Pension Payout vs. Lump Sum Calculator

How to calculate Pension Payout vs Lump Sum Calculator?

This comparison converts guaranteed pension payments to a present‑value equivalent and compares that amount to a one‑time lump sum offer, accounting for investment return and inflation.

Key formula: Lump Equivalent = Annual Pension × (1 - (1 + r)^-n) / r where r = (1 + investment_return) / (1 + inflation) - 1 and n is years of payments.

Using the Pension Payout vs Lump Sum Calculator calculator: an example

Example inputs: monthly pension $1,000; life expectancy (payment years) 20; expected return 5%; inflation 3%.

Step-by-step calculation:

1. Convert monthly to annual: $1,000 × 12 = $12,000 per year.
2. Compute real discount rate: r = (1.05 / 1.03) − 1 ≈ 0.0194 (≈1.94%).
3. Present value of pension: 12,000 × (1 − (1 + 0.0194)^−20) / 0.0194 ≈ $197,500.
4. Compare to a lump sum (for example $200,000): here the lump sum is slightly higher than the pension present value.

Frequently Asked Questions

Which rate should I use for investment return?

Use a realistic after‑fees expected annual return based on your likely investments; choose a conservative rate if you prefer a cautious comparison.

How do I account for tax?

This tool shows pre‑tax values. To include tax effects, adjust the lump sum or pension cash flows for expected taxes or consult a tax advisor for personalized calculations.

What if the pension increases with inflation?

If the pension is inflation‑linked, either reduce the real discount rate accordingly or model rising payments year by year to reflect the indexed increases.