Take the pension or the lump sum?

The present value of a lifetime pension compared to the lump sum offered — with the break-even return rate that makes either choice rational.

Monthly pension payment ($)

Lump sum offered ($)

Discount / return rate (%)

Expected payout years (after starting)

—

Annuity present value ($)

—

Difference (PV − lump)

—

Break-even return rate

—

Verdict

How do I value a pension?

PV = monthly payment × annuity factor: 12·PMT × [1 − (1+r/12)^(−12n)] / r. At $2,500/mo for 25 years and a 5% discount rate the pension is worth about $427k — so a $400k lump sum is 'cheap'; at higher discount rates the lump wins.

What is the break-even rate?

The return the lump sum must earn to equal the pension: if you think you can beat it, take the money; if not, keep the pension. For $2,500/mo vs $400k over 25y it's roughly 5.6%.

Why use my life expectancy?

The pension is a life annuity — its value depends entirely on how long you collect. Shorter expected horizon favors the lump; add a few years of conservatism since annuities also hedge longevity.

Spousal / COLA / survivor terms?

This models the flat single-life quote. Joint-and-survivor or COLA-adjusted pensions are worth more — add a discount-rate or payout-years margin or treat the result as conservative.