Pension vs Lump Sum Calculator
Compare taking a monthly pension or a lump sum using present value.
Pension vs Lump Sum: Which Is Better?
When you leave a job or retire, some pension plans offer a choice: a monthly pension for life or a lump sum that you can roll into an IRA and manage yourself. Comparing them is not just “pension total vs lump sum”—you must account for the time value of money. We do that by calculating the present value (PV) of the pension: we discount each future monthly payment back to today using a rate you choose (your “discount rate”). If that PV is higher than the lump sum offer, the pension is worth more in today’s dollars, all else equal; if the lump sum is higher, the lump sum may be the better deal. Life expectancy matters: the longer you live, the more valuable the pension stream.
What discount rate to use
The discount rate reflects the opportunity cost of tying up money in the pension—i.e., what you could earn if you had the lump sum and invested it. A conservative rate (e.g., 3–4%) makes the pension look more valuable; a higher rate (e.g., 5–6%) makes the lump sum look more attractive. Use a rate you think is reasonable for a low-risk portfolio over your lifetime. The calculator also needs your current age and life expectancy (you can use our life expectancy calculator as a guide).
Beyond the numbers
Even if the PV favors one option, your choice may depend on whether you want guaranteed income (pension) or flexibility and control (lump sum). Pensions are not portable and may have limited inflation protection; a lump sum in an IRA can be invested and left to heirs. Consider survivorship options if you choose the pension. For overall retirement income planning, use our retirement income calculator and retirement calculator.
Pension vs Lump Sum FAQ
It depends on life expectancy, discount rate, and your preference for guaranteed income vs flexibility. Our calculator shows the present value of the pension; if it is higher than the lump sum, the pension may be worth more in today’s dollars. You also need to consider inflation, survivorship options, and whether you want to manage the money yourself.
The discount rate is the rate at which we “bring back” future pension payments to today’s value. Use a rate close to what you’d expect to earn on a conservative long-term investment (e.g., 3–5%). A lower rate makes the pension look more valuable; a higher rate favors the lump sum.
If you roll the lump sum into an IRA, you pay no immediate tax. If you take it as cash, it is generally taxable as ordinary income (and possibly subject to withholding and early-withdrawal penalties if you are under 59½). The calculator does not model taxes; it compares pre-tax present values.
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