Pension Lump Sum vs. Annuity
Value a pension offer on the life table: what each payout option is worth against the lump sum, the return the lump sum would have to earn to match it, and the odds you live long enough for the monthly check to win.
The offer
You
Joint-and-survivor option
What the lump sum could earn
Use a return you could count on, since the pension is a promise and a stock portfolio isn't. A long Treasury or high-grade bond yield is the usual yardstick.
Worth most at 4.5%
Lump sum
$35,250 more than the best pension option
Return the lump sum must earn to match
3.6%
4.02% against the joint option
Checks add up to the lump sum at
75
71% chance you are alive then
The invested lump sum runs dry at
81
51% chance you outlive it, paying yourself the pension
Each option against the lump sum
| Option | A month | Worth today | Versus the lump sum | Implied return | Breaks even at | Odds of reaching it |
|---|---|---|---|---|---|---|
| Single life | $2,900 | $414,750 | −$35,250 | 3.6% | 75 | 71% |
| Joint and 50% survivor | $2,600 | $428,442 | −$21,559 | 4.02% | 76 and 6 mo | 94% |
Worth today is every future check, weighted by the chance someone is alive to cash it and discounted at 4.5%. Life expectancy from the table: 80.9 for you, 84.3 for your spouse.
Checks received against the lump sum paying the same income
Odds of being alive to collect
How it works›
Value. Each year's checks are multiplied by the chance you are alive midway through that year, from the SSA 2021 period life table scaled for health, and discounted at the return you entered. A joint option adds the survivor's share times the chance you have died and your spouse hasn't, treating the two lives as independent.
Implied return. The yearly return at which the pension is worth exactly the lump sum: what you would have to earn, every year for life and without the pension's guarantee, to come out even. Plans price lump sums off corporate bond yields under IRC 417(e), so offers shrink when rates rise and the implied return rises with them.
Break-even and running dry. Break-even is the age at which checks received add up to the lump sum, with nothing for interest. Running dry invests the lump sum at your return, pays out the pension's income each month, and finds the age the money is gone. The odds beside each come from the same life table.
What it leaves out. Taxes, which fall on both the same way if the lump sum is rolled to an IRA. The plan's and the PBGC's credit risk, the value of leaving an unspent lump sum to heirs, and period-certain or pop-up options. Ages under 50 use the age-50 death rate.