The calculator
To match $2,000 a month until 88, the $330,000 lump sum would have to earn 5.1% a year. At the 5.0% you entered, the pension is worth more, and the pension pulls ahead if you live past age 87.8.
The answer depends on how long you live
| Live to | Required return |
|---|---|
| 75 | -5.9% |
| 80 | 1.2% |
| 85 | 4.1% |
| 90 | 5.5% |
| 95 | 6.3% |
| 100 | 6.8% |
The longer you live, the higher the return the lump sum must earn to keep up. A pension is insurance against a long life: it keeps paying however long that is.
Pension lump sum vs annuity: how to compare them
Turn the offer into an interest rate. If the lump sum would have to earn more than a safe investment pays to match the pension over your likely lifetime, the pension is the better deal; if less, the lump sum is. Compare the required return with what you could earn without much risk, not with long-run stock returns: the pension is guaranteed, a portfolio is not. Health and family history matter, since a shorter life favors the lump sum.
Survivor options and inflation
A joint-and-survivor pension pays less each month but continues for a spouse; compare the lump sum with that option if you are married. Most private pensions have no cost-of-living raise, so their buying power falls with inflation; enter 0% unless your plan says otherwise. Private pensions are insured by the PBGC up to a yearly limit if the plan fails.
Taxes and rollovers
Pension payments are taxed as ordinary income as you receive them. A lump sum rolled directly into an IRA stays tax-deferred; paid to you instead, the plan withholds 20% for federal tax and the whole amount is taxable that year. Once in an IRA, the money is subject to RMDs from your RMD age. The how long will my money last calculator tests a lump sum against a spending plan. Investing it all at once or in stages is the lump sum vs dollar-cost averaging calculator.
Assumptions
Monthly payments for one life, starting now, with any cost-of-living raise each year. The lump sum earns a steady return and pays the same income. No taxes, fees or survivor benefit. Not financial advice.
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