Pension Calculator (Lump Sum vs Monthly)
Decide between a lump sum and a monthly pension by comparing their present values.
The choice
Some employers offer a choice between a monthly pension for life and a one-off lump sum. To compare them fairly, bring the future pension payments back to today’s value using a discount rate, then compare that figure with the lump sum.
Example
A pension of $2,500 a month for 25 years, rising 2% a year, is worth about $515,500 today at a 5% discount rate. That is more than a $400,000 lump sum, so the pension looks better on these assumptions.
Things the numbers cannot tell you
- How long you will actually live. A pension pays for life, so living longer than expected favours it.
- The safety of the pension fund, and whether payments are inflation-linked.
- Whether you need access to the money earlier, and how a lump sum would be taxed.
This is general information, not financial advice, so consider speaking with an adviser before choosing.
Frequently asked questions
What discount rate should I use?
Use the rate you could realistically earn after tax on a lump sum, with a safe investment in mind. Test a few values.
Is a lump sum riskier?
Yes. You carry the investment risk and the risk of running out, while a pension pays regardless.
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