How this calculator works
When a pension plan offers a choice between a lump sum today and a fixed monthly payment for life or for a set number of years, the two options are only directly comparable once the monthly stream is converted into today's dollars. This calculator discounts the monthly pension back to a present value using a discount rate you choose (your required return, or what you could otherwise earn investing the lump sum), and compares that present value to the lump-sum offer.
It also reports two other angles on the same decision: the nominal breakeven point (how many years of pension payments, with no discounting at all, it takes to add up to the lump sum), and the implied annual return — the rate of return the pension is effectively paying you if you value it at exactly the lump-sum amount. A higher implied return means the pension is comparatively more generous relative to taking the cash.
This calculator ignores taxes, survivor or spousal benefits, cost-of-living adjustments (COLA), and pension-insurance guarantees such as those from the Pension Benefit Guaranty Corporation in the US — all of which can meaningfully shift the real value of either option. It is a starting point for the math, not financial advice, and a real decision this size should involve a financial professional who can account for your full situation.
The formulas
Present value of the pension: PV = PMT × (1 − (1 + i)⁻ⁿ) ÷ i, where PMT is the monthly payment, i is the monthly discount rate, and n is the number of monthsNominal breakeven years = Lump sum ÷ (monthly pension × 12)Implied annual return: the discount rate r that makes PV(monthly pension, r, years) exactly equal the lump sum, found by testing rates until the present value matchesThe present-value formula is the same ordinary-annuity formula used to price a loan or an annuity payout — a monthly pension is mathematically identical to receiving loan payments from the pension fund.
Worked example: $200,000 lump sum vs. $1,000/month for 20 years
- At a 6% discount rate, the present value of $1,000 a month for 240 months works out to about $139,581 — less than the $200,000 lump sum, so at this required return the lump sum looks like the better deal.
- The nominal breakeven, ignoring any discounting entirely, is $200,000 ÷ ($1,000 × 12) ≈ 16.7 years — if you expect to receive the pension for longer than about 16 years and 8 months, it pays out more raw dollars than the lump sum, before considering what you could have earned investing that lump sum instead.
- The implied annual return of this particular pension (the rate at which its present value exactly equals $200,000) works out to about 1.9% — well below the 6% this example uses as a required return.
- Since the pension's implied return (about 1.9%) is lower than the 6% this person could reasonably expect from investing the lump sum, the lump sum comes out ahead at that assumed rate — but a lower required return, or a longer expected payout period, could easily flip that conclusion.
Frequently asked questions
What discount rate should I use to compare the lump sum and annuity?
A common choice is the return you realistically expect to earn if you invested the lump sum yourself, adjusted for the risk you're comfortable taking — a lower, safer expected return favors the pension, while a higher expected investment return favors the lump sum.
Why does breakeven ignore discounting, when present value doesn't?
Breakeven answers a different, simpler question: how long until the pension has paid out more raw dollars than the lump sum, with no assumption about what you'd do with the money in the meantime. Present value instead asks which option is worth more today under a specific required return — the two numbers are meant to be read together, not interchangeably.
Does this account for cost-of-living adjustments (COLA)?
No. If your pension includes COLA increases, its real value is higher than a flat monthly amount suggests — entering an estimated average future payment, or running the numbers with and without an assumed increase, can help bracket the effect.
What about the risk that a pension plan cannot pay in the future?
That risk is not modeled here. In the US, the Pension Benefit Guaranty Corporation insures many private pensions up to certain limits if a plan fails, which can matter for weighing a lump sum (which removes that risk entirely) against staying in the plan.
Is a higher implied return always a reason to keep the pension?
It's one important input, not the whole decision. Longevity, health, other income sources, survivor benefits for a spouse, and your own investing discipline and risk tolerance all matter alongside the pure math this calculator provides.