Many employers offer departing or retiring workers a choice: a guaranteed monthly pension for life, or a single lump sum now. Both are worth real money, but they aren’t directly comparable. One is a stream of payments spread over an unknown number of years, the other is a check. This pension calculator puts them on the same footing. It discounts the monthly payments to a present value, finds the return the pension effectively pays, and shows how long the lump sum would last if you invested it and paid yourself the same monthly amount.
How to use the pension calculator
- Enter the lump-sum offer and the monthly pension from your plan’s election packet.
- Enter any cost-of-living raise the pension pays each year. Most private pensions pay none.
- Enter the age when payments start and the age you want to plan to, either your life expectancy or a cautious older age.
- Enter the return you would realistically earn by investing the lump sum, after fees.
How the comparison works
Present value. Each monthly payment M is discounted at your return to today’s dollars and the results are added together:
where r = (1 + annual return)1/12 − 1. If the lump sum beats the present value, the lump sum is worth more under your assumptions.
Implied return. The calculator also finds the rate at which the present value equals the lump sum. Think of it as the guaranteed return the pension pays. You would have to beat it, every year and without bad timing, to come out ahead with the lump sum.
Run-out age. Finally, it invests the lump sum at your return and withdraws the pension amount every month. The age at which that balance hits zero is the age you would have to outlive for the pension to win.
Worked example
At 65 you are offered $400,000 or $2,400 a month for life, with no cost-of-living raise. You could earn 5% investing the lump sum and plan to age 90.
- Present value of 300 payments of $2,400 at 5%: $415,126. The pension is worth about $15,126 more.
- The implied return is 5.39%. Investing the lump sum would have to beat that.
- Withdrawing $2,400 a month from the invested lump sum lasts until about 88.3.
- Simple payback, ignoring growth, takes 13.9 years: $400,000 ÷ $28,800 a year.
How the verdict shifts
| Assumption | Pension present value | Better choice |
|---|---|---|
| Live to 80 | $305,724 | Lump sum by $94,276 |
| Live to 85 | $367,064 | Lump sum by $32,936 |
| Live to 90 | $415,126 | Pension by $15,126 |
| Live to 95 | $452,783 | Pension by $52,783 |
| Live to 90, earn 6% | $378,179 | Lump sum by $21,821 |
| Live to 90, 2% yearly COLA | $506,145 | Pension by $106,145 |
Beyond the numbers
Reasons to lean toward the monthly pension: you expect to live a long time, you have little other guaranteed income, you want a survivor benefit for a spouse, or you would rather not manage investments. Private pensions are also backed by the Pension Benefit Guaranty Corporation (PBGC), up to its limits, if the plan fails.
Reasons to lean toward the lump sum: you have health concerns, you have other secure income such as Social Security, you want to leave money to heirs, or the offer is generous compared with the payments.
Some plans let you take part as a lump sum and part as a pension. To estimate your other guaranteed income, use the Social Security calculator. To test how long an invested lump sum lasts under different withdrawals, use the retirement withdrawal calculator.
Estimates only, not financial or tax advice. The election is usually irreversible, so review your plan documents and consider a fee-only fiduciary adviser before choosing.
Frequently asked questions
Should I take the pension lump sum or the monthly payments?
Compare the lump sum with the present value of the payments at a return you could realistically earn, over a realistic lifespan. If the lump sum is larger, it is worth more on paper. Then weigh what the numbers leave out: the pension's longevity protection, any survivor benefit, your health, other guaranteed income and how comfortable you are managing investments.
What is a pension's implied return?
It is the annual return at which the pension payments, through your planning age, are worth exactly the lump sum. In the default example the pension is equivalent to earning 5.39% a year on $400,000 until age 90. Invest the lump sum and earn more than that, and it comes out ahead.
How does life expectancy change the answer?
A lot. In the default example, the pension is worth $305,724 if you live to 80, $415,126 to 90 and $452,783 to 95, against a $400,000 lump sum. The longer you live, the better the monthly pension looks, which is why it works as insurance against outliving your money.
How are pension lump sums calculated by employers?
Private plans must use IRS-specified interest rates, based on corporate bond yields, and mortality tables. When those rates rise, lump-sum offers shrink for the same monthly benefit. That is why the same pension can be offered at very different lump sums from one year to the next.
What happens to taxes if I take the lump sum?
A direct rollover to an IRA or another qualified plan keeps the money tax-deferred. If it is paid to you instead, the plan generally must withhold 20% for federal tax, and the whole amount can be taxable that year. Monthly pension payments are taxed as ordinary income as you receive them.