Should I take the pension or the lump sum?

Enter the lump-sum offer, the monthly pension, your age, the pension start age, the age you plan to, any pension COLA, the return you expect on an invested lump sum, inflation, and survivor terms. It returns the present value of the pension stream, its internal rate of return (the return the lump sum must beat), the payout rate, the 4%-rule income the lump sum could support, and a year-by-year chart of what happens if you invest the lump sum and pay yourself the pension.

A $500,000 lump sum versus $3,000 a month starting at 65, for a 62-year-old planning to 90 with a 50% survivor benefit for four more years, no COLA, 5% expected return, 2.5% inflation. The pension pays 7.2% of the lump sum a year (6.2% of what the lump sum could grow to by 65), and its internal rate of return is about 4.5%. At a 5% return the lump sum is worth about $34,000 more; at 4% the pension wins. Investing the lump sum and paying yourself $36,000 a year would still leave money at 94 at 5% but run out around 98 — the decision hinges on the return you can reliably earn and how long you live.

Payments are treated as arriving evenly through each year. Present value discounts each year’s payments (including survivor payments) at your expected return. The internal rate of return is the discount rate that makes the present value equal the lump sum. The “invest and pay yourself” chart grows the lump sum at your return, deducts the pension amount each year, and marks the age it runs dry.

• Taxes: a lump sum rolled to an IRA stays tax-deferred; taken in cash it is taxed at once and may be pushed into higher brackets. Pension checks are taxed as received.
• Guarantees: private pensions are insured by the PBGC up to age-based limits; public pensions rely on the sponsor. Insurance-company annuities depend on the insurer and state guaranty limits.
• Inflation: a level pension loses purchasing power every year; an invested lump sum can grow with it but is not guaranteed to.
• Flexibility and heirs: a lump sum can be spent unevenly or left to heirs; a pension cannot, except through survivor options.
• Rates: lump-sum values are recalculated with interest rates, so the offer changes from year to year.

One steady return; pre-tax comparison; no early-retirement subsidies, Social Security leveling, or partial lump-sum options.

Confirm any decision with an official Social Security statement, your plan custodian, and a qualified adviser. See the methodology and changelog for every rule the model applies.

What return does the lump sum need to beat?

The pension’s internal rate of return to your planning age. If that is 4.5%, the lump sum only wins if you earn more than 4.5% a year after fees for the rest of your life. Longer lives raise the IRR; shorter lives lower it.

Is 6% a good pension payout rate?

Compare it with what a commercial single-premium annuity would pay at your age and with the 4% rule. A payout well above what an insurer would offer usually means the pension is generous; a payout below it favors the lump sum.

Should I roll a lump sum into an IRA?

A direct rollover to an IRA or your new employer’s plan avoids immediate tax. Taking the lump sum in cash makes the whole amount taxable that year, which is rarely wise. Confirm the mechanics with the plan administrator and a tax professional.