240 | $424,374 | 16.7 years |
| $2,520 | $477,420 | 14.9 years |
| $2,800worked example | $530,467 | 13.4 years |
| $3,080 | $583,514 | 12.2 years |
| $3,360 | $636,560 | 11.2 years |
Every input, tested
Which input moves the present value of pension most
| Input | Tested from | To | Present value of pension at each end | Swing |
|---|---|---|---|---|
| Expected payment years | 19.0 years | 31.0 years | $446,663 to $596,415 | $149,752 (28%) |
| Discount rate | 3.0% | 5.0% | $590,454 to $478,968 | $111,486 (21%) |
| Monthly pension | $2,520 | $3,080 | $477,420 to $583,514 | $106,093 (20%) |
| Lump-sum offer | $405,000 | $495,000 | $530,467 to $530,467 | none |
Two variables at once
Present value of pension by monthly pension and expected payment years
| Monthly pension \ Expected payment years | 13.0 years | 25.0 years | 37.0 years |
|---|---|---|---|
| $2,240 | $272,137 | $424,374 | $518,651 |
| $2,520 | $306,154 | $477,420 | $583,482 |
| $2,800 | $340,171 | $530,467 | $648,313 |
| $3,080 | $374,188 | $583,514 | $713,144 |
| $3,360 | $408,205 | $636,560 | $777,976 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Lump-sum offer | $450,000 |
| Monthly pension | $2,800 |
| Expected payment years | 25.0 years |
| Discount rate | 4.0% |
| Present value of pension | $530,467 |
| Simple break-even age in years | 13.4 years |
Where the inputs come from
Lump-sum offer is the amount the plan will pay now, monthly pension is the amount you would receive for life, expected payment years is how long you expect to collect, and the discount rate is the return you could earn on the lump sum. The plan's benefit statement gives both offers. Use a realistic life expectancy, not the shortest one, and choose a discount rate close to a conservative investment return.
Using the present value of pension in a real decision
A lump sum gives flexibility and legacy value, while the pension gives guaranteed income for life.
When the result stops applying
Most pensions do not adjust for inflation, so the real value of the payments falls over time. The result depends on your discount rate and life expectancy, both guesses. The pension's safety depends on the plan sponsor and the federal PBGC guarantee, which has limits. Lump sums are set using IRS interest rates, so the offer can change with rates.
What to compare it with
Test the income effect with the pension COLA calculator and the annuity present value page. The retirement income gap calculator shows whether the pension covers your spending, and the retirement withdrawal page models the lump sum. Compare the pension with buying an annuity from an insurer using the annuity payout calculator.
People also ask
Frequently asked questions
Should I take the lump sum or the pension?
It depends on your health, other income, need for flexibility and comfort with investing. The pension is safer and lasts for life, while the lump sum offers control and can be left to heirs.
Which discount rate suits a pension comparison?
A conservative expected return, such as a high-quality bond yield, is typical. A higher rate makes the lump sum look better, so test more than one.
Are private pensions guaranteed?
Private pensions are backed by the plan sponsor and insured by the PBGC up to limits, while government pensions depend on the state or federal plan's funding.