Skip to content
FinCalculate

Pension Lump Sum or Monthly Payments: Which Is Better?

Pension lump sum or monthly payments? The answer comes down to the yearly return the lump sum must earn to pay you what the pension pays until the age you plan for.

Example numbers

65 years old

90 years old

Assumptionsyearly pension increase (cola) 0%

Result

The verdictfrom an example

At 4.00% a year, the lump sum runs out at age 85. The pension pays for as long as you live. To last to age 90, the lump sum would have to earn 5.26% a year.

Worked on $250,000 lump sum or $1,500 a month from age 65, planning to age 90, at a 4% return. Change anything below to use yours.

The lump sum lasts to age 90 only if it earns more than 5.26% a year. You expect 4.00%.
Your expected return4.00%
5.26%Break-even return
← Runs out before 90Lasts to 90 →
Break-even return
5.26%
Lump sum runs out
At age 85

The figures behind it

Break-even return
5.26%
The return the lump sum must earn to pay the same income until your plan-to age.
Lump sum runs out
At age 85
At your expected return, drawing the same amount the pension pays.
Left at age 90
$0
What remains after paying yourself the pension amount. It can go to your heirs. A single-life pension stops when you die.
Lump sum could pay to 90
$1,320 a month
The monthly income the lump sum supports until your plan-to age at your expected return.
Pension paid by age 90
$450,000
Payment scheduleShow
AgePension paidLump sum left
65$18,000$241,852
66$18,000$233,371
67$18,000$224,546
68$18,000$215,360
69$18,000$205,801
70$18,000$195,852
71$18,000$185,497
72$18,000$174,721
73$18,000$163,506
74$18,000$151,833
75$18,000$139,686
76$18,000$127,043
77$18,000$113,885
78$18,000$100,191
79$18,000$85,940
80$18,000$71,107
81$18,000$55,671
82$18,000$39,605
83$18,000$22,885
84$18,000$5,484
85$18,000$0
86$18,000$0
87$18,000$0
88$18,000$0
89$18,000$0

What this result assumes

  • Both sides are before tax. The taxable part of pension payments and traditional IRA withdrawals is taxed as ordinary income, so the comparison is fair when the lump sum goes into a traditional IRA by direct rollover. Taken as cash, the taxable part of the lump sum is taxed in the year you receive it, and part is withheld. Money you paid in after tax is not taxed again. Cashing it out before the early-withdrawal age can add an extra tax on top.
  • The return is the same every year. Real markets move, and a bad run early in retirement can empty the lump sum sooner than shown.
  • This compares a single-life pension. A joint-and-survivor option can pay a smaller monthly amount (some plans pay the same) and keeps paying a surviving spouse, and the survivor's payment is often smaller than the joint amount. To test it, enter the joint amount, and set the plan-to age to how old you will be when the younger spouse reaches the age you plan for. If the survivor's payment is smaller, this overstates the pension after the first death.
  • The pension depends on the plan having enough money to pay it. The PBGC guarantees basic benefits in covered private-sector plans, up to a legal limit set each year in single-employer plans. Multiemployer plans have a separate guarantee, and not every pension is covered. Ask the plan administrator whether yours is.
  • Figures are not adjusted for inflation.

Enter your offer to see that return, and the age the lump sum runs out at the return you expect.

Methodology

Reviewed by Acun Özdilek

Paying yourself the pension amount from the lump sum

The calculator invests the lump sum at the return you enter. Each month it adds that month’s growth, then takes out the amount the pension would have paid. If the pension has a yearly increase, the amount taken out rises each year in the same way. The page shows the age at which the money runs out, or that it lasts past the age you plan for and what is left.

The retirement calculator shows how a balance grows before you stop working. The Roth IRA calculator covers tax-free growth, which matters if part of the lump sum ends up in a Roth account.

The break-even return

This is the yearly return at which the lump sum pays exactly what the pension pays, month by month, until the age you plan for. Earn more than that and money is left at that age. Earn less and the lump sum runs out first. The calculator finds it by trying returns from zero up to the highest one the input allows, then narrowing in until the two sides match to within a fraction of a cent a month.

Two cases have no break-even to show. If the lump sum is larger than every pension payment added together, it lasts even when it earns nothing, and the page says so. If it is small enough that it would need more than the highest return the input allows, the page says that instead of showing a rate.

What the page leaves out

Both sides are compared before tax. The taxable part of pension payments and traditional IRA withdrawals is taxed as ordinary income, so the comparison holds when the lump sum goes into a traditional IRA by direct rollover. Taking the lump sum as cash changes the tax picture, and the questions below explain how.

The return is the same every year, with no good or bad years, so a poor stretch early in retirement is not shown. Survivor options, the chance that a plan cannot pay, and inflation are not modelled either. Each has a question below.

Assumptions

  • Both sides are compared before tax.
  • The lump sum earns the same return every year.
  • The pension is a single-life payment unless you enter a joint amount.
  • The yearly increase is zero unless you enter one.
  • Figures are not adjusted for inflation.

Sources

Common questions

What return should I enter for the lump sum?

Nobody can promise one. Enter a long-run average after fees, then compare it with the break-even on the bar. With $250,000 or $1,500 a month from age 65, planning to age 90, the lump sum runs out at 85 if it earns 4% a year, and lasts to 90 with money left if it earns 6%. Try a few returns on either side of your guess. The retirement calculator shows how a return compounds over the years.

How long should I plan for the money to last?

Past average life expectancy. An average includes people who die young, and many people live well beyond it. A single-life pension pays for as long as you live, while the lump sum pays only until it runs out. A later plan-to age asks more of the lump sum, so try a few ages and see how the break-even moves.

Should I roll the lump sum into an IRA?

A direct rollover to a traditional IRA or another pre-tax retirement plan moves the money without it counting as income that year. The taxable part of a rollover to a Roth IRA is taxed as a conversion. Tax is paid later, as you withdraw, which is why this page can compare both sides before tax. Taken as cash, the taxable part is taxed in the year you receive it and the plan withholds part of it. Money you paid in after tax is not taxed again. Cashing out before the early-withdrawal age can add an extra tax on top. The IRS explains the rollover rules in the source below, and 401(k) loan or early withdrawal covers the cost of taking money out early. If your new employer’s plan accepts rollovers, the 401(k) calculator shows how that balance can grow.

What happens to my pension if my employer goes bankrupt?

A pension depends on the plan having enough money to pay it. The Pension Benefit Guaranty Corporation (PBGC) guarantees basic benefits in covered private-sector plans if a plan ends without enough money. In single-employer plans that is up to a legal limit that is set each year, and anything above the limit is not guaranteed. Multiemployer plans have a separate guarantee. Not every pension is covered, so the plan administrator can tell you whether yours is. Once a lump sum is paid to you, it no longer depends on the plan, though it then depends on your investments.

Is the joint-and-survivor option better?

It can pay a smaller monthly amount (some plans pay the same), and it keeps paying a surviving spouse. This page is set up for a single-life pension. To test the joint option, enter its monthly amount and set the plan-to age to how old you will be when the younger spouse reaches the age you plan for. The survivor’s payment is often smaller than the joint amount, so entering the joint amount overstates the pension after the first death. The plan can tell you the survivor’s share.

What about inflation and a cost-of-living increase (COLA)?

Some pensions pay the same amount every year, so inflation lowers what each payment buys. Others add a yearly cost-of-living increase. If yours does, enter it under “Yearly pension increase (COLA)”. The pension then grows each year, so over more than a year the break-even rises. With the starting numbers, a 2% increase moves the break-even from 5.26% to 7.15%, because the lump sum has to keep up with a growing payment. Apart from that increase, the figures are not adjusted for inflation.

Related calculators

All retirement →