Pension Lump Sum vs Monthly Annuity Calculator

Lump Sum vs Monthly Annuity: The Big Decision

When you retire, many pension plans offer a choice:

• Take a lump sum, a large one-time payment you invest and manage yourself
• Take a monthly annuity, guaranteed income for life (or for a set period)

Neither option is universally better. It depends on your health, investment skills, life expectancy, and family situation.

Lump Sum Invested

If you take the lump sum and invest it, your portfolio value at year n:
Portfolio value = Lump sum × (1 + r)^n

You control the money but take on investment risk and longevity risk.

Cumulative Monthly Payments

Total received after n years = Monthly payment × 12 × n

The monthly annuity is simple and guaranteed, but it does not grow unless the plan is inflation-adjusted.

Break-Even Year

The break-even is roughly when cumulative monthly payments equal the lump sum amount.
Break-even years ≈ Lump sum / (Monthly × 12)

The comparison that actually matters, and the one most calculators get wrong

Setting an untouched, compounding portfolio beside a stream of pension cheques is not a fair fight, and it flatters the lump sum enormously. The retiree in that scenario let the portfolio grow for twenty-five years and lived on what, exactly? If you take the lump sum, you have to draw an income from it, and that changes the answer completely.

So this calculator runs a third figure: the lump sum invested at your return rate while you withdraw the same amount the annuity would have paid. That tells you how long the money lasts. In the example below the untouched portfolio looks like a landslide win, while the drawdown scenario runs dry after 23 years and the annuity carries on paying for as long as you live.

The other way to settle it is to put both offers on the same date: discount the payments back to today and ask which is worth more, and what return the pension is quietly paying you. The pension lump sum vs annuity calculator does exactly that, and its drawdown cross-check uses the same monthly model as this page, so the two agree on when the money runs out.

Worked Example

Lump sum: $250,000 | Monthly payment: $1,500 | Investment return: 5%

Simple break-even (no investment): $250,000 / ($1,500 × 12) = 13.9 years
At 20 years: cumulative payments = $360,000 against an untouched portfolio of about $663,000
At 30 years: cumulative payments = $540,000 against an untouched portfolio of about $1,080,000
Drawing $1,500 a month from that same $250,000 at 5%: the account empties after about 279 months, so 23 years and 3 months

Key Considerations

• Health: if you expect to live well past 80, the annuity often wins long-term
• Inheritance: lump sum can be left to heirs; most annuities cannot
• Investment confidence: if you are not confident investing, the annuity removes that risk
• Inflation: a fixed annuity loses purchasing power over time
• Taxes: both options are typically taxable as ordinary income when received