Pension vs Lump Sum Calculator
Compare taking your pension as a lifetime annuity vs a lump sum. Uses present value (NPV) with your discount rate. Include COLA if your pension has cost-of-living adjustments.
Example: $3K/month pension vs $500K lump sum
NPV of Pension
$633,906.50
Lump Sum
$500,000
Recommendation
Pension
With $3,000/month pension, 2% COLA, 5% discount rate, from age 65 to 90, the NPV of the pension is $633,906.50. Compared to a $500,000 lump sum, the pension has higher present value.
Source: FinCalc server-rendered example using the same formulas as the interactive calculator.
Inputs
Results
NPV of Pension
$633,906.50
Lump Sum Offer
$500,000
Total Pension (nominal)
$1,153,090.79
NPV Break-Even Age
83
Year-by-Year (first 10)
| Age | Annual Pension | Cumulative PV |
|---|---|---|
| 65 | $36,000 | $35,132.40 |
| 66 | $36,720 | $69,261.02 |
| 67 | $37,454.40 | $102,414.54 |
| 68 | $38,203.49 | $134,620.81 |
| 69 | $38,967.56 | $165,906.91 |
| 70 | $39,746.91 | $196,299.11 |
| 71 | $40,541.85 | $225,822.97 |
| 72 | $41,352.68 | $254,503.29 |
| 73 | $42,179.74 | $282,364.17 |
| 74 | $43,023.33 | $309,429.02 |
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How the Comparison Works
We compute the present value (NPV) of the pension stream using your discount rate. Each year's pension payment is inflated by COLA, then discounted back to today. If NPV exceeds the lump sum, the pension may offer more value; if the lump sum exceeds NPV, taking the lump sum may be better.
The discount rate represents your opportunity cost—what you could earn if the lump sum were invested. A higher rate favors the lump sum; a lower rate favors the pension. Your longevity and need for guaranteed income also matter beyond the math.
Sources
Data and assumptions align with official publications. For verification and current figures:
- Social Security Administration — Benefits, claiming ages, COLA
Frequently asked questions
Should I take my pension or a lump sum?
Compare the present value of the pension (using a discount rate) to the lump sum. If the pension has COLA increases, that adds value. A higher discount rate favors the lump sum; a lower one favors the pension. Your longevity, need for flexibility, and desire for guaranteed income also matter.
What discount rate should I use for pension NPV?
A common approach is your expected long-term investment return (e.g., 5–7%). If you assume 6%, that is the opportunity cost of the pension; the lump sum could theoretically earn 6% if invested. Use a rate that reflects your risk tolerance and investment assumptions.
Does pension COLA matter?
Yes. A pension with a 2% COLA grows each year; a flat pension does not. Over 25 years, COLA can significantly increase total payments. The calculator applies COLA to each year's pension amount before discounting to present value.
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