Pension Calculator

How to use this calculator

1. Enter or choose lump sum offered.
2. Enter or choose monthly pension instead.
3. Enter or choose years you expect to receive it.
4. Enter or choose yearly pension increase.
5. Enter or choose return you could earn on the lump sum.
6. The present value of the pension updates as you type. Use Copy result or Share to keep it.

Method

PV = Σ Payment_m ÷ (1 + i)^m for m = 1…n, with i = (1 + r)^(1/12) − 1; with no increases PV = Payment × (1 − (1 + i)^−n) ÷ i

Payment_m

pension in month m (raised each year by the increase you enter)

r

yearly return you could earn on the lump sum

n

number of monthly payments

Worked example

1. Monthly rate i = 1.06^(1/12) − 1 = 0.4868%; n = 20 × 12 = 240 payments.
2. PV = 1,000 × (1 − 1.004868^−240) ÷ 0.004868 = 141,384.31.
3. Difference = 141,384.31 − 200,000 = −58,615.69, so the lump sum is worth more at 6%.
4. Simple break-even: 200,000 ÷ 1,000 = 200 months ≈ 16.67 years.

If you could earn 6% a year, $1,000 a month for 20 years is worth about $141,400 today, so a $200,000 lump sum is the better deal on these numbers.

What the result means

The implied return is the key number: it is what you would need to earn on the lump sum, every year, to match the pension. If that is above what you could safely earn, the pension is better value. The pension also insures you against living longer than expected, which a lump sum does not.

Assumptions and limits

• Payments are made at the end of each month for the number of years you enter, then stop.
• The yearly increase, if any, applies from the start of each new year of payments.
• The return on the lump sum is constant and after any fees.
• Taxes on the lump sum and on pension income are not included and often differ.
• Survivor benefits, plan insurance and the risk of the plan failing are not modelled.
• Life expectancy is uncertain; try a few values.