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NPV = LS + PV(Annuity)
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The Pension Vs Lump Sum Calculator helps compare the net present value (NPV) of taking a lump sum payment versus receiving pension annuity payments over time. This calculation is essential for retirement planning and financial decision-making.
The calculator uses the NPV formula:
Where:
The present value of annuity is calculated using: \[ PV = P \times \frac{1 - (1 + r)^{-n}}{r} \] Where \( P \) is annual payment, \( r \) is discount rate, and \( n \) is number of years.
Details: NPV calculation allows for fair comparison between immediate lump sum payments and future annuity streams by accounting for the time value of money. This helps individuals make informed decisions about their retirement options.
Tips: Enter the lump sum amount, annual annuity payment, number of years for annuity payments, and an appropriate discount rate. The discount rate should reflect your expected investment return or inflation rate.
Q1: What discount rate should I use?
A: Typically use a rate between 3-7%. Higher rates favor lump sums, lower rates favor annuities. Consider your investment return expectations and inflation.
Q2: When is a lump sum better than an annuity?
A: Lump sum may be better if you can invest at higher returns, need immediate funds, or have shorter life expectancy. Annuity provides guaranteed income for life.
Q3: Are there tax implications?
A: Yes, both options have different tax treatments. Lump sums may be taxed immediately, while annuities are taxed as received. Consult a tax advisor.
Q4: What about inflation protection?
A: Fixed annuities lose purchasing power over time. Consider if the annuity has cost-of-living adjustments (COLAs).
Q5: Should I consider my health and longevity?
A: Absolutely. If you have longer life expectancy, annuities may provide more total income. Lump sums don't depend on lifespan.