Pension Lump Sum vs Monthly Pension Calculator: Is Your Buyout Offer Worth It?

Quick answer: lump sum or monthly pension?

Turn the offer into an interest rate. A 65-year-old man offered $450,000 or $3,000 a month for life is being paid the equivalent of 4.8% a year by the pension, weighting each payment by the odds he's alive to get it, and 7.3% if he lives to 95. If you could reliably earn more than that, with the same safety, the lump sum is worth more; if not, the pension is. The pension also insures you against living a long time, which a lump sum can't, while the lump sum can be left to heirs.

The interest rate your pension pays you

The calculator finds the return at which the pension's payments, each weighted by the chance you're alive to get it, are worth exactly the lump sum (IRS pension-plan mortality). That's an average: invested yourself at that rate, a lump sum would still run out if you lived much longer than average, which is the risk the pension takes off your hands. For comparison, the IRS rates many calendar-year plans use for 2027 lump sums are 4.65%, 5.75%, 6.73% (Notice 2026-57).

Is your lump sum offer fair? How plans calculate it

Private plans that offer a lump sum generally must pay at least the present value of your pension at the IRS "minimum present value" rates (IRC § 417(e)(3)): one corporate-bond rate for payments in the next 5 years, one for years 5–20 and one after 20, with the IRS unisex mortality table (Notice 2026-27). Many calendar-year plans take the rates from one month in the late summer or fall of the year before and keep them for the whole year; others update them monthly or quarterly. Benefit limits and funding restrictions can also cap or delay a lump sum. For the 65-year-old above, our estimate of the minimum is $420,628 with the rates for 2027 and $438,438 with the rates for 2026. An offer well above the minimum usually reflects lower plan rates or an early-retirement subsidy; one well below it is worth questioning. Government plans don't have to follow these rules.

Rule of thumb: each 1-point change in the rates moves a 65-year-old's lump sum by about 7.6%, and a younger person's by more.

2026 vs 2027: why next year's offer may be smaller

Rates rose between August 2025 and August 2026, so for a plan that uses August rates the same pension buys a smaller lump sum in 2027: for the example above, $438,438 in 2026 vs $420,628 in 2027. If your plan works this way and you're choosing near year-end, taking the lump sum in 2026 can mean more money; check which month and period your plan uses.

Pension lump sum break-even age

The break-even age is when the monthly payments you've received, valued at your expected return, add up to the lump sum. For the 65-year-old at 5%, it's 85, and a 65-year-old man has about a 55.8% chance of living past it (IRS pension-plan table). A 55-year-old offered $520,000 for the same $3,000 a month breaks even at 80. (Deciding when to claim Social Security is a different question: see our Social Security claiming age calculator.)

Survivor options and your spouse

If you're married, the plan's default is a joint-and-survivor pension that keeps paying your spouse 50% to 100% after you die, and you need your spouse's written consent, witnessed by a notary or plan representative, to take a single-life pension or the lump sum (§ 417). A survivor option pays less each month; the calculator counts the survivor's payments, weighted by the odds that your spouse outlives you. A lump sum, rolled into an IRA, passes to your heirs instead.

Inflation and cost-of-living raises

Most private pensions are fixed. At 2.5% inflation, $3,000 a month buys about what $1,831 does today after 20 years. A 2% cost-of-living raise makes the same pension worth $530,952 at 5% (instead of $442,586), and its implied rate 6.8%. Cost-of-living raises are more common in public pensions, and public workers are far more likely to have a pension at all: 86% of state and local government workers have access to one vs 14% in private industry (BLS).

Taxes: rollover, cash-out, 20% withholding and the 10% penalty

• Direct rollover to an IRA or another plan: no tax now; you pay ordinary income tax when you withdraw, and required minimum distributions start at 73 (75 if born in 1960 or later) (IRS). Our RMD calculator shows them, and a rollover can be the first step of a Roth conversion plan.
• Cash-out: the whole amount is taxable this year. The plan must withhold 20%; you can still roll over within 60 days, but you must make up the withheld 20% from other money. For the example single filer with $30,000 of other income, the federal tax is about $128,682.
• Before 59½: a 10% additional tax applies, unless you leave the employer in or after the year you turn 55 (50, or after 25 years of service, for public safety workers in government plans; private-sector firefighters too); that exception covers the plan, not an IRA (IRS; § 72(t)).
• Monthly pension: taxed as ordinary income as you receive it, unless you made after-tax contributions (IRS).

Is your pension safe? PBGC limits for 2026

If a private single-employer plan fails, the PBGC pays your pension up to a yearly maximum that depends on your age when payments start (PBGC). Multiemployer (union) plans have a much lower guarantee: at most $36 a month per year of service (PBGC). Government pensions aren't covered (their security depends on state law and how well the plan is funded), and neither are most church plans. An annuity bought from an insurer is protected by your state's guaranty association, typically up to $250,000 (NOLHGA).

When the lump sum usually wins, and when the pension does

• Lump sum: poor health or a short family lifespan; a plan or employer in financial trouble with a pension above the PBGC limit; other guaranteed income (Social Security, a spouse's pension) covers your basic costs; you want to leave money to heirs; the implied rate is low.
• Pension: good health and long-lived family; you'd be tempted to spend the lump sum; the implied rate is above what safe investments pay; a subsidized survivor option or cost-of-living raise; you value never running out.
• Both: some plans allow part as a lump sum and part as a pension.

Common questions

What is a good pension lump sum offer?

One at or above the IRS minimum for your plan's rates, and one whose implied interest rate is below what you could safely earn. A common shortcut, lump sum ÷ yearly pension, is rough: $450,000 for $36,000 a year is 12.5 times the pension, which means little without your age and rates.

Why did my lump sum offer go down?

Usually because interest rates rose: higher rates mean a smaller present value. Getting older also shortens the payment period.

How do I avoid the 20% withholding?

Ask the plan for a direct rollover to an IRA or your new employer's plan.

Can I take a lump sum and still get Social Security?

Yes. A private pension doesn't reduce Social Security, and since the Social Security Fairness Act (2025, for benefits from January 2024) government pensions don't either. But cashing out a lump sum can make more of your Social Security taxable and raise Medicare premiums two years later.

Sources

1. 26 U.S. Code § 417, Definitions and special rules for purposes of minimum survivor annuity requirements — Legal Information Institute, Cornell Law School. Accessed October 18, 2026.
2. 26 U.S. Code § 72(t), 10% additional tax on early distributions — Legal Information Institute, Cornell Law School. Accessed October 18, 2026.
3. Notice 2026-57: pension plan funding segment rates (August 2026) — IRS. Accessed October 18, 2026.
4. Notice 2025-47: pension plan funding segment rates (August 2025) — IRS. Accessed October 18, 2026.
5. Notice 2026-27: mortality tables for 2027 — IRS. Accessed October 18, 2026.
6. Period Life Table, 2023, as used in the 2026 Trustees Report — Social Security Administration. Accessed October 18, 2026.
7. Maximum monthly guarantee tables (2026) — Pension Benefit Guaranty Corporation. Accessed October 18, 2026.
8. Multiemployer benefit guarantees — Pension Benefit Guaranty Corporation. Accessed October 18, 2026.
9. Topic no. 413, Rollovers from retirement plans — IRS. Accessed October 18, 2026.
10. Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs — IRS. Accessed October 18, 2026.
11. Topic no. 410, Pensions and annuities — IRS. Accessed October 18, 2026.
12. Retirement plan and IRA required minimum distributions FAQs — IRS. Accessed October 18, 2026.
13. Employee benefits in the United States, March 2026 — Bureau of Labor Statistics. Accessed October 18, 2026.
14. How you're protected: annuity coverage limits by state — NOLHGA. Accessed October 18, 2026.

Last checked October 18, 2026.