Pension $5,000/Month vs $900,000 Lump Sum
High-income retirees comparing a $5,000 monthly pension over 20 years against a $900,000 lump sum at 5% discount rate.
How to use this tool
- Enter the monthly pension payment you would otherwise receive.
- Estimate how many years you expect to collect it (your life expectancy in retirement).
- Set a discount rate equal to the return you could earn on the lump sum.
- Enter the lump-sum offer and compare it against the pension's present value.
For larger pensions, the present value gap between the annuity and lump sum can be hundreds of thousands of dollars, making this calculation critical.
Frequently asked questions
- How do I compare a lump sum to a pension?
- Discount the pension's future monthly payments to their present value using a realistic investment return, then compare that figure to the lump-sum offer. Whichever is larger is the better deal on pure dollars.
- What discount rate should I use?
- Use the long-run return you could reasonably earn on the lump sum if you invested it — often 4–6% for a balanced portfolio. A higher rate makes the lump sum look better; a lower one favors the pension.
- Does a higher discount rate favor the lump sum?
- Yes. A higher discount rate shrinks the present value of the future payments, so the fixed lump-sum offer wins more easily. A lower rate raises the pension's value.
- What does this calculator leave out?
- It ignores inflation adjustments, survivor benefits, taxes, and the credit risk of the pension provider. Guaranteed lifetime income also has value beyond the math, especially if you live longer than expected.