Pension vs Lump Sum with Short Life Expectancy (10 Years)
If you expect only 10 more years of payments, compare a $2,500 monthly pension against a $280,000 lump sum at a 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.
A shorter expected payout period significantly reduces the annuity's present value, often tipping the math in favor of the lump sum.
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.