Annuity vs. Lump Sum Calculator 💵

Lump Sum Tax: A large, single payment is often taxed as significant income in one year. This can push you into a much higher marginal tax bracket, resulting in a higher effective tax rate on the total amount.

Annuity Tax: Annuity payments are typically taxed as regular income in the year they are received. Because the payments are smaller and spread out, they may keep you in a lower tax bracket compared to the lump sum.

Future Value (FV): This is the value of an asset at a specific date in the future, based on an assumed rate of growth. This calculator uses FV to project what your *after-tax* amounts could grow into.

Inflation: Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The "inflation-adjusted" value shows what the money will actually be able to buy in the future.

Sarah wins a $1.5 million prize. She can take it as a lump sum, which would be taxed at a high rate of 40%, or as an annuity over 30 years, taxed at her normal 25% income tax rate. She assumes she can get a 7% return on her investments.

Key Inputs:

• Total Payout Amount: $1,500,000
• Annuity Duration: 30 Years
• Lump Sum Tax Rate: 40%
• Annuity Tax Rate: 25%
• Assumed Growth Rate: 7%

Calculation Results:

The high upfront tax reduces her investable lump sum to just $900,000. Even with a 7% return, its after-tax future value grows to $6.85 million. The after-tax annuity payments, though smaller individually, grow to an after-tax future value of $4.49 million.

Verdict: Lump Sum Wins, Despite Taxes.

Because Sarah's assumed growth rate is high, the power of compounding on the larger (though taxed) initial principal outweighs the lower tax rate on the annuity payments over time. The lump sum is the better choice for her aggressive investment strategy.

John is retiring with a $500,000 pension. Taking it as a lump sum would incur a 30% tax, while the annuity payments would be taxed at a lower 20% rate. He is a conservative investor and assumes a 5% growth rate.

Key Inputs:

• Total Payout Amount: $500,000
• Annuity Duration: 25 Years
• Lump Sum Tax Rate: 30%
• Annuity Tax Rate: 20%
• Assumed Growth Rate: 5%

Calculation Results:

The after-tax lump sum ($350,000) grows to a future value of $1.18 million. The after-tax annuity payments grow to $798,000. For a conservative investor, the stability of the annuity might be appealing, but the numbers show the lump sum provides a significantly higher financial return.

Verdict: Lump Sum is the Better Financial Move.

Even with a conservative growth rate, the lump sum provides a better return. The lower tax rate on the annuity isn't enough to make up for the lost compounding potential on the larger upfront investment.

This calculator uses a simplified flat tax model for educational purposes. In reality, tax laws are incredibly complex. A lump sum could be subject to different types of taxes, and your marginal tax rate can change from year to year, affecting your annuity. This tool is designed to show the *structural difference* in how taxes are applied to each option.

It is essential to consult a qualified financial advisor or tax professional. They can provide advice based on your specific financial situation, location, and the source of the funds.

Generally, an annuity is considered less risky. It provides a guaranteed income stream, protecting you from market volatility and the risk of mismanaging a large sum of money. A lump sum carries investment risk; while it has higher potential for growth, it could also lose value if the market performs poorly or if poor investment decisions are made. Your personal risk tolerance is a key factor in this decision.