Pension Lump Sum vs Monthly Annuity Calculator
Compare taking your pension as a lump sum vs monthly payments.
Find the break-even age and total lifetime value of each option.
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 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 doesn’t grow (unless inflation-adjusted).
Break-Even Year The break-even is roughly when cumulative monthly payments = lump sum amount. Break-even years ≈ Lump sum / (Monthly × 12)
However, if you invest the lump sum, the comparison is more nuanced: You must compare the portfolio drawdown scenario vs the guaranteed payments.
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 vs lump sum portfolio ≈ $663,000 At 30 years: cumulative payments = $540,000 vs lump sum portfolio ≈ $1,081,000
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