One of the exciting things people looked out for in retirement is the pension. At last, you will be able to earn money without doing any work. Well, it is not as if you didn’t work for the money anyway. You did work for it and deserve it. That is why you are in control of how you earn it. Many retirees are given the option to choose between collecting their pension in a lump sum or as a monthly payment. Not only retirees are confronted with this kind of option. Some people who won a huge amount in the lottery were also presented with similar options. Take it as a single huge payment, or bit by bit for the rest of your life. So, if you have those options, which one will you go for?
Decision making may be difficult. To make it worse, many people in this situation don’t have enough time to think about it. Worse still, whatever option they go for will be irreversible. It is very tempting to choose the lump sum. Many people want their money in their bank account and feel that it is safer with them. While it is true that collecting it as a once-off payment ensures you get everything, do you think you have what it takes to manage a huge sum of money? Do you consider the risk you are taking with huge cash in your account? If you choose to invest in a business do you know that no matter how promising the business looks, it is still a risk? And even if everything goes on well, have you considered the tax you are going to pay on a lump sum payment?
But that doesn’t mean you should opt for a monthly payment. Remember life is at risk. As much as you want to live long, death may come anytime, especially after retirement. So if you die after collecting just a few payments, what happens to the rest. Although you may be a type that will be safe if I die, I won’t be around to worry about it, still remember, you may not die and the company that is supposed to pay you dies. It is still part of the risk. The company may become bankrupt or just lose the ability to pay you in the future.
So under what condition should you go for a lump sum and under what condition should you choose a monthly payment?
Go for lump sum if ….
Whether you win a lottery or want to collect your pension payout, it is recommended that you should choose a once-off lump sum payment over a monthly payment if any of the following apply to you.
You think you will soon die: Some things are difficult to cope with but you must accept them and make the best of your situation. So, if you have any reason to suggest you’ve got a little more time to leave, then collect the whole of your money and distribute it the way you like before you die.
If you’ve got a great business idea and you are good at running businesses: remember business is a risk and you can lose. But if you have a great idea and you are confident it will work. Then you can take a lump sum and invest it. But think twice. It will be better if you have done a similar thing before and are sure you can do it again.
If you have financial discipline: Many people will go on an expensive holiday after winning big in a lottery or collecting their pension fund, some will be expensive cars or jewelry. You can easily convince yourself with statements like “at least I worked for it, now is the time to enjoy it.” However, if you know that you can manage your spending effectively, then you can collect your entire money once, put everything in your account, and pay yourself monthly from it.
If you have other retirement plans: Maybe you have already taken care of your retirement. So the pension fund can go to business payment of your children study loan or building of a house. But first, be sure that your retirement has been taken care of.
Go for a monthly payment if …
Now let’s look at conditions that will make you go for a monthly payment.
You don’t have any other option for retirement: if your pension fund is all that you rely on for the remaining part of your life, then it is better to collect it monthly. But only do this if the organization is financially strong and is part of the Pension Benefit Guaranty Corp.
You are not good in business: If you know investments are not for you, then don’t risk everything you have worked so many years for on an investment that may fail. It will be better if you go for the monthly payment option.
If you cannot manage money effectively: You know yourself and your capabilities. So, if you know you cannot discipline yourself when you have a huge amount of money in your bank account, then it will be better if the money never gets to your account at all.
If you have family, friends, and dependants that may want to prey on your money: Everybody knows that you have retired now. They expect that you have collected your pension fund. Then many people may want to use the opportunity to pressurize you to do them favor. While some people can bluntly say no, some don’t know how to turn their family and friends’ requests down. So, if you know that your dependants and friends may want to make several requests for favor and you won’t be able to deny them, then choose a monthly payment and let them understand that you only take a few amounts of money monthly.
But before you decide on either lump sum or monthly payment, try to seek the advice of a financial expert, especially an expert in tax.
With Gratitude and Love