How to use the pension calculator
- Enter the lump sum your plan offers.
- Enter the monthly pension you would get instead (the single-life amount, or the joint-and-survivor amount if that is what you would choose).
- Enter the yearly increase (COLA) the pension pays, or 0 if it is fixed.
- Enter the return you could realistically earn by investing the lump sum yourself.
- Enter how many years in retirement to plan for and the age when payments start.
- Compare the present value with the lump sum, then check the break-even age.
How the comparison works
Present value answers one question: how much money would you need today, invested at your return, to pay yourself the same pension for the same number of years? If that amount is more than the lump sum, the pension is the better deal for that length of retirement. Payments are assumed at the end of each month and the COLA is added once a year.
Worked example
The defaults are a $300,000 lump sum or $1,800 a month with no COLA, a 5% return, 25 years of retirement and payments from age 65.
- Monthly rate: 1.05^(1/12) − 1 = 0.4074%
- One year of payments is worth 11.6882 × $1,800 at the start of that year
- Discounting 25 years at 5% gives a factor of 14.7986
- Present value: $1,800 × 11.6882 × 14.7986 = $311,344
That is $11,344 more than the lump sum, so the pension wins over 25 years. Put another way, the $300,000 invested at 5% could pay only $1,734.41 a month for 25 years. The break-even age is 88 and 4 months: if you invested the lump sum and drew $1,800 a month, it would run out then. Counting payments alone, with no investment return, the pension repays $300,000 at 78 and 11 months.
A 2% COLA lifts the present value to $379,609. If you could earn 8% instead of 5%, the present value falls to $238,912, and drawing $1,800 a month would never use up a $300,000 lump sum at that return, so the lump sum wins.
What else to weigh
| Favors the monthly pension | Favors the lump sum |
|---|---|
| You expect to live a long time | Poor health or a short life expectancy |
| You want income you can't outlive | You want money to leave to heirs |
| You prefer not to manage investments | You can invest well and stay disciplined |
| The pension has a COLA | You worry about the plan's or employer's finances |
US private pensions are insured by the Pension Benefit Guaranty Corporation up to legal limits, which lowers the risk of a plan failing. Taking a lump sum usually means rolling it into an IRA to avoid immediate income tax. To see how long a lump sum lasts at a chosen withdrawal, use the annuity payout calculator.
Frequently asked questions
What return should I use for the lump sum?
Use what you could earn with a similar level of safety. A pension is close to guaranteed income, so comparing it with a high stock-market return flatters the lump sum. Many people test a range such as 4% to 6%; the break-even return is the rate where the present value equals the lump sum.
What does the break-even age mean?
It is the age at which the lump sum, invested at your return and drawn down by the same monthly amount, would be used up. If you live beyond it, the pension paid you more. If you die before it, the lump sum would have left money over.
Should I include a survivor benefit?
If you are married, compare the lump sum with the joint-and-survivor pension rather than the single-life amount, because the lump sum would also have to support your spouse. Enter the lower joint-and-survivor payment and plan for the longer of your two expected lifetimes.
Is the pension or the lump sum taxed differently?
Monthly pension payments are taxed as ordinary income as you receive them. A lump sum rolled directly into an IRA is not taxed until you withdraw it; one paid to you in cash is taxable in that year and may face a 10% penalty if you are under 55 when you leave the employer. Check the details with your plan administrator or a tax adviser.
Related calculators
- Annuity Payout Calculator — The monthly income a lump sum can pay for a set number of years, or how long a chosen payment will last.
- Retirement Calculator — See what your savings grow to by retirement, how long they last, and how much more to save each month.
- Present Value Calculator — What a future sum, or a stream of regular payments, is worth today at a given discount rate.
- Social Security Calculator — Your monthly Social Security benefit at every claiming age from 62 to 70, with full retirement age and break-even ages.
Results are estimates for educational purposes and are not financial, tax or legal advice. See our disclaimer.