Pension: Lump Sum vs Monthly Payments
When an employer offers a lump sum in place of a monthly pension, the only honest comparison is present value: what the stream of payments is worth today at a realistic rate, and what return the lump sum would have to earn to replicate them.
Ignores taxes, inflation, survivor options, and PBGC backing — a pension also removes the risk of outliving the money, which this simple comparison can't price.
Illustrative only, based on the assumptions you enter — not a quote, an offer, or financial advice. Rates and rules change; verify current figures with a licensed professional before acting.
How this calculator works
The calculator discounts the monthly pension from your start age to your planning horizon at the rate you choose, then compares that value to the lump sum. It also solves for the implied return — the rate at which the lump sum, invested and drawn down, would exactly fund the same payments.
If the implied return is higher than you could prudently expect after costs, the pension is the better deal on the numbers; if it is low, the lump sum is competitive. Employers price buyouts using rates and mortality tables set by federal rules, which need not match your situation.
The math ignores what a pension quietly includes: longevity insurance (payments never run out), no investment or behavior risk, and PBGC backing within limits. A lump sum adds flexibility and something to leave heirs — the classic trade.
Frequently asked questions
What planning age should I use?
At least average life expectancy for your age — and longer if you are healthy or married, since planning to an average means a roughly 50% chance of outliving it.
What happens to the lump sum tax-wise?
Rolled directly to an IRA it stays tax-deferred; taken in cash it is taxable income at once, usually with mandatory withholding. Almost everyone choosing a lump sum should roll it over.
Can I split the difference?
Some plans allow a partial lump sum, and separately you can buy a lifetime annuity with part of a rolled-over lump sum — recreating a pension for a slice of the money.
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This tool is for general education only and is not financial, tax, or legal advice. Results are illustrations based on your inputs — not quotes or guarantees. Consult a licensed professional before making decisions about annuities, settlements, or retirement accounts.