What is a Lump Sum Payment?
When the phrase "lump sum" is mentioned in an article, it could actually mean a variety of things, such as a pension, lottery winnings, personal injury, or workers compensation. However, they all have one important element in common. They are referring to taking a lump of cash in hand, over opting for small payments over the course of years.
If you are searching for more information about a lump sum, one of the most common reasons is that you are considering the option of receiving a check for life, or a one-time lump sum payment. When most people are initially explained this option, they tend to gravitate towards the lifetime payments, as it sounds grandiose, safe, and responsible.
Once you start looking at your options closer, you will notice that your annuity may not be indexed for inflation. Think of it this way. An annuity with three percent inflation that is worth $2,000 today, will only be worth half that in 20 years. If you happen to need it for 30 years, we don't even want to begin thinking of how much purchasing power it will have lost.
In the case of an economy that is experiencing prevailing interest rates, like it is now, your outlook can become even worse. This is because it would mean locking in a low rate of return for the rest of your life. At this point you might be asking yourself, but doesn't taking a lump sum require a person to be savvy with money? No, that is not true at all.
Many expert financial advisers can help you devise a plan to help you invest your lump sum for the short term, while waiting for interest rates to become more favorable. In other cases, you may need to invest more aggressively if you plan on living a long and fruitful life, as it will help your money last longer (remember what we said about collecting a small pension for 30 years).
Either way, you can always let your lump sum sit in an IRA, where it will be predominantly tax free. The point is, don't count out collecting a lump sum before you take into consideration how much money you are going to need to continue enjoying the quality of life you do today.
You might be interested to try our structured settlement present value calculator to find out what your annuity us worth if thinking to sell your settlement, or learn more about the process and just how long it takes to get a lump sum for your payments.