Lump Sum vs Monthly Pension: Which Pays More? 2026

Lump sum or monthly pension? Compare the present value, not the total paid

The total paid is a trap: $2,500 a month for 25 years is $750,000.00 — $250,000 more than the $500,000 lump sum — and it still loses. The reason is that a dollar today is worth more than a dollar in twenty years: the pension pays slowly, and the lump sum pays now. The honest comparison is the present value: present value = monthly payment × [1 − (1 + monthly rate)^−months] / monthly rate, where the monthly rate is the annual discount rate / 12 and the months are the years × 12. On the defaults — a $500,000 lump sum, $2,500 a month, 25 years, a 5% discount rate — the monthly rate is 5% / 12 = 0.4167%, the months are 300, the annuity factor is 171.060047, and the pension’s present value is $2,500 × 171.060047 = $427,650.12. The difference is lump sum − present value = $500,000.00 − $427,650.12 = $72,349.88, and because it is positive, LUMP SUM wins by $72,349.88. The break-even monthly payment — the payment that would tie the lump sum — is $500,000 / 171.060047 = $2,922.95 (exact 2922.9502). The break-even years — how long you would have to collect the pension for it to tie — are 35.9 years (exact 35.9098). The undiscounted years to equal the lump sum — ignoring the discount rate entirely — are $500,000 / ($2,500 × 12) = 16.7 years (exact 16.6667). This page is the pension sibling of the site’s annuity calculator — the same present-value model, a different question: the annuity calculator prices a stream of payments, and this one decides a retirement choice. The nearest pages are the annuity calculator, the 401(k) vs IRA calculator, and the 401(k) contribution calculator — none of them compares a lump sum with a monthly pension.

At the defaults — lump sum $500,000, monthly pension $2,500, 25 years, discount rate 5% — the annuity factor is 171.060047, the pension’s present value is $427,650.12, the total paid is $750,000.00, the difference is $72,349.88 in the lump sum’s favour, and the winner is LUMP SUM wins. The break-evens are: monthly payment $2,922.95 (exact 2922.9502), years 35.9 (exact 35.9098), undiscounted years 16.7 (exact 16.6667). Check the identities: PV = monthly × [1 − (1 + i)^−n] / i; total = monthly × 12 × years; difference = lump sum − PV; break-even monthly = lump sum / annuity factor; break-even years solves PV = lump sum; the pension’s PV caps at monthly / i as the years grow — at the defaults the cap is $600,000.00. The winner is decided from the ROUNDED (to-the-cent) present value vs the lump sum: equal rounded values are a tie. When the lump sum is at or above the cap, there is NO break-even: the pension can never catch the lump sum at that discount rate, and the page shows “—” with that explanation, not a number. At a 0% discount rate there is no discounting: PV = monthly × 12 × years, and the break-even years are the same as the undiscounted figure. Rounding convention: totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum.

The worked example, line by line

Setup: lump sum $500,000, monthly pension $2,500, 25 years, discount rate 5%.

Line 1 — the monthly rate and the months. 5% / 12 = 0.4167% a month; 25 × 12 = 300 months.

Line 2 — the annuity factor. [1 − (1 + 0.0041667)^−300] / 0.0041667 = 171.060047.

Line 3 — the pension’s present value. $2,500 × 171.060047 = $427,650.12.

Line 4 — the total paid. $2,500 × 12 × 25 = $750,000.00 — more than the lump sum, and still the worse deal.

Line 5 — the difference and the winner. $500,000.00 − $427,650.12 = $72,349.88; positive, so LUMP SUM wins.

Line 6 — the break-even monthly payment. $500,000 / 171.060047 = $2,922.95 (exact 2922.9502). A pension of $2,922.95 a month would tie the lump sum.

Line 7 — the break-even years. The years that make PV = $500,000 are 35.9 (exact 35.9098). You would have to collect the pension for nearly 36 years for it to tie.

Line 8 — the undiscounted years. $500,000 / ($2,500 × 12) = 16.7 years (exact 16.6667) — the answer if you ignore the time value of money entirely.

Reverse: the monthly payment for a tie is $2,922.95 (exact 2922.9502); at $2,922.95 the pension PV is $499,999.96 ($0.04 under $500,000), at $2,922.96 it is $500,001.68 — $2,922.95 is the nearest. The years for a tie are 35.9 yrs (exact 35.9098 yrs); at 35.9 years the pension PV is $499,951.12 ($48.88 under), at 35.8 years it is $499,450.67 — 35.9 is the nearest 0.1-year step. The lump sum for a tie is $427,650.12 (the PV itself); a $427,650.12 lump sum ties the pension to the cent. The monthly payment for a tie at 20 years is $3,299.78 (exact 3299.7787); at $3,299.78 the pension PV is $500,000.20 ($0.20 over), at $3,299.79 it is $500,001.71 — $3,299.78 is the nearest. The undiscounted years for the pension total to equal the lump sum are 16.7 yrs (exact 16.6667 yrs).

Every branch, checked

Lump sum $250,000: PV $427,650.12, PENSION wins by $177,650.12; break-even monthly $1,461.48, break-even years 10.8. Halve the lump sum and the pension wins by a wide margin — a $250,000 lump sum only needs a $1,461.48 pension to tie it.

Lump sum $750,000: PV $427,650.12, LUMP SUM wins by $322,349.88; break-even monthly $4,384.43, break-even years — (none: pension PV caps at $600,000, below the $750,000 lump sum). No pension at $2,500 a month can ever catch a $750,000 lump sum at 5% — even paid forever, the pension is only worth $600,000 today.

Monthly pension $2,000: PV $342,120.09, LUMP SUM wins by $157,879.91; break-even monthly $2,922.95, break-even years — (none: pension PV caps at $480,000, below the $500,000 lump sum). A $2,000 pension can never catch the $500,000 lump sum at 5% — its cap is $480,000.

Monthly pension $3,500: PV $598,710.16, PENSION wins by $98,710.16; break-even monthly $2,922.95, break-even years 18.1. A $3,500 pension is worth more than the lump sum, and it only takes 18.1 years to tie.

15 years in retirement: PV $316,138.11, LUMP SUM wins by $183,861.89; break-even monthly $3,953.97, break-even years 35.9. Fifteen years of pension is not enough — and the break-even years do not depend on the years you enter: the 15-year and 35-year branches both need 35.9 years to tie, because the break-even is a property of the lump sum, the payment, and the rate, not of the years you typed in.

35 years in retirement: PV $495,355.87, LUMP SUM wins by $4,644.13; break-even monthly $2,523.44, break-even years 35.9. Even 35 years of pension falls $4,644.13 short of the lump sum — it only wins past 35.9 years.

Discount rate 3%: PV $527,191.13, PENSION wins by $27,191.13; break-even monthly $2,371.06, break-even years 23.1. A lower discount rate makes future money worth more, so the pension wins — and it only takes 23.1 years to tie.

Discount rate 7%: PV $353,717.26, LUMP SUM wins by $146,282.74; break-even monthly $3,533.90, break-even years — (none: pension PV caps at $428,571, below the $500,000 lump sum). A higher rate discounts the pension hard — at 7% the pension can never catch the lump sum, because its cap is $428,571.

Reverse — the other way round: the monthly payment for a tie is $2,922.95 (exact 2922.9502); the years for a tie are 35.9 yrs (exact 35.9098 yrs); the lump sum for a tie is $427,650.12 (the PV itself); the monthly payment for a tie at 20 years is $3,299.78 (exact 3299.7787); the undiscounted years are 16.7 yrs (exact 16.6667 yrs).

What the defaults assume

The model assumes the pension pays every month for exactly the years you enter, the lump sum is invested at the discount rate, and the discount rate stays the same — it does not model inflation, taxes on the lump sum, or the pension dying with you. It assumes monthly compounding at the annual rate / 12, and it assumes the pension has no cost-of-living adjustment: a flat $2,500 a month for 25 years. It leaves out the tax on the lump sum — which can be large — the survivor benefit, and what happens if you live past the years you entered: at 40 years the pension is worth $518,460.73 and PENSION wins by $18,460.73, with the same 35.9-year break-even. With a $0 lump sum, the pension wins by $427,650.12 — take the pension. With a $0 monthly pension, the PV is $0.00, LUMP SUM wins by $500,000.00, and the break-even monthly payment and break-even years are undefined — the page shows “—”, not a number. With a 0% discount rate, the PV is $750,000.00 — the same as the total paid — PENSION wins by $250,000.00, and the break-even years are 16.7, the same as the undiscounted figure. Rounding convention: totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum; the reverses are nearest-value solutions, and the exact unrounded figures (2922.9502, 35.9098, 3299.7787, 16.6667) are stated wherever the rounded figures appear.

Output · formula · meaning

Who uses this

• The retiree offered $500,000 or $2,500 a month: they learn the lump sum wins by $72,349.88 — the pension is worth $427,650.12 today — so they know the lump sum is the better deal unless they live past 35.9 years, and they check the $250,000 branch (PENSION wins by $177,650.12) before assuming the lump sum always wins.
• The retiree with a $3,500-a-month pension: they learn the pension wins by $98,710.16 — so they know the monthly pension is the better deal, and they check the break-even years (18.1) before deciding how long they need to collect it.
• The retiree who expects a long retirement: they learn the pension only wins past 35.9 years — so they know the bet is on longevity, and they check the 40-year edge (PENSION wins by $18,460.73) before choosing the pension for a 40-year horizon.
• The retiree weighing a 7% return on the lump sum: they learn at 7% the pension can never catch the lump sum — its cap is $428,571 — so they know the lump sum wins if they can earn 7%, and they check the 3% branch (PENSION wins by $27,191.13) before deciding what return to assume.

Accuracy & limitations

The math is exact for the numbers you enter: present value = monthly × [1 − (1 + i)^−n] / i; total paid = monthly × 12 × years; difference = lump sum − present value; break-even monthly = lump sum / annuity factor; break-even years solves PV = lump sum; the pension’s PV caps at monthly / i. The winner is decided from the ROUNDED (to-the-cent) present value vs the lump sum: equal rounded values are a tie. What the model cannot do is know how long you will live: check the years, because the answer flips at 35.9 years — at 35 years the lump sum wins by $4,644.13, at 40 years the pension wins by $18,460.73. It assumes the pension pays every month for exactly the years you enter, the lump sum is invested at the discount rate, and the rate stays the same. It leaves out the tax on the lump sum, inflation, cost-of-living adjustments, and the survivor benefit. It is a present-value comparison, not retirement advice: for what an annuity is worth, see the annuity calculator; for how much to save, see the 401(k) contribution calculator.