A pension, lottery win, or legal settlement often gives you a choice: take it all now, or take smaller payments over time. Compare both in today's dollars to see which is actually worth more.
A dollar today is worth more than a dollar in the future, because a dollar today can be invested and start growing immediately. This tool converts a stream of future annuity payments into its present value, the amount of money today that would be exactly equivalent, using your assumed discount rate. Comparing that present value directly against the lump sum offer tells you which option is actually worth more in today's terms. Every slider on this page has a matching number field: drag to explore, or type exact figures if you already know your numbers.
The discount rate represents what you could realistically earn if you invested the money yourself. A higher discount rate makes future payments worth less today, since you could theoretically grow a smaller lump sum into the same eventual total. This means the same pension or lottery offer can favor the lump sum for someone confident in their ability to invest well, and favor the annuity for someone who would otherwise not invest the money at all.
This exact choice appears in several common financial situations: choosing between a pension's lump sum buyout and its monthly payments, choosing between a lottery jackpot's cash option and its annuity option, and evaluating a structured legal settlement offer. In each case, the underlying math is identical, even though the dollar amounts and time horizons vary enormously.
This tool compares pure financial value and does not account for taxes, which can differ significantly between a lump sum and a payment stream depending on the source, or for the value of a guaranteed income stream that cannot be outlived, which is a real benefit of many annuity and pension options regardless of the raw present value math. It also assumes a single unchanging discount rate for the entire period, when in reality your own investment returns will vary year to year.
Present value, future value, and annuity calculations are foundational material on CFA Level 1 and throughout the retirement and pension planning content on the CFP exam. Annuity products themselves, including their payout structures, are also tested on the Life and Health insurance license exam and Series 65. Our TVM Solver covers the same underlying present value and future value math used here.
Not necessarily. It depends heavily on your discount rate assumption and your own investing discipline. If you would not actually invest a lump sum and instead spend it, a guaranteed annuity stream may leave you better off in practice even if its present value is technically lower.
The advertised jackpot is typically the total of all annuity payments added together with no discounting, which is always a larger headline number than the lump sum cash option. The cash option is generally close to the actual present value of that annuity stream, before taxes.
A common approach is to use the return you realistically expect from investing the lump sum yourself, often based on your target asset allocation. Some people instead use a more conservative rate to reflect the safety of a guaranteed pension payment, which makes the annuity option look relatively more attractive.
Yes. Each slider has a paired number input. Type directly into any gold field to enter a precise figure, and the slider along with all results update immediately.
Lump sum and annuity comparisons show up directly on CFA, CFP, and insurance licensing exams. Practice for free.
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