📋 Your Pension Offer Details
Your monthly annuity amount if you choose payments
Enter monthly pension amount.
One-time buyout amount offered by the pension plan
Enter lump sum offer amount.
Your age when pension payments would begin
Enter your current age (40-85).
SSA tables: 65-yr male ~84, female ~87. One in four lives past 90.
Enter life expectancy age.
Conservative: 4-5% (bonds). Moderate: 5-7% (balanced). Aggressive: 7-9%
Enter expected return (0-20%).
Cost-of-living adjustment on pension (0 if none)
Enter COLA rate (0 if none).
Determines PBGC guarantee applicability
Select pension type.
Monthly payment is already reduced to include this benefit
Select survivor benefit.
Net Present Value Advantage
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⚠️ Disclaimer: This comparison uses the standard present value of annuity formula and assumes a constant return rate. Actual investment returns vary and are not guaranteed. Pension annuity payments are guaranteed for life; lump sum investment returns are not. This is not financial advice — consult a fee-only financial planner before making this irreversible decision.
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Sources & Methodology
Annuity NPV formula is the standard present value of annuity used in actuarial science and financial planning. PBGC guarantee limit from official PBGC.gov 2026 data. IRS 417(e) segment rate explanation per IRS Bulletin.
PBGC — Guaranteed Benefits (2026 Maximum Limits)
Official PBGC data on the maximum monthly benefit guarantee for private-sector defined benefit pensions. The 2026 PBGC guarantee is approximately $6,750/month at age 65. Benefits beginning earlier or with joint-and-survivor options may be lower. Government pensions are not covered by PBGC.
IRS — Minimum Present Value Segment Rates (Section 417(e))
IRS publishes monthly 417(e) segment rates used by employers to calculate pension lump sum values. When these rates rise, lump sum offers decrease. When rates fall, lump sums increase. The segment rates directly determine the size of your lump sum offer relative to your monthly annuity.
Core Formulas:
Annuity NPV = PMT_monthly × [1 − (1 + r_m)^−n_months] / r_m
where r_m = annual_rate/12, n_months = (life_expectancy - current_age) × 12
(With COLA: NPV = PMT_monthly × [1 − ((1+cola_m)/(1+r_m))^n] / (r_m − cola_m))
Break-even age: year Y where cumulative payments = lump_sum × (1+r)^Y
Solved iteratively year by year
Lump sum depletion: months = ln(PMT / (PMT − PV × r_m)) / ln(1 + r_m)
where PMT = monthly pension, PV = lump sum, r_m = annual rate/12
Implied annuity return rate: IRR solve where NPV(annuity at rate) = lump_sum
Solved by binary search between 0% and 15%
Annuity NPV = PMT_monthly × [1 − (1 + r_m)^−n_months] / r_m
where r_m = annual_rate/12, n_months = (life_expectancy - current_age) × 12
(With COLA: NPV = PMT_monthly × [1 − ((1+cola_m)/(1+r_m))^n] / (r_m − cola_m))
Break-even age: year Y where cumulative payments = lump_sum × (1+r)^Y
Solved iteratively year by year
Lump sum depletion: months = ln(PMT / (PMT − PV × r_m)) / ln(1 + r_m)
where PMT = monthly pension, PV = lump sum, r_m = annual rate/12
Implied annuity return rate: IRR solve where NPV(annuity at rate) = lump_sum
Solved by binary search between 0% and 15%
Pension Lump Sum vs Annuity Guide 2026: NPV, Break-Even & PBGC
Choosing between a pension lump sum and monthly annuity payments is one of the most irreversible financial decisions you will ever make. Once you choose, you generally cannot change it. The math alone does not make this decision — your health, risk tolerance, other income sources, legacy goals, and investment discipline all play critical roles. But understanding the math is the essential foundation, and most people get it wrong by ignoring the time value of money, the PBGC protection limit, or the true implied return rate of their pension.
The Net Present Value (NPV) Formula for Pension Annuities
NPV = PMT × [1 − (1 + r/12)^−(n×12)] / (r/12)
PMT = monthly pension payment | r = annual discount rate | n = years of expected payments
Example: $3,000/month pension, 25 years remaining, 5.5% discount rate:
r_m = 5.5%/12 = 0.4583% per month
n = 300 months
NPV = $3,000 × [1 − (1.004583)^−300] / 0.004583 = $3,000 × 154.2 = $462,600
If the lump sum offer is $510,000, the lump sum is worth $47,400 MORE at this discount rate.
Example: $3,000/month pension, 25 years remaining, 5.5% discount rate:
r_m = 5.5%/12 = 0.4583% per month
n = 300 months
NPV = $3,000 × [1 − (1.004583)^−300] / 0.004583 = $3,000 × 154.2 = $462,600
If the lump sum offer is $510,000, the lump sum is worth $47,400 MORE at this discount rate.
What Is the Break-Even Age?
The break-even age is the age at which the cumulative value of pension payments equals the value of the lump sum grown at your assumed return rate. Before the break-even age, the lump sum (invested) is worth more. After the break-even age, the annuity has provided more total value. Most break-even ages fall between 78 and 87.
| Lump Sum | Monthly Pension | Return Assumed | Break-Even Age (starts at 62) |
|---|---|---|---|
| $500,000 | $3,000/mo | 4% | ~Age 78 |
| $500,000 | $3,000/mo | 6% | ~Age 82 |
| $500,000 | $3,000/mo | 8% | ~Age 88 |
| $700,000 | $3,000/mo | 5% | ~Age 90+ |
The PBGC Guarantee — Know Your Protection Limit
Private-sector defined benefit pensions are insured by the Pension Benefit Guaranty Corporation (PBGC). If your employer's pension plan fails, PBGC pays benefits up to the maximum guarantee — approximately $6,750/month at age 65 in 2026. If your pension exceeds this limit, the excess is at risk if your employer goes bankrupt. In this case, taking the lump sum eliminates PBGC risk. Government pensions (federal, state, military) are not covered by PBGC but are backed by government authority.
Frequently Asked Questions
Calculate the NPV of monthly payments using PV = PMT × [1-(1+r)^-n]/r, where PMT is monthly payment, r is monthly discount rate, and n is months of expected payments. Compare this to the lump sum offer. If NPV of annuity is higher, annuity wins at your assumed return. Our calculator does this instantly and also finds the break-even age and implied return rate.
Use the realistic return you expect to earn on the lump sum after adjusting for risk: 4-5% for conservative fixed-income portfolios, 5-7% for a balanced 60/40 portfolio, up to 8-9% for aggressive equity-heavy portfolios. Avoid using 10%+ as it biases the analysis toward the lump sum. A common approach is to use the current 30-year Treasury yield as a conservative benchmark, or 5-6% as a middle estimate.
The break-even age is when cumulative pension payments equal the lump sum grown at your assumed return. Most break-even ages fall between 78 and 87. The higher your assumed return on the lump sum, the later the break-even age. If you expect to live past the break-even age, the annuity produces more total lifetime value. If health suggests shorter life expectancy, the lump sum is mathematically better.
The PBGC guarantees approximately $6,750/month ($81,000/year) at age 65 for 2026 for private-sector pensions. If your pension exceeds this and your employer has financial risk, taking the lump sum removes that exposure. Government pensions (federal, state, military) are NOT covered by PBGC but are backed by government authority, making them effectively more secure for large amounts.
Lump sum favors: shorter life expectancy; investment discipline and ability to earn above implied annuity return; pension exceeds PBGC guarantee and employer has financial risk; want to leave assets to heirs; have other guaranteed income (Social Security, spouse's pension); or the lump sum offer is generous relative to the monthly payment (high implied return required).
Annuity favors: longer life expectancy or family history of longevity; limited other guaranteed income; prefer simplicity with no investment management; worry about outliving assets (longevity risk); pension includes COLA that preserves purchasing power; cannot earn the implied return on the lump sum; or worry about poor investment decisions or spending the lump sum too fast.
Yes — if you do a direct rollover to an IRA, no taxes or penalties apply. The money grows tax-deferred until withdrawal. Required Minimum Distributions (RMDs) begin at age 73. If you take the lump sum as cash instead of rolling it over, the entire amount is taxable ordinary income in that year, plus potential 10% early withdrawal penalty if under 59.5. Always do a direct rollover, never a 60-day rollover, to avoid mandatory 20% withholding.
The implied return is the annual rate you would need to earn on the lump sum to produce the same total lifetime value as the monthly annuity. If the implied return is 5%, you need your lump sum to earn more than 5% annually to outperform the pension. If that seems achievable, take the lump sum. If you can't realistically earn that consistently, the pension's guaranteed return is more valuable.
Employers use IRS Section 417(e) segment interest rates and IRS mortality tables to calculate the present value of your future monthly payments. When segment rates rise (as in 2022-2024), lump sums decrease. When rates fall, lump sums increase. This is why many retirement counselors advise watching segment rates before deciding when to retire — a lower-rate environment can produce a significantly higher lump sum offer.
A survivor benefit continues reduced pension payments to your spouse after your death. Under ERISA, if you are married and choose the annuity, your spouse must consent in writing if you elect no survivor benefit. The 50% survivor benefit reduces your monthly payment by approximately 5-10%. The 100% survivor benefit reduces it more. The value depends on the age gap between spouses and their relative life expectancies. With the lump sum, any remaining balance automatically passes to your heirs.
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