Pension vs. Lump Sum Calculator

What this estimate assumes

• "Present value" discounts the pension's future monthly payments back into today's dollars using your discount rate — essentially asking, "how much would I need today, invested at that rate, to generate these same payments?"
• It assumes you live to receive payments for the full number of years you enter. Pensions typically stop paying at death, which is a real risk the lump sum — once it's in your own account — doesn't carry.
• It doesn't account for survivor benefits that might continue reduced payments to a spouse after your death.
• It doesn't account for taxes. Both a pension and a lump sum are usually taxed as ordinary income when received, though a lump sum rolled directly into an IRA or 401(k) can defer that.
• It doesn't price in the guaranteed, insured nature of pension income versus the market risk you take on by investing a lump sum yourself.

How to use this calculator

1. Enter the one-time buyout amount you've been offered in Lump sum offer ($).
2. Enter the monthly amount the pension would pay instead in Monthly pension payment offered ($).
3. Enter how many years you expect to collect those payments in Years you expect to receive payments — a reasonable starting point is your actuarial life expectancy at the age payments would begin.
4. Enter the return you could realistically earn if you invested the lump sum instead in Discount rate (%). A higher rate here favors the lump sum; a lower rate favors the pension.
5. If your pension includes an annual cost-of-living adjustment, enter it in Annual cost-of-living adjustment on pension (%) — leave it at 0 if your pension pays a flat amount with no increases.
6. Click Compare pension vs. lump sum to see the pension's present value next to the lump sum offer, and which one comes out ahead.

Worked example

Take the calculator's own defaults: a $250,000 lump sum offer, a $1,800/month pension, 25 years (300 months) of expected payments, a 6% discount rate, and no cost-of-living adjustment (0%).

Because the COLA is 0%, this reduces to a standard fixed-annuity present-value calculation. The monthly discount rate is 6% ÷ 12 = 0.5%. Over 300 months, (1.005)^300 works out to roughly 4.466, which means (1.005)^-300 is about 1 ÷ 4.466 ≈ 0.2239.

Plugging into the present-value formula: PV = monthly pension × (1 − (1.005)^-300) ÷ 0.005 = 1,800 × (1 − 0.2239) ÷ 0.005 = 1,800 × 0.7761 ÷ 0.005 = 1,800 × 155.22 ≈ $279,400.

That present value, roughly $279,400, is about $29,400 more than the $250,000 lump sum offer. In plain terms: you'd need more than $250,000 invested at a 6% return to generate $1,800/month for 25 years on your own, so at this discount rate the pension is the better deal mathematically. That doesn't automatically make it the right choice, though — you might still prefer the lump sum if you expect a shorter-than-average lifespan, want the flexibility of controlling the money yourself, or have concerns about the pension payer's long-term ability to keep making payments. (These figures are hand-rounded approximations of the exponential terms; the calculator above computes the exact values.)

Frequently asked questions

What's a reasonable discount rate to use?

A common approach is to use the return you could realistically and reliably earn investing the lump sum — many people use something between 4% and 7%, roughly in line with a diversified portfolio's long-run average. Using a higher discount rate makes the lump sum look relatively more attractive, since it assumes you could grow that money faster on your own; a lower rate favors the pension. Try a few different rates to see how sensitive the comparison is to this assumption.

How does a cost-of-living adjustment (COLA) change the comparison?

A COLA increases your monthly pension payment over time to help it keep pace with inflation, which raises the present value of the pension compared to a flat, non-adjusting payment of the same starting amount. Even a modest annual COLA, like 2%, can meaningfully increase the pension's present value over a payout stretching 20-30 years, since the increases compound year after year.

What if I don't know how many years I'll receive payments?

Try your actuarial life expectancy for your age as a starting point — many online life-expectancy calculators or Social Security's own tables can give you a reasonable estimate — then run the comparison again a few years shorter and a few years longer. Because a pension typically stops paying at death, how long you actually live is the single biggest unknown in this comparison, and it's worth seeing how the answer changes across a realistic range rather than relying on one number.

Is pension income guaranteed the way this calculator assumes?

Private pensions are generally backed by the Pension Benefit Guaranty Corporation (PBGC) up to certain limits, and public pensions vary by plan and by state, but "guaranteed" still depends on the plan sponsor's ongoing solvency and the specific insurance in place. A lump sum, once it's in your own account, isn't exposed to the pension payer's financial health at all — that's a real, non-quantified factor this calculator doesn't price in.

Does this account for taxes?

No. Both a pension and a lump sum rolled into a taxable account are generally taxed as ordinary income when received (a lump sum rolled directly into an IRA or 401(k) can defer that tax instead). This calculator compares the two offers before taxes — your actual after-tax comparison depends on your tax bracket now and in the future, and whether you roll the lump sum into a tax-deferred account.

What about survivor benefits on the pension?

Many pensions offer a reduced monthly payment in exchange for continuing payments to a spouse after your death. This calculator only models a single stream of payments for the number of years you enter — it doesn't separately value a survivor benefit option. If your pension offer includes one, compare its reduced monthly amount using the same method, and factor in the extra security it provides for a surviving spouse.