Annuity vs Lump Sum Calculator
Choosing between an annuity (periodic payments) and a lump sum is one of the most consequential financial decisions in retirement. The right answer depends heavily on your assumed investment return: at high returns, the lump sum often wins because you can grow it faster than the annuity stream's implicit rate. At low returns, the annuity wins because guaranteed payments are worth more relative to uncertain investment gains. This calculator computes the present value of the annuity at your chosen rate and directly compares it to the lump sum on offer.
Annuity vs lump sum formula
PV of annuity = payment * [1 - (1 + r)^(-n)] / r
Total undiscounted = payment * n
Better choice: max(PV of annuity, lump sum)
Where r is the annual discount rate and n is the number of payment years. A higher discount rate reduces the present value of future payments, making the lump sum relatively more attractive. A lower discount rate increases the PV of the annuity, making the stream of payments look better.
Key factors beyond the math
- Longevity: if you live significantly longer than the payment period, a lifetime annuity provides more total income than a fixed-term calculation shows.
- Inflation: annuity payments are usually fixed; a lump sum invested in equities may provide inflation protection over long periods.
- PBGC coverage: pensions backed by PBGC provide security even if the sponsor fails; private annuities rely on insurer solvency (state guaranty funds exist but have limits).
- Tax efficiency: rolling a lump sum to a Traditional IRA defers all taxation and may provide more flexibility than taxable annuity income.
- Estate planning: a lump sum can be inherited; period-certain annuities pay heirs only through the guarantee period; life-only annuities pay nothing to heirs after death.
Frequently asked questions
How do I compare an annuity to a lump sum?
Convert both options to the same time basis (present value). The present value of the annuity is calculated by discounting future payments at your expected investment return. Compare that PV to the lump sum offer. Whichever is larger at your assumed rate provides more value.
What discount rate should I use?
Use your expected long-term investment return on the lump sum. If you believe you can earn 6% annually investing the lump sum in a diversified portfolio, use 6%. Higher assumed returns make the lump sum look more attractive because future annuity payments are worth less in today's dollars when discounted at a high rate.
Does the break-even point depend on how long I live?
Yes. For lifetime annuities, the break-even is the age at which the cumulative annuity payments discounted to today equal the lump sum. If you live longer than the break-even, the annuity wins. This calculator uses a fixed payment period; for life-contingent annuities you also need an expected lifespan.
Are taxes different for lump sum vs annuity?
Usually yes. A lump sum from a pension or 401(k) is all taxable in one year if taken as a distribution (though it can be rolled to an IRA). Annuity payments are taxed as ordinary income spread over many years, potentially keeping you in a lower bracket each year. Tax deferral or rollover affects which option is better after tax.
What if the payment period is for life, not a fixed term?
For a lifetime (life-contingent) annuity, use your life expectancy from SSA actuarial tables as the payment period. For example, a 65-year-old male has an average life expectancy of about 18 additional years; a female about 21 years (SSA Period Life Table). Enter that number as your years of payments.
Official sources
- SSA Actuarial Life Tables: Period Life Table
- PBGC: Premium Calculator and Information
Reviewed by the CalculatorHub team, edited by James Graham, 15 June 2026. See our methodology.