What should you do when you are faced with a choice between lump sum versus payments? It’s a hard choice for anyone to make, but it can be one of the most difficult and heart wrenching you’ll ever have to make. You want to take the lump sum, but you also want to keep more money for retirement and investment purposes. This article will help you understand the benefits and pitfalls of each option.
The biggest advantage to lump sum versus payments is that your taxes are significantly reduced. For most people this alone makes them an attractive option, but there are others. If you’re in the habit of accumulating large amounts of money in a tax sheltered account and plan on withdrawing it within a few years, then a lump sum may not be your best option. However, if you’re only planning on giving this money away, it isn’t important to you. At the end of the year, you can decide whether or not you need those funds. Many people are able to withdraw all of their money at once without having any negative impact on their taxes.
Another great advantage of lump sum versus payments is that some companies offer a specified amount in a stipulated finding. For example, many companies offer a $1500 dollar stipulated finding. For many companies this is an ideal finding because it offers a lot of room for growth. These amounts don’t have to be indexed to inflation and you can often purchase more in a year’s time than you would in the past. The stipulated finding can change from year to year, but most companies look to match a set amount so that your actual return doesn’t fall by the way.
One of the disadvantages of lump sum versus payments is that some people feel they aren’t receiving their full benefit. With pension payments your benefits increase as you approach retirement age. Once you reach the final year of your pension you will receive your entire pension. With these types of payments you don’t get your full pension until you have been collecting it for five years. Your pension payments stop once you reach the age of sixty five.
With this said some people believe that they are receiving a more generous retirement age when they receive their lump sum. When a company offers a specified amount in a stipulated finding most people feel they are getting a nice retirement age. Unfortunately this isn’t always the case and some people end up waiting five years or longer to receive the full amount of their pension. In the end, this is really up to the individual.
As you can see there are advantages and disadvantages to both lump sum versus payments and pension plans. Depending on your specific situation you may want to make the right choice for your financial future. Hopefully this has helped you understand some of the pros and cons of these two financial tools. It’s important to remember that these tools are designed for your long-term benefit and shouldn’t be used for short-term planning.