Lump Sum vs Annuity Calculator
Should you take the lump sum or the annuity? Compare using net present value, find the break-even discount rate, or see how investing the lump sum could grow over time. Works with any currency.
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How to Use This Calculator
Tab "Compare"
Enter the lump sum offered, the monthly annuity payment, the duration in years, and your discount rate (expected return on invested money). The calculator computes the net present value (NPV) of the annuity and compares it to the lump sum. The option with the higher value is highlighted as the winner. Use this for lottery winnings, pension buyouts, legal settlements, or inheritance decisions.
Tab "NPV Analysis"
Enter the same lump sum, payment, and duration. The calculator produces a sensitivity table showing the NPV of the annuity at multiple discount rates (2% through 12%). It also finds the break-even rate where the NPV of the annuity exactly equals the lump sum. Below the break-even, the annuity wins; above it, the lump sum wins.
Tab "What Would You Earn?"
Enter the lump sum, monthly payment, duration, and an expected annual return. The calculator shows how much the lump sum would grow to if you invested it at that return rate, compared to the total annuity payments over the same period. This helps you visualise the power of compound growth on a large lump sum.
The Formulas
NPV = PMT × [(1 − (1 + r)−n) / r]
where r = annual discount rate / 12 (monthly rate), n = years × 12 (total months)
Break-even discount rate:
Solve for the annual rate where NPV of annuity = Lump sum
Found iteratively using bisection method
Future value of invested lump sum:
FV = Lump × (1 + return / 12)years × 12
Compounded monthly
Total annuity payments:
Total = Monthly payment × years × 12 (undiscounted sum)
All calculations are universal and pre-tax. Tax treatment of lump sums versus annuities varies significantly by source (lottery, pension, settlement) and jurisdiction. Results are estimates only.
Worked Examples
Example 1 — Lottery: $500K lump sum vs $3,000/mo for 20 years
A lottery winner can take $500,000 today or receive $3,000 per month for 20 years. They assume a 5% discount rate (moderate investment returns).
At a 5% discount rate, the lump sum is worth more than the annuity in today's dollars. The total undiscounted annuity payments are $720,000, but when adjusted for the time value of money, they are worth less than $500,000 today.
Example 2 — Pension buyout: $350K lump sum vs $2,200/mo for 25 years
A retiree is offered a $350,000 pension buyout or $2,200 per month for 25 years. With a conservative 3% discount rate:
At a conservative 3% rate, the annuity is significantly more valuable. The retiree would need to earn more than the break-even rate investing the lump sum to make it worthwhile.
Example 3 — Investing the lump sum: $500K at 7% for 20 years
If you take the $500,000 lump sum and invest it at 7% annual return for 20 years:
At 7% returns, the invested lump sum grows to over $2 million — nearly three times the total annuity payments of $720,000. This illustrates the power of compound growth, though actual returns are never guaranteed.