Pension Lump Sum Calculator: The Return the Annuity Pays You
Think of the monthly pension as an investment you buy with the lump sum. If you live to your life expectancy, the payments work out to a certain annual return; that return is the bar the lump sum has to beat, after fees and with no risk of running out. (SSA: period life table)
Example: a $300,000 lump sum or $1,800 a month starting at 65, no cost-of-living raises.
| Man, 65 | Woman, 65 | |
|---|---|---|
| Break-even age (no interest) | 78.9 | 78.9 |
| Life expectancy | about 83 | about 86 |
| Return the annuity pays to that age | 3.1% | 4.2% |
| Chance of living past break-even | 68% | 77% |
The longer you're likely to live, the better the annuity looks.
How is the lump sum calculated?
Plans convert your monthly benefit into a lump sum using IRS-set interest rates and mortality tables. When those segment rates rise, lump sums shrink, sometimes by 10% or more in a year — so the timing of your retirement date can change the offer. (IRS: minimum present value segment rates)
What else should you weigh besides the math?
Four things the return figure can't capture. Each one can flip the answer for a particular household, so go through them before you sign the election form.
- Spouse: a joint-and-survivor annuity protects the survivor; a lump sum has to be managed to do the same.
- Inflation: most private pensions never rise, so their real value falls every year.
- Safety: the PBGC insures most private pensions up to a limit (PBGC: guaranteed benefits).
- Health: the single biggest factor in who wins.
Our take: most healthy retirees should take the checks
If you're in good health, married, and short on guaranteed income besides Social Security, the annuity is longevity insurance you can't buy as cheaply elsewhere. Take the lump sum if your health is poor or the plan's finances are shaky. Check your odds on the life expectancy calculator, test the lump sum on the how long will my money last calculator, and see the tax side on the retirement tax calculator.