Here we look at the difference between an annuity and a lump sum. If you have a pension plan or you are among the few who are lucky enough to win the lottery, you will have to decide whether you want your money in an annuity or lump sum.
Annuity vs. Lump Sum
An annuity is a payment that is made in equal intervals. These steady payments can be made annually or monthly. This allows you to collect portions of your money yearly, or monthly over a period of time.
Lump-sum, on the other hand, is a payment that is processed one time, rather than over a period of time. This allows you to collect all your money in one payment.
Pros and cons of annuity and lump sum
Pros of an Annuity
-Your spouse or a different beneficiary may be able to get this lifetime pension if you pass it down to them
– You will have a whole lifetime income.
Cons of an Annuity
-Your financial stability may be lessened with annuities.
-In death, some annuities may not pay benefits to your beneficiaries or family.
-If you, unfortunately, get sick, the annuities may not be able to cover the medical bills.
-Sadly, you could die before collecting all the money that is owed to you.
Pros of Lump Sum
-Large amounts of money can be pumped into investments earlier.
-Debts can be paid quickly if you have any.
-The remaining amount can be passed as an inheritance.
Cons of Lump Sum
-Due to poor management, the money could end up running out before you die.
It is wise to analyze your situation as well, even after weighing the pros and cons. In this analysis, there are three important factors to consider.
Of the three factors, life expectancy is the most important one. If you have a good reason to believe that you and your spouse will live well beyond life expectancy or if your healthy, the monthly payments might be better for you. This can also work if your spouse is younger than you. On the other hand, the lump sum option could work better for you if your health is poor, and you don’t see yourself living beyond life expectancy. Still, it will be wise to overestimate your life expectancy in case you outlive what you expected, better than running out of cash ten years earlier.