If you win the lottery or have an annuity or retirement account that has reached maturity, you might be faced with deciding between reliable, monthly payments or a single, lump sum check. Although it might seem safe to choose monthly payments, the fact of the matter is they aren't right for everyone. Here are two reasons the lump sum option might work better for you:
1: You Are Worried About Inflation
A dollar earned twenty years ago is a little different than a dollar earned today. Buying power can change significantly over time, which is why accounting for inflation is important when you decide between payout options. For example, $1,000 in 1980 has about $2,848.57 worth of buying power in 2015. Unfortunately, if you opt for monthly payments, you will receive a pre-portioned amount of your money—regardless of your future expenses.
Although lump sum payments are typically taxed, the money you stand to collect today might give you valuable buying power, which can be used for investments. For example, you might be able to invest in stocks, bonds, or real estate that will appreciate over time. In addition to helping you develop a reliable nest egg, buying power can also help you to diversify your portfolio, so you are less susceptible to environmental factors such as recessions, job losses, or major life events. For example, if you have the money to invest in a wide variety of markets, your family might be able to stay afloat during difficult times, instead of relying on measly monthly payments from a retirement or annuity account.
2: You Are In Poor Health
The idea of monthly checks might seem comforting, but what if you won't be around to collect them? Depending on your account terms, those payments might stop the second you die. For example, if you have a "life only" annuity, your beneficiaries won't have any claim on your earnings after you pass away. Because of the intricacies of financial regulations, lump sum payments might be a better option if you are in poor health, or if you are elderly. In addition to giving you immediate access to your money, lump sum payments might also help you to:
- Give Money to Others: You might plan on tucking away a portion of your earnings each month to help your kids through college, but what if you aren't around long enough to make a difference? The great thing about lump sum payments is because you have immediate financial control, you can give money to other people while you still can.
- Enjoy Your Life: Lump sum payments might also help you to enjoy the remainder of your life. By getting an early payout, you might be able to explore Europe, take a cruise, or build the home of your dreams.
- Take Care of Significant Medical Expenses: If you are in poor health, you might also be dealing with steep medical bills stemming from procedures, medications, and hospital stays. However, by taking the lump sum, you can pay off your debts early, so your surviving spouse doesn't have to worry about calls from collection agencies.
As you think about your repayment terms, try to be realistic about the amount of money you stand to collect. Calculate the number of years you think you would be able to collect monthly checks, and then compare it to the taxed amount of your lump sum payment. You never know—by taking the lump sum, you might be able to walk away with more money.
You can also visit sites like http://www.mylumpsum.com for additional information and planning regarding if a lump sum payment is your best option.Share