A lump sum payment provides the total value in today’s dollars of all your expected future annuity payments. The lump sum calculation factors in your age plus IRS-published life expectancy and interest rates.

Interest rates and lump sums have an inverse relationship. When interest rates increase, lump sum values decrease, and vice versa.

For example, let’s say that you are expected to receive a $100 annuity payment one year from today and the current one-year interest rate is 10%. If you had $91 today, it would grow with interest over the course of the year and reach $100 one year from today. Therefore, the lump sum value today of the future annuity payment is $91 when the interest rate is 10%.

If the current one-year interest rate is 5%, you would need $95 today to reach $100 one year from now. Therefore, the lump sum value today of the future annuity payment is $95 when the interest rate is 5%.

This illustrates the inverse relationship of interest rates and lump sums. At a higher interest rate, a smaller amount of money in today’s dollars is needed to meet the value of expected future payments.