Should I take the pension lump sum or the monthly check?

1. Your pension offer

2. Your assumptions and household

Result

Questions people ask

Should I take the lump sum or the monthly pension?

This tool does not tell you which. It shows what the monthly pension is worth in today's dollars at the return you think the lump sum could earn, given how long you expect to live, and the return you would have to earn on the lump sum just to match the pension. If that required return is higher than you can safely earn, the pension is the better value; if it is easy to beat, the lump sum may be.

What is the implied return on a pension lump sum?

It is the yearly investment return at which the pension you would give up is worth exactly the lump sum, counting the chance you do not live to collect every payment. It is the return the lump sum has to earn, every year, to break even with the pension. A required return of 3% is easy; 7% means you are being asked to give up a lot for cash.

Why does the tool ask for an age I have a 50/50 chance of reaching?

Because the value of a pension depends on how long it pays, and nobody knows that. Type the age you would call a coin flip for your own health and family history. The tool uses a smooth survival curve shaped like adult mortality around that age, and the grid shows how much the answer moves if you live to 78 or to 92.

How does a survivor benefit change the value?

If a spouse would keep a share of the pension after you die, the pension keeps paying in more of the futures where you die first, so it is worth more. Enter the spouse's age, their own 50/50 age and the survivor share of your pension. Type the monthly amount for the option you are actually comparing, since joint-and-survivor options usually pay less per month.

What does the sustainable withdrawal number mean?

It is the first-year monthly amount the lump sum could pay, starting when the pension starts, growing with the same cost-of-living rate, and running the money down to zero at the planning age, assuming it earns the return you typed every year. It is a straight line comparison, not a market forecast, and real returns are uneven.

How is tax handled?

The tool takes one rate on the lump sum. If you roll the lump sum into an IRA, nothing is withheld when you move it, so leave this at 0; if you take it as cash, a large share can be taxed, and under 59 and a half a penalty can apply. Pension payments and IRA withdrawals are both taxed later, so this comparison is before tax on both sides. Confirm with a tax professional.

Is this financial or tax advice?

No. It is arithmetic on numbers you type in, with simplified assumptions: monthly payments, a stylised survival curve, a constant return and a constant cost-of-living rate. Your plan's lump sum may also have been set with different interest-rate and mortality assumptions than yours. Read your plan documents, and consider a fee-only adviser, before you elect anything.

Not decided

Whether your plan is insured and how much of it is guaranteed if the employer fails, how the plan set the lump sum (the interest rates and mortality it used may differ from yours), your health, the other income you will have, inflation beyond the cost-of-living rate you typed, the order of your retirement withdrawals, your tax bracket, and whether to elect at all. Payments are modelled monthly with a smooth survival curve rather than a life table, and a constant return.

Related tools: the Social Security claiming age calculator, the retirement withdrawal sequencer and the lease buyout calculator for other lump-sum-for-income decisions.