Pension Lump Sum vs Annuity Calculator
Compare a pension lump-sum offer against lifetime monthly annuity payments — present value, drawdown break-even age, and which is worth more. Educational, not financial advice.
The pension’s present value is the worth today of its monthly payments to your life expectancy, discounted at your assumed return. If the lump sum exceeds that value, the lump is mathematically richer — and vice versa. The break-even age is when a lump invested at your return and drawn down by the pension amount would run out (“never” means the return covers the withdrawals indefinitely). The annuity adds longevity insurance (it never runs out) and removes investment risk, which the math alone doesn’t price. Excludes taxes, COLAs, survivor options, and the pension’s credit risk. Not financial advice — consult a professional. Everything runs in your browser.
About this tool
Many pensions, and many people leaving a job with a pension, face a one-time, irreversible choice: take a single lump-sum payout now, or take a guaranteed monthly annuity for life. This calculator helps you compare them on a financial basis. The core method is present value: it computes what the stream of monthly pension payments is worth in today's dollars, discounting future payments at the investment return you think you could earn, and runs the discount out to your life expectancy. If the lump-sum offer is larger than that present value, the lump is mathematically the richer deal at your assumptions; if it is smaller, the annuity wins. The tool also runs a second, intuitive lens — the drawdown break-even age — by investing the lump sum at your assumed return and 'paying yourself' the same monthly pension from it each year, then reporting the age at which that pot would run dry. If it runs out before your life expectancy, the annuity is the safer bet; if the investment return covers the withdrawals indefinitely, the lump can last forever and then some. The numbers, though, deliberately do not capture the qualitative trade-offs that often decide the question. The annuity is longevity insurance: it cannot be outlived, removing the risk that you live longer than expected or that markets perform poorly — risks that fall entirely on you with a lump sum. The lump offers flexibility, the chance to leave money to heirs, and control over investments, but demands discipline and exposes you to market and sequence-of-returns risk. Other real factors include taxes, cost-of-living adjustments on the pension, survivor/joint options, and the credit risk of the pension provider (federal PBGC insurance covers private pensions only up to limits). Use this to frame the math, then weigh the guarantees. It is educational and not financial advice — consult a professional. Everything runs in your browser; nothing is uploaded.
How to use it
- Enter the lump-sum offer and the monthly pension alternative.
- Enter your current age and life expectancy.
- Enter the investment return you could realistically earn on the lump sum.
- Compare the lump sum to the pension's present value, and check the drawdown break-even age.
Frequently asked questions
- How do I compare a pension lump sum to an annuity?
- Compute the present value of the monthly payments — their worth today, discounted at your expected return over your life expectancy. If the lump-sum offer exceeds that value, the lump is mathematically richer; if not, the annuity is.
- What is the drawdown break-even age?
- The age at which a lump sum, invested at your assumed return and drawn down by the pension amount each year, would run out. If that age is beyond your life expectancy, the lump can sustain the income; if before, the annuity provides more security.
- Why might the annuity be better even if the lump "wins" the math?
- The annuity is longevity insurance — it never runs out and carries no investment risk. The lump-sum comparison assumes you earn the return every year without fail; the annuity removes both market risk and the risk of outliving your money.
- What return assumption should I use?
- Use a realistic, somewhat conservative return for a retiree portfolio. A higher assumed return makes the lump sum look better (it discounts the pension more heavily); a lower one favors the annuity. Test a range.
- What does this leave out?
- Taxes, cost-of-living adjustments on the pension, survivor or joint-life options, and the credit risk of the pension provider (private pensions are PBGC-insured only up to limits). These can change the decision.
- Is this financial advice?
- No. It is an educational comparison of the financial trade-offs. The choice is usually irreversible — consult a financial professional. Nothing is uploaded; all math runs in your browser.