Lump sum or monthly pension?
Many employers let retirees choose between a one-time lump-sum payment and a monthly pension for life. To compare them, the calculator finds the present value of all the monthly payments you expect to receive, discounted at the return you could earn if you invested the lump sum yourself. If that value is higher than the lump sum, the pension is the better deal on paper.
It also shows the return the lump sum would need to earn to match the pension, and the monthly income the lump sum could pay until your planned age.
Things to weigh beyond the math
- Longevity – a pension keeps paying however long you live, which protects you from running out of money.
- Survivor benefits – a joint-and-survivor option pays your spouse after you die, in exchange for a smaller check.
- Inflation – most private pensions have no cost-of-living increase, so their buying power shrinks over time.
- Control and heirs – a lump sum can be invested, spent flexibly and passed on, but investment losses are your risk.
Frequently asked questions
Is a pension lump sum taxable?
Yes, unless you roll it directly into an IRA or another retirement plan. A cash payout is taxed as income, and the plan usually withholds 20% for federal tax.
Is my pension protected if my employer fails?
Most private-sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), up to legal limits. Government pensions are backed by the state or local government instead.
Why do lump-sum offers change with interest rates?
Plans calculate lump sums with IRS-set interest rates. When rates rise, the lump sum for the same pension gets smaller; when rates fall, it gets larger.