Pension Calculator
This calculator compares taking a recurring pension (annuity) to accepting a lump-sum payout and investing it. It estimates the present value of the pension stream using a discount rate and projects what the lump sum would grow to at an assumed after-tax return adjusted for inflation.
Use the tool to explore sensitivity to the discount rate, expected investment return, tax treatment of the lump sum, and assumed life expectancy. Results are illustrative and intended to inform decisions alongside professional advice.
Computes the present value of the pension stream using a discount rate, projects the net lump sum invested at an expected after-tax return adjusted for inflation, and computes the equivalent annual annuity implied by the net lump sum for the same horizon.
Inputs
Advanced inputs
Pension (Annuity) details
Lump sum and assumptions
Results
Present value of pension (annuity)
-$35,000,000.00
Projected value of invested lump sum at horizon
$386,259.00
Equivalent annual annuity from net lump sum
-$450.00
Annual payment difference (pension minus equivalent)
$42,450.00
| Output | Value | Unit |
|---|---|---|
| Present value of pension (annuity) | -$35,000,000.00 | currency |
| Projected value of invested lump sum at horizon | $386,259.00 | currency |
| Equivalent annual annuity from net lump sum | -$450.00 | currency |
| Annual payment difference (pension minus equivalent) | $42,450.00 | currency |
Visualization
Methodology
We compute the present value of the pension as the PV of an ordinary annuity: PV = adjusted annual payment × (1 - (1 + r)^-n) / r, where r is the chosen discount rate and n is years of payment.
We compute the net lump sum after an assumed immediate tax rate then project it forward using a real growth rate (after-tax return minus inflation). We also calculate the annual annuity equivalent that a net lump sum would purchase at the chosen discount rate to provide a like-for-like annual-payment comparison.
Worked examples
If a pension pays $42,000/year, retirement at 65, life expectancy 90 (25 years), and discount rate 3%: the calculator shows the present value of that stream at the chosen discount rate.
If offered $500,000 lump sum taxed at 25%, invested at a 5% after-tax return with 2% inflation, the calculator projects the invested value over the same horizon and computes what annual payment that net lump sum equates to at the discount rate.
Key takeaways
This tool produces numeric comparisons: present value of the pension, projected value of an invested lump sum, and the annuity-equivalent annual payment implied by the lump sum.
Use results as a starting point. Key inputs (discount rate, expected return, taxes, survivor options, and life expectancy) materially change outcomes.
Expert Q&A
Which inputs most affect the comparison?
Discount rate used for present-value calculations, expected after-tax return on invested lump sum, tax rate applied to the lump sum, and life expectancy have the largest impact. Small changes in assumptions can change the recommendation.
What discount rate should I use?
There is no single correct discount rate. Common practice uses a rate reflecting your investment alternatives, risk tolerance, and inflation expectations. Test several rates to see sensitivity.
Does this include taxes on pension payments?
This calculator treats the pension payment input as pre-tax. It assumes an immediate tax on the lump sum as entered. It does not model ongoing taxes on pension distributions or investment tax-efficiency—adjust inputs to reflect your tax situation or consult a tax advisor.
Can I model survivor or joint life options?
Use the pension payment multiplier to approximate reduced or increased payments for a chosen survivor option. For precise plan options (guaranteed periods, pop-up provisions, different survivor percentages), consult plan documentation and a financial advisor.
How accurate are these numbers?
Results are mathematical estimates based on user inputs and simplify many real-world details (tax rules, fees, sequence-of-returns risk, plan-specific terms). They are not guarantees. See accuracy and standards section below.
Sources & citations
- National Institute of Standards and Technology (NIST) — https://www.nist.gov
- International Organization for Standardization (ISO) — https://www.iso.org
- Institute of Electrical and Electronics Engineers (IEEE) — https://www.ieee.org
- Occupational Safety and Health Administration (OSHA) — https://www.osha.gov
- U.S. Internal Revenue Service (tax information) — https://www.irs.gov