| Making The Lump Sum Annuity Decision |
| Articles - Retirement |
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Before you actually retire you will have to make some serious decisions. One of these decisions includes the lump sum annuity option. Which one will you choose taking the entire amount up front, or a monthly annuity installment? There are pros and cons to both of these options, depending on how you interact with money.
Before you actually retire you will have to make some serious decisions. One of these decisions includes the lump sum annuity option. Which one will you choose taking the entire amount up front, or a monthly annuity installment? There are pros and cons to both of these options, depending on how you interact with money. Taking the entire pension immediately can be very tempting, but you must have a plan for managing the money. If you do not have a plan in tact for managing the money you may very well risk losing it. If you do not think you are up to the task of good money management you will have to hire someone to do it for you, which will not be free. If you just do not want to worry about money and receive a set amount to cover the basics, monthly installments of your pension can help you do this. When you take the entire amount up front you will have to think about investments and money management. You also risk losing it if not invested correctly. The monthly annuity option guarantees a set amount of money for life. What this payment will not take into consideration is the inflation rate. Even though the amount you will receive now is enough to cover your expenses and then some, it will lose its buying power in a few years. Even if inflation rises slightly, you can buy today with your annuity will be less in the years to come. If you are good with finances and know how to invest your money, then maybe taking the entire pension immediately is a good option. You can at least help control the interest that you place your money into. Since you are not locked into a fixed-rate annuity you can more your money around to assure you get the best interest possible. Also, when taking a fixed-rate annuity you are locking in the current base interest rate on your monthly payment. In the current economic climate interest rates are very low, so you will be stuck with a low interest rate for the life of your payments. With a lump sum you can consider short-term investment until interest rates increase. In this scenario you will have some other sort of income to cover your personal expenses. Annuity payments are taxable. If you invest your pension lump payment you can roll it over into an IRA that is generally not taxed. It is taxed when you make a withdrawal, and the taxes are usually less than with an annuity option. Thus, these are only some of the many factors to consider when making the lump sum annuity decision. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Enrique Castillano also writes about Retirement Planning and Annuities including Lump Sum Annuity and Sell Structured Insurance Settlement |