Lump sum or monthly pension: what you are really comparing
When a defined benefit plan offers you a choice, one side is a single payment today and the other is a stream of payments over many years. You cannot compare 300,000 now with 2,000 a month by eye, because money received later is worth less than money received now. The standard way to put them side by side is present value: discount each future payment back to today, add them up, and compare the total with the lump sum.
That is what this calculator does. It is a comparison tool, not a forecast. How long you will collect the pension is unknown, so you enter the number of years to assume. The result tells you what the payments are worth under that assumption and at the discount rate you choose, and at what return the lump sum would break even.
The formula
Payments are made at the end of each month. With a monthly payment M, a yearly increase c and a yearly discount rate r, the payment in month k is M × (1 + c)^(year − 1) and its present value is that payment divided by (1 + r)^(k/12). The total is the sum of these over every month you assume:
PV = Σ paymentk ÷ (1 + r)k/12, for k = 1 … 12 × years
The break-even return is the discount rate at which PV equals the lump sum. If you could invest the lump sum and earn that return every year, you could withdraw exactly the pension payments for exactly the years you assumed and end with nothing. Earn more and the lump sum comes out ahead; earn less and the pension does.
The table under the results, "If you invested the lump sum and paid yourself the pension", shows the same idea month by month: the lump sum grows at your discount rate, the pension amounts are taken out at the end of each month, and the first month the money cannot cover a payment is the depletion month. In the example, 300,000 invested at 5% runs out in month 233 (19 years 5 months), before the 25 years you assumed are over, which is another way of seeing that the offer is smaller than the 345,938 the payments are worth today. It assumes one fixed return every month, so real investing, with good and bad years, could make the money last longer or run out sooner.
Worked example: 2,000 a month for 25 years
Take a pension of 2,000 a month with no increases, assumed to last 25 years, discounted at 5%. The payments add up to 600,000, but their value today is 345,938. Against a 300,000 lump sum, the payments are worth 45,938 more. The break-even return is 6.55%: if you believe you can earn more than that on the lump sum, year after year, the lump sum is the better deal under these assumptions.
The undiscounted total passes 300,000 in month 150 (12 years 6 months), but in today's money at 5% it takes until month 233 (19 years 5 months). Waiting for the payments to add up past the lump sum is a rougher test than discounting, because it ignores the return the lump sum could earn.
Why the discount rate decides the answer
The discount rate is the most influential number you enter. A higher rate shrinks the value of far-off payments. Here is the same 2,000 a month for 25 years against the 300,000 offer:
| Discount rate | Payments worth today | Against the lump sum |
|---|---|---|
| 3% | 423,631 | +123,631 |
| 4% | 381,755 | +81,755 |
| 5% | 345,938 | +45,938 |
| 6% | 315,149 | +15,149 |
| 7% | 288,550 | -11,450 |
There is no single correct rate. One common approach is to use a conservative, low-risk yield, on the reasoning that a guaranteed pension is more like a bond than a stock. One personal-finance writer, The Finance Buff, discounts at the SEC yield of a total bond market fund for that reason, and notes that a plan sponsor or insurer might use a corporate bond yield curve instead. A higher rate such as the long-run return on a diversified portfolio makes the lump sum look better, but it also assumes you take investment risk that the pension does not carry. Try several rates and see how far the answer moves.
Cost-of-living increases
A pension that rises each year is worth more than a flat one. With a 2% yearly increase the same 2,000 a month for 25 years is worth 421,788 today at 5%, against 345,938 with no increases, a difference of 75,850. The final monthly payment in that case is 3,216.87. Calculator.net points out that most private pensions are not inflation-adjusted, so use 0% unless your plan documents promise increases. Check your plan documents.
Survivor payments
If you choose a joint-and-survivor option, payments continue to a spouse or other beneficiary after you. This calculator models the survivor side in a deliberately simple way: after the years you assume for yourself, a survivor receives a share of the then-current payment for the survivor years you enter. With 2% increases, 50% of the payment for 10 survivor years adds 49,874 in today's money, for a total of 471,661.
This does not model who dies first, so it is not the same as comparing a single-life pension with a joint one. A joint option usually pays a smaller monthly amount in exchange for the survivor benefit, so to compare them, run the calculator once for each payment amount. It also does not reflect a spouse's age or health.
Choosing the number of years
Because payments end when you assume they end, the years you enter matter almost as much as the rate. At 5% with no increases, 15 years of 2,000 a month is worth 254,770, 25 years is worth 345,938 and 35 years is worth 401,907. The pension is an insurance contract against a long life, so the longer you actually live, the better the pension turns out in hindsight. A lump sum is the better outcome if you die early or can earn well above the break-even return. Nobody can know in advance, so treat the years as a scenario rather than a guess. This page does not use a life expectancy table or your health; for that, speak to an adviser.
What this calculator does not include
Real elections involve more than the present value of two cash flows. This calculator leaves out income tax and any penalty on the lump sum, the option to roll a lump sum into an IRA or similar account, how your plan calculates the lump sum, whether spousal consent is required, early-retirement reductions, and the financial strength behind the pension. For a plan that PBGC has taken over, PBGC says lump sums are calculated with IRS section 417(e)(3) interest rates since 2021, and that people who want the rates their own plan uses should ask the plan directly. This page does not know your plan's rates. It also does not model how long you personally will live or what you will earn on the lump sum. Treat the output as one input to a decision and not as advice.
To explore related ideas, the annuity payout calculator shows how a balance can be turned into regular payments, the retirement planning calculator estimates how much you need to save, and the real return calculator and the inflation calculator help you think about purchasing power. If you are also deciding when to claim Social Security, try the Social Security claiming age calculator.
Pension lump sum questions
How do I compare a pension lump sum with monthly payments?
Convert the monthly payments to a present value using a discount rate, then compare that total with the lump sum. For 2,000 a month for 25 years at 5% the value today is 345,938.
What discount rate should I use?
There is no single right answer. A lower, bond-like rate treats the pension as the safe asset it is. A higher rate assumes you can earn more on the lump sum but also take more risk. Run several rates and see how far the answer moves, as in the table above.
What is the break-even return?
It is the yearly return the lump sum would have to earn to pay out the same monthly payments for the years you assumed. In the example it is 6.55%. If you expect to earn more with acceptable risk, the lump sum looks better. If less, the pension does.
Should I include a cost-of-living increase?
Only if your plan states one. Many private pensions have no automatic increases, so enter 0 in that case.
Is this calculator an actuarial valuation?
No. It uses the number of years you enter and has no mortality table. It is a comparison under assumptions you choose, with no tax or plan rules, and it is not financial advice.