ReckonBoxPension or lump sum, judged by the rate
The clearest way to compare a monthly pension against a lump-sum offer is the implied rate of return: the return the lump sum would have to earn to replicate the pension for life. It turns two numbers that look nothing alike into one you can act on.
On a $2,000 monthly pension against a $300,000 lump sum over 20 years, that rate is about 5.2% a year. Earn more than that with acceptable risk and the lump sum can match the pension and leave something over. Earn less, and the pension is the better deal. Spread evenly with no growth, the lump sum would pay just $1,250 a month.
Why the totals mislead
Comparing the undiscounted totals of the two offers ignores the time value of money, which usually flatters the pension. The default pension pays $480,000 over 20 years against a $300,000 lump sum, a gap that looks decisive until you remember a dollar in year 20 is worth far less than a dollar today.
That is exactly the trap in the simpler calculators. They add up the monthly checks and declare the bigger pile the winner. The lump sum is what the plan pays instead of that income stream, so the fair question is what return it must earn to recreate it. The implied rate answers that, and on the default the honest number is 5.2%, not the 60% total-payout advantage the raw sum suggests.
What the rate tells you
The implied rate of return is the hurdle: beat it with investments you're comfortable holding, and the lump sum wins; fall short, and the pension does. A rate around 5% sits right at the edge of what a conservative portfolio can promise, which is why this decision is genuinely close for many people.
Your life expectancy tilts it. Because the pension pays until you die while the lump sum is finite, expecting a long life raises the pension's value and lowers the rate the lump sum must beat. A cost-of-living adjustment does the same, and matters more than most realize, since a pension that keeps pace with inflation is worth far more than a flat one.
Where the numbers come from
The lump sum is treated as the present value of the pension payments, and the implied rate is the discount rate that makes those two equal, solved numerically. The tool discounts each monthly payment, applies any annual cost-of-living adjustment, and finds the rate where the present value of the whole stream lands on the lump sum. That is the same actuarial net-present-value logic the plan uses to set the offer.
The break-even age is a simpler figure: the point where the running total of pension checks passes the lump sum, ignoring growth. On the default it is age 77.5. It is easy to picture but weaker than the implied rate, because it pretends money has no time value.
What this does not decide for you
This weighs the math, and the choice has more to it. It does not model the taxes on either option, the survivor benefit a joint-and-survivor pension pays a spouse, the credit risk that a private pension could be cut if the employer fails, the PBGC insurance that partly backs it, or the discipline a lump sum demands to not spend it. A guaranteed check you cannot outlive is worth something no rate captures.
None of this is advice on which to take. It shows the return you would need to justify the cash. For a decision this large, a fee-only financial adviser and a tax professional are the right call.
Frequently asked questions
Should I take the pension or the lump sum? The clearest test is the implied rate of return: the return the lump sum would need to earn to replicate the monthly pension for life. On a $2,000 pension against a $300,000 lump sum over 20 years, that is about 5.2% a year. If you can earn more than that with acceptable risk, the lump sum can match the pension and leave a surplus; if not, the pension is hard to beat.
What is the implied rate of return on a pension? The implied rate of return is the discount rate that makes the lump sum equal the present value of the pension payments. The lump sum is what a plan pays instead of the income, so solving for that rate tells you the return you must beat to come out ahead by taking the cash. On the default it is 5.2%, a high hurdle for a safe portfolio.
Why not just compare the total payouts? Because comparing undiscounted totals ignores the time value of money. The default pension pays $480,000 over 20 years against a $300,000 lump sum, which makes the pension look far ahead, but a dollar in year 20 is worth much less than a dollar today. The implied rate of return corrects for that, which is why it is the number to use.
What is the pension break-even age? The break-even age is when the running total of pension payments passes the lump sum, ignoring investment growth. On a $2,000 pension and a $300,000 lump sum, that is 150 payments, or age 77.5. Living past it means you collect more in raw dollars from the pension, though the implied-return test is the sounder comparison because it accounts for growth.
How does life expectancy change the answer? A longer life expectancy raises the pension present value and lowers the implied rate the lump sum must beat, so the pension looks better the longer you expect to live. A shorter one does the reverse. Since the pension pays for life while the lump sum is finite, your own health and family history matter more here than any market forecast.
Does a cost-of-living adjustment matter? Yes, a lot. A pension that rises with inflation each year is worth far more than a flat one, and raises the implied rate the lump sum must earn to keep up. Many private pensions have no adjustment, so their real value erodes, while most government pensions do adjust. Enter your annual increase to see the effect on the comparison.