Pension Lump Sum vs Annuity Calculator 2026 β Breakeven Analysis
Compare pension lump sum vs monthly annuity. Calculate breakeven age, lifetime value, present value, and run scenarios at 4%, 7%, and 10% investment returns.
$
$
Average US: men 81, women 84
%
0% = fixed payment, 2% = inflation-adjusted %
--
Breakeven Age
$0
Total Annuity Payments (lifetime)
$0
Lump Sum Value at Death
--
Better Option
Lump Sum vs Annuity Summary
How to Use This Pension Calculator
Enter your lump sum offer, monthly annuity amount, current age, and life expectancy. The calculator determines which option provides greater lifetime value and finds the breakeven age β the point where the cumulative annuity payments equal the invested lump sum.
If you roll the lump sum to an IRA, it grows tax-deferred. If taken as cash, the entire amount is taxed as ordinary income immediately (potentially a huge tax hit).
The Formula
Annuity lifetime value = Sum of monthly payments with COLA over life expectancy
Lump sum FV = Lump sum x (1 + return)^years (minus tax if taken as cash)
Breakeven age = Age when cumulative annuity = lump sum balance
Winner = Whichever has higher value at life expectancy
Lump sum FV = Lump sum x (1 + return)^years (minus tax if taken as cash)
Breakeven age = Age when cumulative annuity = lump sum balance
Winner = Whichever has higher value at life expectancy
Example
Janet, age 62, offered $400,000 lump sum or $2,200/month annuity (no COLA), 6% return:
Annual annuity: $2,200 x 12 = $26,400/year
Years to age 85: 23 years
Total annuity payments: $26,400 x 23 = $607,200
Lump sum IRA at 6% after 23 years: $400,000 x 1.06^23 = $1,556,000
Verdict: Lump sum wins if Janet dies at 85 β but annuity wins if she lives to 95+
Annual annuity: $2,200 x 12 = $26,400/year
Years to age 85: 23 years
Total annuity payments: $26,400 x 23 = $607,200
Lump sum IRA at 6% after 23 years: $400,000 x 1.06^23 = $1,556,000
Verdict: Lump sum wins if Janet dies at 85 β but annuity wins if she lives to 95+
Extended
Monte Carlo Scenarios & Lifetime Value Comparison
Compare lump sum performance at 4%, 7%, and 10% returns against annuity over full retirement horizon
Simplified Monte Carlo: 3 Return Scenarios
| Scenario | Return | Lump Sum Value at Death | Total Annuity | Winner |
|---|
Year-by-Year Comparison
| Age | Cumulative Annuity | Lump Sum Balance | Ahead |
|---|
Lump Sum Tax Impact (if taken as cash)
Frequently Asked Questions
Should I take the pension lump sum or annuity?
It depends on your life expectancy, investment ability, and financial needs. Take the lump sum if you are in poor health (short life expectancy), have investing expertise, want to leave an inheritance, or need flexibility. Take the annuity if you expect to live a long time, lack investment discipline, have no other guaranteed income, or your employer is financially unstable. The breakeven age is typically 80-85 years old.
What is the lump sum breakeven age?
The breakeven age is when the cumulative value of the annuity payments equals the growth of the lump sum investment. If you live past the breakeven age, the annuity typically wins. If you die before it, the lump sum (which can pass to heirs) wins. Most breakeven ages fall between 78 and 87 depending on the assumed investment return and COLA adjustments.
What are the tax implications of taking the pension lump sum?
If you take the lump sum as cash, the entire amount is taxable as ordinary income in that year β potentially pushing you into the highest tax brackets. The smart move is a direct rollover to a Traditional IRA (tax-deferred) or Roth IRA (taxable now, tax-free later). A direct rollover avoids the 20% mandatory withholding and 10% early withdrawal penalty if under age 59.5.
What is a COLA adjustment and why does it matter for pension annuities?
A Cost of Living Adjustment (COLA) increases your monthly pension payment each year by a fixed percentage to offset inflation. A pension with 2% annual COLA is worth significantly more over a 20-30 year retirement than one with no COLA. For example, a $2,000/month pension with 2% COLA grows to $2,971/month after 20 years versus staying flat forever without COLA.
How does the pension lump sum present value calculation work?
The present value (PV) of an annuity discounts all future payments back to today using your expected investment return as the discount rate. If your lump sum offer exceeds the PV of the annuity stream, the lump sum is mathematically favorable. If the annuity PV is higher, the annuity is the better deal on paper β but remember this assumes you live to your target life expectancy.