Compare lump sum vs annuity offers.
Better option
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Lump sum value
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PV of annuity
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Your breakdown
Updates live as you type| Option | Raw total | Present value at 6% |
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The question behind the choice
Lottery winners, pension retirees, and inheritance beneficiaries all face the same fork: take a single lump sum now, or accept a stream of payments stretched over many years. The two cannot be compared directly, because a dollar today is worth more than a dollar arriving a decade from now. The tool that settles the argument is present value, which discounts every future payment back to what it is worth in today's money and adds them up. Once both options sit in present-value terms, you can compare them honestly. This calculator does exactly that, and the answer hinges almost entirely on one number you control: the rate at which you discount the future.
Discount rate decides everything
Your discount rate is the return you believe you could earn on the lump sum if you took it and invested it. Pick a high rate and future payments look feeble, which favors taking the cash now. Pick a low rate and the payment stream looks rich, which favors the annuity. A disciplined investor who expects 6% to 8% in a diversified portfolio will usually find the lump sum wins, because the implicit return baked into most annuities sits lower, often 3% to 5%. But the rate is also a statement about risk tolerance. A retiree who would keep the money in cash should use a low discount rate, and for that person the guaranteed annuity may genuinely be the better deal. The calculator lets you test rates and watch the verdict flip.
A $35,000 annuity against $500,000 cash
Take a concrete offer: a $500,000 lump sum, or $35,000 a year for 25 years. At first glance the annuity totals $875,000 in raw dollars and looks like the obvious winner. But discount those 25 payments at 6%, the rate you think you can earn, and the picture changes.
In present-value terms the annuity is worth only about $447,000, so the $500,000 lump sum wins by roughly $52,600 even though it pays out far fewer raw dollars. Time is the reason. Money arriving in year 25 is heavily discounted, so the back half of the annuity contributes much less to its present value than the headline total suggests. The chart compares the two on equal footing.
The break-even rate and what it tells you
Instead of arguing about which discount rate is right, find the rate where the two options tie. For a $35,000 annuity over 25 years against a $500,000 lump sum, the present values are equal at a discount rate of about 4.9%. That single number is the most useful output of the whole exercise. If you genuinely believe you can earn more than 4.9% on the lump sum over the long run, take the cash and invest it. If you doubt you can clear that bar, or you want a guaranteed income you cannot outlive, the annuity is the safer choice. Framing it as a hurdle rate turns a vague preference into a concrete investment decision.
How are these payouts taxed?
It depends on the source, and tax can change the answer. Lottery winnings are taxed as ordinary income whether you take the lump sum or the annuity, but a lump sum lands entirely in one tax year and can push you into the top federal bracket of 37%, while the annuity spreads the income and may keep more of it in lower brackets. A pension lump sum rolled into an IRA defers tax until withdrawal. An inherited retirement account follows its own rules and can trigger the ten-year distribution requirement. Run the present-value comparison first, then layer in the tax timing, because a lump sum that wins before tax can lose after a 37% one-year hit.
Does inflation change which option wins?
Yes, and it usually argues for the lump sum. Most fixed annuities pay the same nominal dollar amount every year, so a $35,000 payment buys steadily less as prices rise; after 25 years of even moderate inflation its purchasing power can be roughly half what it is today. A lump sum you invest in assets that grow with or ahead of inflation preserves real value better. If the annuity offered includes a cost-of-living adjustment, that gap narrows considerably, so check whether the payments are flat or indexed before you decide.
When is the annuity genuinely the smarter choice?
When the guarantee is worth more to you than the expected return. If you lack the discipline to leave a large lump sum invested, or you are worried about outliving your savings, or you simply do not want to manage a portfolio, the annuity's predictable lifetime income has real value that present value alone does not capture. Behavioral risk is real: many lump-sum recipients spend the windfall far faster than they planned. For someone who would struggle to manage $500,000 responsibly, a slightly lower present value in exchange for a check that arrives every year can be the wiser trade.