🪙 Annuity vs Lump Sum
Which payout is worth more at your discount rate.
When you have the option to take a payout as a lump sum today versus a series of periodic annuity payments, this calculator tells you which is worth more given a specific discount rate — your assumption about what you could otherwise earn on the money.
It calculates the present value of the annuity payment stream:
PV = PMT × [(1 − (1 + r)−n) / r]
where PMT is the periodic payment, r is the discount rate, and n is the number of payments — and compares it directly to the lump sum offer. If the lump sum exceeds the annuity's present value, taking the lump sum and investing it yourself (on the real-return terms explored in Real Return & Inflation) theoretically comes out ahead, before accounting for taxes or spending discipline.
An annuity paying 5,00,000/year for 15 years, discounted at 8%, has a present value of roughly 42,00,000–43,00,000. If the lump sum alternative offered is 50,00,000, the lump sum is mathematically the better deal at that discount rate.
Choosing a discount rate that's unrealistically high (assuming you'll definitely beat the annuity's implied return) biases the comparison toward the lump sum — the honest comparison uses a discount rate you could actually, reliably achieve, factoring in your own investing discipline and risk tolerance.
What it does
Compares a lump sum offer against a monthly annuity by discounting the annuity payments to today's value, and reports the annuity's implied IRR.
When to use it
Use it when a pension, insurance payout, or settlement offers a choice between a lump sum and monthly payments.
Assumptions
- Payments continue for a fixed number of years (your expected payment period).
- The annuity can escalate annually at the escalation rate.
- The discount rate reflects what the lump sum could earn if invested.
Take whichever has the higher value at your discount rate, then weigh non-math factors: an annuity removes longevity risk but reduces flexibility and dies with your estate. The IRR tells you what return the lump-sum option must beat to be the better deal.