Pension lump sum vs annuity calculator

What this compares

A pension plan that offers a choice gives you two things with the same price tag: a single check now, or a stream of checks later. Neither is "worth" more in the abstract. They differ by the rate of return you would have to earn on the single check to reproduce the stream. This page finds that rate, shows what the stream is worth today at a rate you pick, and tells you how long the lump sum would last if you used it to pay yourself the same checks.

Method (our derivation)

Every monthly check is discounted back to today at the monthly equivalent of your yearly rate i: the monthly rate is (1 + i)^1/12 − 1, and the present value is the sum of each check divided by (1 + monthly rate) to the power of its month number. With a yearly increase g, the check goes up by g each twelfth month. The break-even return is the i that makes that present value equal the lump sum; since the value falls as i rises, the page halves the search range 200 times. The "lump sum lasts" figure invests the lump sum at i, pays the checks from it every month and counts how long the balance stays above zero.

Worked example

A plan offers $250,000 now or $1,500 a month for 25 years, with no increases. The checks add up to $450,000 and equal the lump sum in 13.9 years. At an expected 5% return, the pension is worth $259,454 today, which is $9,454 more than the lump sum. The break-even return is 5.39%: the lump sum has to earn that to pay the same checks for the full 25 years. First-year pension divided by the lump sum is 7.2%. These are example numbers, not typical ones.

Limits and common mistakes

• Comparing before tax with after tax. A lump sum rolled into an IRA and monthly checks are both taxed later, but a lump sum paid to you directly can be taxed at once. Put the two on the same footing.
• Using a "safe" return that is not safe. A break-even rate of 5.4% earned with certainty is a bond-like return; earning it with stocks has risk the pension does not have.
• Forgetting the end date. The comparison runs for the years you enter. A pension lasts for life, so a long life favors it; an early death favors the lump sum, which can pass to heirs.
• Assuming the pension is the same as an annuity you could buy. A commercial annuity from an insurer has its own price and fees, which may differ from a plan's conversion.
• Plan quirks. Some plans offer Social Security leveling, early retirement subsidies or partial lump sums. The page does not model them.

What is the break-even return?

It is the yearly rate of return at which the lump sum, invested and drawn down by the same monthly checks the pension would have paid, runs out exactly when the pension payments end. Put another way, it is the internal rate of return of the pension seen as a purchase: you give up $250,000 today and get $1,500 a month for 25 years. Here that rate is 5.39%. If you expect to earn more than that, safely and after fees, the lump sum can match the pension. If you expect to earn less, the pension is the better deal in this simple view. We find the rate numerically by repeated halving, and the arithmetic is ours, not a published formula.

How long do I need to live for the pension to win?

Without any discounting, $1,500 a month adds up to the $250,000 lump sum after 13.9 years. That is the simple payback. At a 5% assumed return, the lump sum invested funds the same checks for 23.3 years, which is the more honest test, because the unspent lump sum keeps earning. If your health and family history make a shorter payout period likely, shorten the years field: with 15 years the same pension is worth $191,078 against $250,000.

Does the pension have an inflation increase (COLA)?

Many private pensions do not. If yours has a fixed yearly increase, enter it. With a 2% yearly increase, the first-year pension of $18,000 grows each year, and the pension is worth $316,341 at 5% instead of $259,454; the break-even return rises from 5.39% to 7.38%. A pension without increases loses buying power every year, while a lump sum you invest has a chance to keep up with prices, though it has no guarantee.

How do I include a surviving spouse?

Pension plans often reduce the monthly amount for a joint-and-survivor option; enter that reduced check as the monthly pension. Then use the survivor fields for how long a survivor may receive benefits after the retiree's payments end and what share of the check continues. With 50% for 10 more years after the 25 years, the pension becomes worth $280,442. The lump sum, on the other hand, passes to heirs if you or your spouse die early. The calculator treats the survivor period as additional years; it cannot model each person's survival.

How do plans set the lump sum?

For private defined-benefit plans, the IRS publishes monthly "minimum present value segment rates" under section 417(e)(3) of the Internal Revenue Code, used with a mortality table to convert a monthly pension into a lump sum. IRS Notice 2026-65 lists 5.06%, 5.99% and 6.72% for September 2026, for three time bands of payments. Higher rates make the same pension worth less today, so lump sums are smaller when rates are high and larger when they are low. Your plan may use a different measure, and its document decides: it can offer a lump sum larger than the minimum. Ask the plan for the exact rate and the date its quote is good through.

What are the tax consequences of taking the lump sum?

A lump sum from a traditional pension is generally taxable in the year you receive it unless you roll it over. A direct rollover into an IRA postpones tax; a check paid to you directly usually has 20% withheld for federal tax and can add to your income for the year. Monthly pension checks are taxed as ordinary income as you receive them. The IRS says (Topic no. 413) that a taxable eligible rollover distribution paid to you from an employer plan is subject to mandatory withholding, generally 20%, even if you plan to roll it over later; a direct rollover avoids that withholding. Under 59½, the part you do not roll over may also face a 10% additional tax unless an exception applies. The calculator does not compute any of this tax.

Is the guarantee of the pension worth anything?

Yes, and the calculator does not price it. A pension is paid for life regardless of markets, so it removes investment, inflation and longevity risk from the retiree, at the cost of control and inheritance. Plans differ in how well funded they are; a lump sum moves that risk to you in another form. This page gives the numbers for the choice, not the choice itself.

Estimates for planning only — not financial, tax or legal advice. Your plan documents and the plan administrator decide. How we check our calculators.

Sources, checked October 28, 2026: IRS Notice 2026-65 (corporate bond yield curve, segment rates under section 417(e)(3) and the minimum present value segment rates for September 2026); Internal Revenue Code section 417(e) (not read in full; described only in general terms); IRS Topic no. 413, Rollovers from retirement plans. Related: annuity calculator, retirement calculator, retirement withdrawal calculator and RMD calculator. How we check our calculators.