Pension vs Lump Sum Calculator
The two offers, and what you would do with the cash
Your result will appear here
Fill in the fields on the left and this updates as you type.
Know what this estimate is based on
- Jurisdiction
- General mathematical model
- Scope and limitations
- Scenario model, not a forecast. Returns, volatility, inflation, fees, and taxes are assumptions and actual investment outcomes can be lower or negative.
- Source links checked
- Jul 30, 2026
Built and regression-tested by Smart Tools Lab. It has not been individually reviewed by a licensed financial, tax, or legal professional.
How to use
- 01
Enter the monthly pension and the lump sum your employer has offered.
- 02
Enter the age payments would start and the age you expect to live to.
- 03
Add the return you would realistically earn on the lump sum, and any cost-of-living increase on the pension.
- 04
If a survivor benefit is part of the election, enter its percentage and the years you expect a survivor to collect after you.
- 05
Read the age at which each option pulls ahead, and the return the pension is quietly paying on the money offered.
Formula
Run both forward: the lump sum grows at your return while you draw the same amount the pension would have paid, and the pension accumulates its payments with any cost-of-living increase. The crossover is the first age at which the pension's cumulative total overtakes.
Example
A $2,800-a-month pension from 65 against a $480,000 lump sum, with a 6% return and a life expectancy of 88: the pension pays $772,800 in total, and its implied return on the offer is 4.52%. Valued at 6% the stream is worth $418,631 — less than the $480,000 — and the invested lump sum still has $243,099 left at 88, so on those assumptions the cash wins. Lower the return, or add a cost-of-living increase, and it flips.
Definitions
- Implied return
- The rate at which the pension's lifetime payments are worth exactly the lump sum being offered.
- COLA
- A cost-of-living adjustment: an annual increase in the pension. Most private plans have none.
- PBGC
- The federal insurer of private pensions. It guarantees benefits, but only up to published limits that rise with age.
Good to know
An income you cannot outlive, or a balance you control
A defined-benefit pension offer usually comes with a choice: a monthly payment for life, or a single sum now. They are not two versions of the same thing. The pension is longevity insurance — it keeps paying however long you live, and the risk of living a long time sits with the plan. The lump sum is capital: you control it, you can invest it, leave it to heirs, or spend it faster than intended, and every one of those risks is yours. Framing this as "which is worth more" answers only part of it, because the two options are not even carrying the same risk.
The return the offer is quietly paying
The cleanest way to price the offer is to ask what rate makes the pension's lifetime payments worth exactly the lump sum. That implied return converts the plan's arithmetic into a number you can compare with your own: $2,800 a month from 65 to 88 against a $480,000 lump sum works out at 4.52%. If you would invest the cash conservatively, an implied return near 5% is the plan paying you more than you would earn — and it pays it with no sequence risk. If you would invest in equities over a long horizon, the lump sum has room to beat it. The crossover age is the same comparison told as a date: the year at which the pension's cumulative payments overtake the invested lump sum.
Inflation and the survivor
Two features change the answer more than the headline numbers do. Most private pensions have no cost-of-living adjustment, so at 3% inflation a flat payment buys about half as much after 24 years — a long retirement quietly erodes it, while an invested lump sum at least has the chance to keep up. Public and union plans more often adjust, and where they do the pension becomes much harder to beat. The second is the survivor election: taking a lower payment so a share continues to a spouse after you die. It is priced by the plan as though it were an insurance decision, because it is one, and for a couple with a large age gap or a big earnings difference it is often worth far more than the payment it costs.
The risks the arithmetic cannot price
A pension is a promise from a plan, and plans can be underfunded or terminated. The Pension Benefit Guaranty Corporation insures private single-employer plans, but only up to published limits that vary with your age at the plan's termination, so a large benefit may not be fully covered. Against that, a lump sum has behavioral and sequence risk: a bad first decade of returns while drawing income does damage a good later decade cannot undo, and a large balance is easier to spend than a monthly cheque. Taxes differ too — a lump sum rolled directly to an IRA is not taxed at the time, but taken as cash it is all income in one year. There is also a middle path: take the lump sum and buy a commercial annuity with part of it, keeping some guaranteed income and some control.
Frequently asked questions
Why an age rather than a present value?
Because a present value collapses both options to one number at one moment and hides when the crossover happens. The Present Value Calculator does that comparison well, and it is linked here. What it cannot express is a cash flow whose shape changes partway through — which is exactly what a survivor benefit does.
What is the implied return?
The rate at which the pension's payments over your life expectancy are worth exactly the lump sum offered. It converts the offer into a number you can compare with what you could earn: if the implied return is 4.5% and you would invest conservatively, the pension is paying more than you would make.
How much does a cost-of-living increase change things?
A great deal over a long retirement. Most private pensions have none, and 3% inflation halves what a flat payment buys in about 24 years. Public pensions often do adjust. Enter it if you have it, because it moves the crossover years earlier.
What about the survivor benefit?
Electing a survivor option lowers your own payment in exchange for continuing a share to a spouse after you die. This page values it as that share for the years you enter, discounted at the same return. Leave the years at zero for a single-life election.
What does the arithmetic leave out?
The risks that are not symmetrical. A pension is a promise from a plan that can be underfunded; the PBGC guarantees benefits only up to its own limits. A lump sum is yours, with the sequence risk and the temptation that come with it. Taxes differ too — a lump sum rolled to an IRA is not taxed at the time, one taken as cash is.