Deciding whether to take a lump sum of $400,000 or monthly retirement benefit of $2,000 requires calculating the relative value of each option. Generally, the sooner you can receive the lump sum, the more value it will have because you can invest it over a longer period of time. The monthly payment option may be more valuable if you expect to live long after you start receiving benefits. Other factors include inflation, your additional sources of income and how carefully you can manage a large sum of money. An important financial decision such as choosing between a lump sum or monthly payout can benefit from the help of one financial advisor.
Sometimes companies with Pension plans Offer current and future retirees the option to receive a large one-time payment instead of a series of smaller payments that are usually administered monthly. These buyouts provide a way for companies to manage their risk and also offer a number of potential benefits to retirees.
Deciding whether or not to accept a lump sum offer involves evaluating a number of factors. Some of these – such as the dollar amount of the lump sum or the monthly benefit – are clearly specified in advance. For other important variables, such as the investment return that can be expected or future inflationthe assessment must rely on educated guesses about future developments.
Two of the most critical variables are when the lump sum is paid and how long the employee expects to live. In general, the lump sum is paid, the more value that choice assumes. Likewise, the longer the beneficiary expects to live, the more valuable the payment stream is.
Some of the factors to be assessed include the beneficiary’s current health, the age at which their parents died, and the typical lifespan that could be expected by someone of their age and gender.
Other individual circumstances can also tip the scales. For example, someone with a lot of high-interest debt may be better off with a lump sum that they can use to pay off their loans. On the other hand, for someone who is not confident in their ability to manage a large sum of money prudently, monthly payments may be the safer choice.
If you are faced with the choice between receiving a lump sum or monthly payments from a pension or annuity, a financial advisor can help you weigh your options.
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If you were faced with the choice between a lump sum of $400,000 or $2,000 per month for the rest of your life, what would you do?