Comparing Lump Sum versus Payments

Although lump sum versus monthly payments may not always be your most optimal option, remember that times are changing and your financial needs may change over time. One of today’s major advantages is the fact that you can now build an emergency fund that can help take care of major unexpected expenses. One of the major advantages of lump sum versus monthly payments is it often provides you with immediate cash. If an unforeseen emergency comes up, you’ll have the funds available to deal with it.

Lump Sum versus Payments

While lump sum versus monthly payments do provide some flexibility, think about this. If you had a major accident or the unexpected happened but you had adequate insurance coverage, would your annuity survive? Most people probably would not. This same logic applies to your current savings account. If you don’t have enough money in the fund to handle unexpected expenses, you are going to be financially devastated.

As you can see, if your major unexpected expense is not life threatening, then a lump sum payment will likely be more helpful to you than a monthly pension payment would. Of course, if you are absolutely certain that your major incident will end up with death, then your annuity payments can stand to lose a lot of value. However, most people who are starting out or rebuilding a retirement plan at their current employer are not at risk for dying before they get the pension that they’ve worked so hard to attain. So as you can clearly see, lump sum versus monthly payments is about more about an investment strategy than it is a direct comparison between the two kinds of investments.

The final topic I would like to touch on in this article is the subject of paying taxes. Many people mistakenly believe that a lump sum payment will not affect them in any way as long as they are paying their taxes on time. While it is true that you may not be able to deduct any interest payments from your regular monthly income tax obligations, you could conceivably take a calculated lump sum payment in exchange for a much higher tax liability. The same could apply to your state income tax liability. So in summary, while a lump sum payment is certainly not “free money,” there are several scenarios where paying taxes might actually mean a loss of some value over the course of your lifetime.

Hopefully this short article has given you something to think about when comparing lump sum versus monthly payments. The important thing is that you should never make the mistake of comparing monthly payments with pension plans. Your pension is an investment, and as such, should always be treated as such. While you don’t want to rely solely on your pension as your primary saving structure, it can certainly provide you with significant safety and peace of mind. Just remember: When you’re ready to retire, you’ll have a whole new world to enjoy, one that may not have anything to do with your pension.

If you find yourself confused as to whether you should use your retirement funds for lump sum versus payments, simply remember that all you have to do is to compare apples to apples. If you have a substantial nest egg at retirement, why would you want to give it away by taking a lump sum versus payments? On the other hand, if you are in a position that makes it difficult to earn even a small amount of money every month, why take the risk of surrendering your nest egg? In short, lump sum versus payments should not be a major consideration in your final decision. Instead, use your money wisely – use it to supplement your retirement income when it is needed, and invest for your future. Then, you’ll be glad that you took the time to plan ahead and maximize your resources.