The Difference Between Lump Sum and Payments

One of the more popular questions when comparing lump sum versus payments deals with whether or not a lump sum is actually better than fixed monthly payments. The fact is, it truly depends upon a variety of individual circumstances. First, you have to properly analyze how much money you will receive when you retire. This amount will vary depending on your retirement age and whether or not you plan on living in your home until then. In addition, your income will also change throughout the years as you earn more money and pay down debt. While both of these factors will likely be important, lump sum payments can actually be slightly more useful in certain situations.

Lump Sum versus Payments

One of the main reasons you may wish to compare lump sum versus payments when planning for your retirement is because some plans do not allow you to withdraw a certain portion of your future value. If this is the case for you, then you may actually be better off over the long run by receiving a fixed annuity. This way, you will receive a predetermined rate of interest that will remain consistent. Plus, you can plan for your retirement in a manner that includes a little extra cash now and a larger chunk of money in the future.

Another possible reason to consider lump sum versus payments when comparing your retirement options is because you could be entitled to a pension. Usually, people receive pensions when they reach a certain age. Unfortunately, most people never get to use their pension since it is usually allocated to someone else who may live longer than they do. By investing your future value into an annuity, you can ensure that you will actually receive a pension when you should. In fact, you can even choose to pay your lump sum upfront so that you receive the full value at retirement.

Lastly, lump sum versus payments plans are much more affordable for active workers versus non-active workers. Active workers tend to pay more into a pension plan simply because they have to earn more. These workers therefore benefit the most from investing a large amount of their future income. If you are currently employed but anticipate living a longer life due to advancing in your career, a pension may not be worth it for you.

On the flip side, annuity payments are much more affordable if you are planning to retire at a younger age. The reason is that you will only need a small amount of money at the beginning of your retirement. You can then let the lump sum accumulate until your final retirement age. Therefore, if you invest your money wisely, then you will not need to make any major changes to your lifestyle until after you are eighty five years old. With a pension, you will still have decent savings regardless of how long you live.

Investing both pension plans is an excellent way to diversify your portfolio. In fact, some experts even recommend it as a general financial investment strategy. However, each individual has to assess their own situation and determine what is best for them. For many people, lump sum versus payments are a much more cost effective way to secure their future.