Pension lump sum vs annuity
Pension lump-sum is a major one-time decision. This calculator computes the implied internal rate of return (IRR) of the annuity stream — compare it to what you can reasonably earn in a portfolio. Higher IRR favors annuity; lower favors lump.
Implied IRR of the annuity
—%
over 25 years of payments
Total nominal payments if you live to 90
$600,000
undiscounted, no COLA assumed
Monthly draw lump sum can sustain
$2,577
at 6% annual return, fully spent in 25 yrs
How to read this
- If the implied IRR is higher than your expected portfolio return, the annuity is offering a better deal — favor it.
- If the implied IRR is lower than your expected portfolio return, the lump sum is the better risk-adjusted offer — favor it.
- Don't ignore the qualitative factors: spousal protection, COLA, plan solvency, your appetite for managing money, and tax brackets at draw vs. now.
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FAQ
- When does the lump sum usually win?
- When the implied IRR is below what you can reasonably earn in a diversified portfolio (often the case in low-interest-rate environments), when plan funding is shaky, when you need flexibility for unequal spending, or when you are leaving a legacy.
- When does the annuity usually win?
- When the implied IRR is high (especially with COLA features), when longevity risk is real (long-lived family), when other guaranteed income (Social Security) is light, or when you do not want to manage investments.
- What about my spouse?
- Joint-and-survivor options reduce the monthly payment but continue some percentage to a spouse for life. A 100%-survivor election can lower monthly payment by 10-25%. Single-life gives the highest monthly but ends at your death.
- Is the pension safe?
- Most private US pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), but with caps. Government and union plans may not be PBGC-insured. Check your plan funding ratio and PBGC coverage before assuming the annuity is risk-free.
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Educational guidance only. Not legal, tax, or individualized investment advice. We do not recommend individual securities or guarantee outcomes.