How to Calculate Pension Lump Sum
What is Pension Lump Sum?
Evaluates lump sum pension settlements versus lifetime monthly payments accounting for life expectancy and returns.
Formula
PV of Annuity = PMT * [(1 - (1+r)^-n) / r]
Step-by-Step Guide
- 1Enter monthly pension payment amount
- 2Input discount rate (expected return) and life expectancy
- 3Compare lump sum to annuity present value
Worked Examples
Input
$2,000/month pension, age 65, 3% discount rate, 25-year life expectancy
Result
Lump sum equivalent ≈ $530,000
Pension decision analysis
Common Mistakes to Avoid
- ✕Not considering inflation over time
- ✕Underestimating life expectancy
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