Guide 1 · The math

Lump Sum or Monthly Pension? The Break-Even Math With Real Numbers

Start with a real-shaped offer

Say your letter offers a choice at age 65: $300,000 as a lump sum, or $1,650 a month for life (single life, no cost-of-living increase). This is a common shape — the monthly amount is 6.6% of the lump sum per year.

What the 6% rule says — and what it hides

The rule: multiply the monthly pension by 12, divide by the lump sum. Here, $19,800 ÷ $300,000 = 6.6% — above 6%, so "take the pension." The rule isn't useless; a high payout rate is genuinely a point in the pension's favor. But notice what it never asks:

• How long will the checks actually arrive? The rule implicitly assumes they arrive forever, or at least for the same span for everyone. A pension is worth far more to someone who lives to 95 than to someone who lives to 75 — the rule treats them identically.
• What could the lump sum earn? If your investments reliably returned 8%, almost any pension loses. At 4%, most pensions win. The rule picks no rate at all.
• Is there a COLA? A pension rising 2% a year is a different animal from one frozen forever. The rule can't see the difference.
• What happens to your spouse? A single-life pension dies with you. The rule is silent on the survivor election, which is half the decision for married couples.

Number one: the break-even age

The most intuitive calculation — and the one a GAO study found participants already trying to do by hand — is simple payback. Divide the lump sum by the annual pension: $300,000 ÷ $19,800 = 15.2 years. Starting at 65, the monthly checks add up to the lump sum at about age 80.2.

Live past 80.2 and the pension has paid out more cash than the lump sum. Die before it and the lump sum (what's left of it) comes out ahead. That framing is honest as far as it goes — but it ignores both the time value of money (the lump sum could be invested) and the probability of reaching each age.

Number two: mortality weighting

Actuaries don't multiply your check by a guessed lifespan. They weight it, year by year, by the probability you're alive to receive it. At 65, the SSA Period Life Table puts average remaining life expectancy at about 18.9 years — but the payments in year 25 should only count at the probability (roughly 3 in 10) that you're alive then.

Weight this offer's checks that way and discount them at a 5% assumed investment return, and the pension's expected present value lands at roughly $227,000 — well below the $300,000 lump sum. In other words, at a 5% earning assumption, this particular offer favors the lump sum. At a 3% assumption the same pension is worth about $272,000 — still behind. Only when the assumed return drops to about 2% does the pension pull even, at roughly $300,000. The assumed return is doing enormous work in this decision, which is exactly why a single rule of thumb can't.

Number three: the implied guaranteed return

The cleanest way to see any offer is to solve for the return at which the two choices are worth exactly the same. For this offer, that rate is roughly 2%. Read it as a sentence: "This pension is offering me a guaranteed return of about 2% a year, for life, with the longevity risk on them."

Now the decision has a handle. If your lump sum can reliably beat that rate after tax and risk — for decades, in sequence, including the bad years at the start — the lump sum wins on the math. If it can't, the pension is the better instrument. Everything else is refinement.

The two adjustments people forget

COLA. If this pension rose 2% a year instead of sitting flat, its value at the same 5% discount climbs from about $227,000 to about $271,000 — and its implied guaranteed return rises from roughly 2% to roughly 4%. Most private-sector pensions have no COLA — but if yours does, ignoring it is the most expensive mistake in the whole calculation.

The survivor election. All the math above is single-life. Electing a 100% joint-and-survivor benefit might cut the monthly check to, say, $1,450 — but it pays across two lifetimes, which is a different (and often better) instrument than the single-life stream it replaces. Any honest comparison values the option you would actually elect, decomposed into the three states: both alive, only you, only your spouse.

Run it on your letter

Your numbers will differ from this example — sometimes in the direction that makes the pension a bargain, sometimes the opposite. The free PensionVerdict checker runs exactly this math — mortality-weighted value, implied guaranteed return, both break-even ages, plus the PBGC guarantee screen the free calculators skip — on the figures from your own letter. Two minutes, in your browser, nothing uploaded.

This guide is educational and is not financial advice. Figures in the worked example are estimates under the stated assumptions (SSA Period Life Table 2021 life expectancies; returns as noted) and will vary with the assumptions chosen.