14 Jul What’s Best for Your Retirement Savings: a Lump Sum or an Annuity?
Today’s companies and corporations typically offer their former employees two options when it comes to defined-benefit contribution plans for retirement. If you’re retiring soon or have recently done so, you’ve most likely been presented with these two options: get a lump sum immediately, or receive annuity payments in the future.
Most of us are concerned about the amount of money we’ll have saved up when we retire — yet few of us are aware of the main differences between receiving a lump sum versus annuity payments over the course of our retirements.
To ensure you make the right choice for your retirement, take a look at this guide to the main advantages and disadvantages of lump sums and annuities:
The advantages of getting a lump sum now
The biggest advantage of a lump sum? You get all your money at once and don’t have to wait around to get it. As a result, your employer will send you a check for tens of thousands of dollars at the start of your retirement, which can help you make a major investment or purchase. However, while it might seem like a lump sum is the better choice at first, it’s important to be aware that employers push their employees to opt for the lump sum. This is because lump sums cost much less to the company in the long run. Additionally, there are immediate annuities whose payments start within 30 days that may be a better option for you.
When you should opt for an annuity
In contrast to a lump sum, an annuity pays you a small portion of your money each month for a predetermined span of years. If your finances thrive under a budget, annuity payments are a great way to spread out your money with annual fees of just 3%. Annuities are also much more flexible than a simple lump sum. If you choose an annuity and later decide that you need that cash immediately, you can sell annuity payments in exchange for a lump sum. Selling your annuity as opposed to making a withdrawal can help you avoid 10% early-withdrawal penalty fees. Many people choose to get cash for annuity now if they fall into unexpected financial hardship or want to make a major purchase.
Have any other questions or thoughts on the difference between a lump sum versus annuity? Get the conversation going by leaving a comment below.