Offered a one-time lump sum or a series of payments, from a pension, prize, settlement or buyout? Enter both options and the return you could earn on the money. The calculator finds the present value of the payments, tells you which option is worth more today and gives the break-even rate where they are equal.
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Some payouts grow each year, e.g. a cost-of-living adjustment.
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What you could earn by investing the lump sum yourself.
Enter your values to see the result.
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How to use the Lump Sum vs Payments Calculator
Enter the lump sum you are offered.
Enter the payment amount, how many payments and how often they are paid.
Choose when the first payment arrives and any yearly increase.
Enter the discount rate: the return you could realistically earn by investing the lump sum.
Read which option is worth more, the present value of the payments and the break-even rate.
The present value formula
For equal payments the present value is the standard annuity formula:
PV = P × (1 − (1 + r)−n) ÷ r (payments at the end of each period)
PV = P × (1 − (1 + r)−n) ÷ r × (1 + r) (first payment today)
P = payment amount, n = number of payments
r = rate per period = (1 + yearly rate)1/periods per year − 1
Example: $50,000 a year for 20 years, first payment today, at 5%: PV = 50,000 × (1 − 1.05−20) ÷ 0.05 × 1.05 = $654,266. That beats a $600,000 lump sum by $54,266. The break-even rate is about 6.18%: if you could reliably earn more than that, the lump sum would win.
Convert the payments to today's money with present value: PV = Σ payment ÷ (1 + r)^t, where r is the return you could earn and t is when each payment arrives. If the PV of the payments is higher than the lump sum, the payments are worth more; if lower, take the lump sum.
What discount rate should I use?
Use the return you could realistically earn on the lump sum with similar risk. For a guaranteed pension or government-backed payout, a high-quality bond yield is a reasonable choice. Using a stock market return makes the lump sum look better but ignores its higher risk.
What is the break-even rate?
It is the discount rate at which the lump sum and the payments are worth exactly the same. If you are confident you can earn more than this rate, the lump sum comes out ahead; if not, the payments are the better deal.
Why does the total of the payments overstate their value?
Money received later is worth less than money today, because today's money can be invested and because of inflation. $50,000 a year for 20 years adds up to $1,000,000, but at a 5% rate it is worth only about $654,000 today if the first payment is immediate.
What else should I consider besides the math?
Taxes (a lump sum may push you into a higher bracket), your health and life expectancy for lifetime pensions, the payer's financial strength, inflation protection, whether you would spend a lump sum too fast, and survivor benefits. A fee-only financial planner can help with large decisions.
Does this handle lifetime annuities?
It values a fixed number of payments. For a lifetime pension, enter the number of payments you expect based on a realistic life expectancy, and try a few longer and shorter periods to see how sensitive the result is.
Are all the tools on FreeToolCabin tested for quality and accuracy?
Yes! Every tool on our site undergoes automated Q/A testing in real browser environments to ensure high precision, correct output, and zero errors. If you happen to spot a bug or have a suggestion, please contact us at [email protected] and our team will review it right away.