Annuity vs Lump Sum Calculator
Compare a pension or lottery annuity to a lump sum offer using present value
Last updated: November 2025
Offer Details
Annual: $18,000
Used as the discount rate for present value
Comparison Summary
| Metric | Lump Sum | Annuity |
|---|---|---|
| Today's value | $250,000 | $227,288 |
| Total nominal received | $250,000 | $360,000 |
| Years of payments | N/A | 20 |
| Longevity risk | You bear it | Transferred |
| Inheritance after death | Full balance | Usually $0 |
| NPV difference | $-22,712 | |
Lump Sum Invested vs Annuity Payments Invested
Both lines assume 5% annual return. The Lump Sum line shows what 250,000 grows to. The Annuity line shows what reinvested monthly payments grow to.
Understanding the Tradeoffs
The NPV Lens
Discounted present value is the cleanest single-number comparison. If the annuity NPV (at a reasonable discount rate of 5-6%) exceeds the lump sum offer, the annuity is being offered at a "premium" relative to the market and is the better deal in pure dollar terms. If the lump sum exceeds the annuity NPV, the employer is paying you to take it off their books, and a disciplined investor can likely beat the annuity by managing the money. The discount rate matters a lot, lower rates (3-4%) favor the annuity, higher rates (7%+) favor the lump sum.
Longevity Insurance
A lifetime annuity is, fundamentally, longevity insurance. It transfers the risk of outliving your savings to the insurer or pension fund. People who live to 95 win on a lifetime annuity, those who die at 70 lose. Mortality credits, the redistribution of pooled funds from those who die early to those who live long, are why annuities can offer income rates that look better than self-managing a lump sum. If you have a family history of long life or thin other safety nets, leaning toward the annuity makes sense.
Inflation and COLA
A fixed (non-COLA) annuity loses purchasing power every year. At 3% average inflation, $3,000 monthly today buys only about $2,230 in 10 years and $1,660 in 20 years. Government and union pensions usually include a COLA; most private pensions do not. A lump sum invested in a diversified portfolio (stocks + bonds + TIPS) can keep up with inflation. The longer the expected retirement, the bigger the inflation drag on a fixed annuity.
Behavioral and Practical Considerations
An annuity provides forced spending discipline, a guaranteed paycheck that you cannot blow on a bad investment. For many people, this guardrail is worth the loss of optionality. A lump sum requires investment skill, discipline against market timing, and resistance to family or friend pressure to "lend" the money. If you are not confident managing a $500k+ portfolio, the annuity is often the safer choice, even when the NPV says the lump sum technically wins.
Frequently Asked Questions
Pension lump sum vs monthly annuity?
Depends on longevity expectations, expected return on the lump sum, COLA presence, survivor needs, and pension fund health. Compute the NPV: if the annuity PV materially beats the lump sum at 5-6% discount, annuitize; otherwise, lump sum with disciplined investing is often better.
What is longevity risk?
The risk you outlive your savings. A lifetime annuity transfers this risk to the insurer or pension fund, you cannot run out. A lump sum keeps the risk with you (requires careful 4% rule or dynamic withdrawal planning). Longevity risk is the strongest argument for annuitizing at least a portion of retirement income.
Does PBGC insure my pension annuity?
PBGC insures most private single-employer DB pensions up to a 2026 max around $7,431/month at age 65. Multi-employer guarantees are lower. PBGC does NOT cover state, local, federal, church, or many small-employer pensions, those depend on the sponsor's funding ability.
How does inflation affect a fixed annuity?
A fixed annuity loses real value every year. At 3% inflation, $3,000/month today buys $2,230 in 10 years and $1,660 in 20 years. Over a 25-year retirement, a fixed annuity loses roughly half its real value. A lump sum in stocks/TIPS typically keeps pace with inflation.
COLA-adjusted vs flat annuity?
COLA starts lower but rises with inflation; flat starts higher and stays constant. COLA typically wins for 20+ year retirements as compounding inflation protection beats the higher flat starting amount. Break-even usually sits at year 8-12 depending on inflation.
Taxes on rolling lump sum to IRA?
Do a trustee-to-trustee direct rollover from the pension trustee to a Traditional IRA. No taxes due, tax-deferred status preserved, and you control timing of withdrawals and Roth conversions. If you take the lump sum directly, employer must withhold 20% federal tax (recoverable only by depositing the full pre-withholding amount in an IRA within 60 days).