Learn how to make one of the most important retirement decisions
When you retire, you often face a critical decision: take your pension as a lifetime annuity (regular payments) or as a lump sum (one-time payment). This choice can significantly impact your financial security.
Your current age and expected lifespan. Use family history and health factors to estimate life expectancy realistically.
The guaranteed monthly payment you'd receive if you choose the annuity option.
The one-time payment you'd receive if you choose the lump sum option.
The expected average annual return if you invest the lump sum. Be realistic - 5-7% is typical for balanced portfolios.
The break-even age is when the total value of the invested lump sum equals the total annuity payments received. Before this age, the annuity is better; after this age, the lump sum becomes better.
Example: If break-even occurs at age 82, the annuity is better if you live past 82. The lump sum is better if you don't reach age 82.
Inflation erodes purchasing power over time. A fixed annuity payment that seems adequate today may not cover expenses in 20 years.
With a lump sum, your investments can potentially grow faster than inflation, maintaining your purchasing power throughout retirement.
At 3% inflation, $2,000 monthly loses half its purchasing power in 24 years. What buys $2,000 of goods today will cost about $4,000 in 24 years.
If you have a spouse or dependents, survivor benefits ensure they continue to receive income after you pass away. This is a crucial factor in the annuity vs lump sum decision.
Would your spouse be comfortable managing investments if you take the lump sum? If not, the annuity's simplicity and guarantees may be worth the potentially lower total value.
This calculator provides educational information to help you understand the financial aspects of your decision. However, the annuity vs lump sum decision is complex and should be made in consultation with a qualified financial advisor who understands your complete financial situation, tax considerations, and personal goals.
Consider consulting with a fee-only financial planner before making your final decision.