Whether you are receiving retirement funds, lottery winnings, or earnings from a legal settlement, often you must decide if you want your money in a lump sum payment or in annuity payments. The difference is that with a lump sum payment you receive all of the monies owed to you all at once, and with annuity payments you get the money spread out over monthly, quarterly, or yearly payments. Deciding which to take is really a matter of considering what works best for your current lifestyle and future financial plans.
Pros and Cons of Annuity Payments
Having the security of regular and predictable amounts of money received automatically each month is appealing to some people. If you are relying on the money owed to you to be able to help meet monthly living expenses, then have annuity payments for a specified amount of time can help you budget for those expenses. The taxes on annuity payments are much lower then lump sum payments because they are smaller amounts of money.
The drawback to annuities are that if you change your mind and decide later that you want all of your money, there are large penalties for withdrawing your cash. Also, unless you add a survivor benefit to your annuity, then once you pass, your heirs will not receive any money.
Pros and Cons of Lump Sum Payments
Having a large amount of cash at one time can be very appealing. You can choose to invest that money in a way that can earn you even more cash or decide to spend it right away on travel, home repairs, or whatever else you like. You also have the option with a lump sum payout to put it aside and designate that money for your heirs.
On the down side, there are heavy taxes on large sums of money. Sometimes the taxes aren’t worth taking the single payment, and getting the smaller annuity payments can earn you more money in the long run.
Deciding Which Payment is Best
There are many factors to consider when deciding which type of payout is best.
Take into consideration your current income needs. For someone who has a sizable retirement portfolio, having money in an annuity may not be all that beneficial. Having a large sum of money at once might more appealing. However, for one who does not have enough retirement savings, annuity payments might be a good option.
Think about your health. If you are very healthy then getting annuity payments might make the most sense as you are guaranteed these payments until your death. If you are in poor health, it might be best to take a lump sum payment and spend it on current financial needs or designate it as an inheritance.
Analyze the risk in relation to your financial health. If you are very likely to use a lump sum payment unwisely, than annuity payments might be beneficial.
Deciding whether an annuity or lump sum payment is best, is really a matter of analyzing your own financial situation and considering which pay out option best fits your needs.