A $250K Pension Buyout Only Beats a $24K/Year Pension If You Can Earn Over 9%
We ran a standard pension-buyout decision through the calculator: a $250,000 lump-sum offer against a $24,000/year pension with a 2% cost-of-living adjustment, for someone retiring at 65 who expects to live to 85. The breakeven discount rate — the return you’d need to earn investing the lump sum for it to match the pension’s present value — comes out just above 9%. That’s meaningfully higher than the conservative 4-6% range typical of retirement-portfolio planning, which is why the pension wins in the base case.
The breakeven, worked out
| Value | |
|---|---|
| Lump-sum offer | $250,000 |
| Annual pension payment | $24,000 (2% COLA) |
| Years in retirement | 20 (age 65 to 85) |
| Present value at 4% discount rate | ~$334,000 |
| Present value at 9% discount rate | ~$250,000 (breakeven) |
| Present value at 10% discount rate | ~$234,000 |
At a 4% discount rate — a reasonable assumption for a retirement portfolio built for income stability, not growth — the pension’s present value clears the lump-sum offer by roughly $84,000. The lump sum only wins once you assume a return above about 9%, a rate closer to an aggressive all-equity long-run average than what most retirement-income portfolios are built to deliver.
Why the guarantee is worth more than the math alone shows
Present-value comparisons treat the pension’s future payments and the lump sum’s future investment growth as equally certain — but they aren’t. The pension pays out regardless of what markets do in any given year; the lump sum’s 9%+ breakeven return is an assumption, not a promise, and a bad sequence of returns early in retirement (the classic “sequence of returns risk”) can permanently impair a portfolio in a way a guaranteed pension simply can’t be impaired. For a household without other guaranteed income sources (a second pension, a large Social Security benefit), that guarantee carries real value the pure math doesn’t fully capture.
Where this framework doesn’t apply
- You have a spouse who’d need continued income. This comparison uses the single-life pension amount. Most plans also offer a joint-and-survivor option — a reduced payment that continues to a spouse after your death — which is often the more relevant real-world comparison for a married retiree.
- Your pension plan is underfunded. A well-funded plan backed by PBGC insurance is a very different risk than a plan in financial trouble. Check your plan’s funded status before treating “guaranteed” as risk-free.
- You have other substantial guaranteed income already. If Social Security and a spouse’s pension already cover your essential expenses, the case for taking the lump sum (and accepting more market risk on this smaller slice) gets stronger, since you’re not relying on this specific decision for baseline security.
- You genuinely need liquidity, not income. A large one-time expense (medical, family) that only a lump sum can cover changes the calculus beyond pure present-value comparison.
What to actually do
- Get the actual lump-sum quote and single-life pension amount from your plan administrator in writing.
- Ask for the joint-and-survivor quote too if you have a spouse who’d need continued income.
- Run the numbers at a conservative discount rate (4-5%) — not the most optimistic return you can imagine.
- Check your plan’s funded status and PBGC coverage before assuming the pension side is fully risk-free.
- If the numbers are close, lean toward keeping the pension unless you already have substantial guaranteed income elsewhere.
For the other major guaranteed-income timing decision in retirement, see when to claim Social Security between 62 and 70, and for how long a lump sum would actually last if you drew it down, see the 4% safe withdrawal rate and what the Trinity Study actually found.
Open the Pension vs Lump Sum Calculator → and run your own offer, payment amount, and discount rate assumption.