Pension Lump Sum vs Monthly Annuity — IRR + Breakeven Calculator
TL;DR: When your employer offers $450K lump sum OR $2,700/month for life, the question is the internal rate of return baked into the pension. If the IRR exceeds what you can safely earn on the lump sum, take the pension. If not, take the lump. This calculator solves both, plus the breakeven age.
How this calculator works
Two key calculations:
IRR (Internal Rate of Return): the discount rate at which the present value of the monthly pension equals the lump sum. Solved iteratively (bisection method). If pension IRR > safe-investment return on the lump sum, pension wins on pure math.
Breakeven age: the age at which cumulative pension dollars first equal the lump sum.
Breakeven = Age_start + (Lump / Monthly) / 12
If you expect to live past breakeven age, pension wins on cumulative-dollar math (before factoring investment returns).
The calculator also projects the lump sum compounded at your assumed investment return to life expectancy, so you can compare ending values.
What the result means
Pension IRR is the implicit rate of return on the pension stream — assuming you live exactly to your life expectancy. If you can safely earn MORE than this on the lump sum, take the lump. If not, take the pension.
Breakeven age is when cumulative pension dollars equal the lump sum (ignoring investment growth). If you'll likely live past breakeven, pension wins. If family longevity is short, lump wins.
Lump-invested ending value at LE is the future value of the lump sum at your assumed return rate, at life expectancy. Compare this to total cumulative pension dollars over the same period to see which provides more total wealth.
When MYGA wins / when the alternative wins
Take the lump sum when: pension IRR is under 4%, family longevity is short, you want to leave money to heirs, or your employer pension is at financial risk (underfunded, frozen plan).
Take the monthly pension when: IRR is 6%+ AND you expect normal longevity, want simple guaranteed income, and don't need to leave a residual.
Roll lump to IRA + buy SPIA wins when: pension IRR is mediocre but a current SPIA quote from a top carrier is higher than the pension — rare but happens during high-rate periods.
Hybrid (50/50) wins when: employer allows partial — some monthly for floor, some lump for flexibility/heirs.
Worked example
Scenario: 62-year-old offered $450,000 lump OR $2,700/month for life. Expects to live to 88. Assumes 5.5% safe return on lump.
- Years of pension to LE: 26
- Total pension dollars to age 88: $2,700 × 12 × 26 = $842,400
- Pension IRR (solving for rate where PV equals $450K): approximately 5.6%
- Breakeven age: 62 + ($450K / $2,700) / 12 = age 76
- Lump invested at 5.5% to age 88: $450,000 × 1.055^26 = $1,805,000
Pension IRR (5.6%) just edges out the assumed safe return (5.5%) — close call. The lump-invested wins on ending dollars ($1.8M vs $842K cumulative pension), but only if she can compound at 5.5% safely AND doesn't spend it along the way. For most retirees who'd spend the cumulative pension as income, the comparison is closer than it looks.
Common mistakes
- Comparing pension dollars to a stock-portfolio expected return. Pension is bond-like; compare to bond/MYGA returns, not 8% stock assumptions.
- Ignoring inflation. Most private-sector pensions are NOT inflation-adjusted. $2,700 today buys half in 25 years.
- Ignoring PBGC limits. Pension Benefit Guaranty Corporation insures private pensions up to a cap (~$87K/yr at age 65 in 2026). If your employer fails, large pensions get cut.
- Forgetting joint survivor election. Single-life pays more but leaves surviving spouse with nothing. Joint & 50%/100% survivor is the right default for couples.
- Ignoring tax consequences of lump rollover. Take lump and roll directly to IRA — never receive a check (20% mandatory withholding). Or take in installments to manage bracket.
Related calculators & reviews
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- MYGA Monthly Income Calculator
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FAQ
Q: How is the lump sum calculated by the employer?
A: Using IRS-mandated segment rates (corporate bond yields). Higher rates = smaller lump sum. Many retirees in 2023-2024 saw lump-sum offers drop 20-30% as rates rose.
Q: Can I take part lump and part pension?
A: Many plans allow a partial lump-sum / partial annuity split. Check your Summary Plan Description.
Q: Are pension payments protected if my employer fails?
A: Private-sector pensions are insured by PBGC up to ~$87,300/yr at age 65 (2026 limit). Public pensions vary by state.
Q: Does the lump sum get taxed?
A: If rolled directly to an IRA via trustee-to-trustee transfer, no current tax. If received as a check, 20% mandatory federal withholding + may trigger ordinary income on full amount.
Q: Can I roll the lump to an annuity?
A: Yes — roll into a traditional IRA, then buy an immediate or deferred annuity inside the IRA. Compare carrier SPIA quote to your employer's pension offer.
Q: Does the IRR include survivor benefit?
A: Our calculator assumes single-life. Joint & survivor pension typically pays 10-15% less monthly but continues to surviving spouse.
Q: What if my plan is frozen?
A: Lump sum offers from frozen plans often look more attractive — the future accrual is gone anyway. Run the IRR; if pension IRR > safe return, still take it.
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Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer appointed with multiple A-rated carriers
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Disclosure
This calculator is for educational and illustrative purposes only and is not a personalized recommendation, solicitation, or offer of any specific product. Outputs are approximations using publicly available rates, IRS tables, and standard payout factors as of 2026; actual carrier illustrations may differ. Annuity rates, caps, payout factors, surrender schedules, and tax brackets change frequently. Always confirm current values against the most recent carrier disclosure document, IRS Publication 590-B, and the actual contract before purchasing. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated carriers. Tax discussion reflects federal law as of 2026 and is subject to change. Consult a CPA and licensed advisor before acting on any output shown.