How to compare the two
A pension lump sum is the plan's offer to buy out your future payments today. The fair way to compare is to ask what return you would need to earn on the lump sum to pay yourself the same monthly amount for as long as you expect to live. If that return is high, the pension is the better deal; if it is low, the lump sum might be.
A $300,000 lump sum against $1,800 a month from 65 to 90 needs a return of about 5.3% a year to match. The simple break-even, ignoring returns, comes at almost 79. The pension pays 7.2% of the lump sum each year, well above the 4% many retirees safely withdraw.
Other things to weigh
The pension removes the risk of outliving your money and of poor markets, and many include survivor benefits. The lump sum gives control, can be left to heirs and protects you if the employer's plan has trouble, though US private pensions are backed by the Pension Benefit Guaranty Corporation up to limits. Health and family longevity matter a lot: the longer you expect to live, the better the pension looks.
Common questions
Should I take my pension as a lump sum?
It depends on the return needed to match the pension, your health and your other income. If the needed return is above about 5%, the pension is usually hard to beat.
What if my pension has cost-of-living increases?
Then it is worth more than this calculator shows, making the lump sum less attractive.
Is the lump sum taxed?
Rolled into an IRA, it is not taxed until withdrawn. Taken as cash, it is taxed as income.
This calculator gives estimates for planning. Real returns, rates and prices change, so treat the result as a guide rather than a promise. Read how we build and check our calculators.