What is the pension vs lump sum calculator?
In short
A $3,000/month pension paid for 25 years has a present value of roughly $568,000 at a 4% discount rate. If your employer offers a lump sum buyout below that, the pension wins. The break-even logic: if you can invest the lump sum and earn more than the implied discount rate, take the cash. Most pension buyout rates imply 4–6% — if you're confident you can beat that return, the lump sum wins; if not (or if you want guaranteed income), keep the pension.
Converts a monthly pension stream into its present value (NPV) and compares it directly to a lump sum buyout offer, showing which is worth more and the break-even investment return.
How to use this calculator
- 1Enter the monthly pension you'd receive and how many years you expect to collect it.
- 2Enter the lump sum buyout offer.
- 3Set the discount rate (what you could safely earn on the lump sum) and expected investment return.
- 4See which option has higher present value and by how much.
The formula
- P
- — Monthly pension payment
- n
- — Total months = years × 12
- r
- — Monthly discount rate = annual rate / 12
- PV
- — Present value of pension
- LS
- — Lump sum offer
Worked example
The scenario
$3,000/month pension, 25 years, $500,000 lump sum, 4% discount rate.
The result
Pension PV ≈ $568,000. The pension is worth $68,000 more than the lump sum at a 4% discount rate.
Common use cases
- Employees offered a pension buyout by their employer.
- Retirees choosing between monthly pension and a one-time payment.
- Anyone comparing a structured annuity to a lump sum settlement.
Limitations & assumptions
- Does not account for survivor benefits (spousal pension continuation).
- Assumes constant monthly payments — does not model inflation-adjusted pensions.
- Does not include taxes, which may differ significantly between the two options.
Frequently asked questions
How do you calculate the present value of a pension?
What discount rate should I use?
Should I take the pension or lump sum?
What is the break-even investment return?
Does the pension offer survivor benefits?
Disclaimer: KalkWise calculators are provided for general informational and educational purposes only and do not constitute financial, investment, tax, or legal advice. Results are estimates based on the figures you enter and the assumptions described above. Actual outcomes will vary. Consult a qualified professional before making financial decisions.