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DOGE Your employer offers you $400,000 today or $2,800 a month for life. Which is worth more? The answer isn’t a feeling — it’s math. And in 2026, the math looks very different than it did four years ago. Here’s how to run the break-even calculation before you make an irrevocable choice.
A pension lump sum is the present value of your future monthly payments, discounted using IRS-mandated interest rates (§417(e) segment rates). When rates rise, lump sums shrink. When rates fall, they grow. The same pension can produce lump sums varying 15–25% depending on the rate environment — a 2022 offer is not comparable to a 2026 offer.
The 2026 Rate Environment
For 2026 plan years, the IRS §417(e) segment rates (November 2025) are 4.07% / 5.15% / 6.01%. These are the discount rates your plan must use to compute your lump sum.
Context matters: the high-rate years of 2022–2024 cut some lump sums by 15–25% versus what the same workers would have received a few years earlier. If your lump sum offer looks smaller than a colleague’s from 2021, interest rates — not your employer — are the reason.
The Break-Even Math
The core comparison: how long must you live for the monthly payments to exceed the lump sum?
| Factor | What to check |
|---|---|
| Break-even age | Typically 78–83: live past it and the annuity wins; die before it and the lump sum wins |
| Your health & longevity | Family history, current health — the single biggest input no calculator knows |
| Survivor benefit | A 100% joint-and-survivor annuity pays less monthly but protects your spouse; price that protection |
| PBGC backstop | If your plan fails, the PBGC guarantees up to ~$7,436/month ($89,232/year) at 65 for single-life annuities in 2026 |
| Inflation | Most pensions have no cost-of-living adjustment — a fixed $2,800 buys less every year |
When the Lump Sum Usually Wins
- Health concerns or shorter life expectancy — if the break-even age looks unreachable, take the cash.
- You can invest it well — rolling the lump sum into an IRA and earning market returns can beat the annuity’s implied return. See our 401(k) rollover guide for the mechanics.
- Estate goals — leftover annuity payments generally die with you (and your spouse); a lump sum in an IRA passes to heirs.
- Employer risk — if the company’s future worries you, cash today beats a promise tomorrow (though the PBGC backstop covers most plans).
When the Annuity Usually Wins
- Longevity — good health and long-lived parents push the math toward lifetime payments.
- You want simplicity — a monthly check that arrives no matter what the market does has real psychological value.
- Your spouse needs protection — a joint-and-survivor annuity is longevity insurance for two lives.
- You’re a spender, not an investor — honest self-assessment matters more than spreadsheets.
The Hybrid Most People Miss
Some plans let you split: take part as a lump sum and part as an annuity. You get liquidity plus a guaranteed income floor. If your plan allows it, model the split — it often beats either extreme on a risk-adjusted basis.
The Bottom Line
Don’t decide on gut feel, and don’t anchor on a colleague’s offer from a different rate regime. Get your plan’s actual numbers, compute your break-even age (expect 78–83), weigh your health honestly, and remember: the lump sum is irrevocable, but so is the annuity election. Run the math once, carefully — you only get one shot.
Related reading: Annuity Pros and Cons 2026 · 401(k) Rollover to IRA Guide · Social Security: When to Claim
Sources
- IRS §417(e) segment rates, via pensionmath.com
- PBGC maximum guarantee figures, via smartbizcalc.com
- Financial Advisors for Pension Rollover — lump sum vs annuity guide
Not financial advice. Do your own research. Pension decisions are irrevocable — consider a fiduciary advisor before electing.
Frequently Asked Questions
Is it better to take a pension lump sum or monthly annuity payments?
It comes down to your break-even age — typically 78–83. If you expect to live past it, the annuity usually wins; if not, the lump sum does. Your health, your spouse’s needs, and whether you’d invest the lump sum well matter more than the raw numbers.
How is my pension lump sum calculated?
Plans must use IRS §417(e) segment rates — 4.07% / 5.15% / 6.01% for 2026 plan years. Higher rates shrink lump sums, which is why 2022–2024 offers ran 15–25% smaller than a few years earlier.
What happens to my pension if my employer goes bankrupt?
Most private pensions are insured by the PBGC. For 2026, the maximum guarantee is about $7,436/month ($89,232/year) at age 65 for single-life annuities.
Continue the playbook: The 2026 Retirement Tax Playbook — all five retirement-tax guides in one hub.
