As we grow older and approach retirement age, one of the biggest things that concern us is how we can remain financially independent and maintain the lifestyle that we are accustomed to even after we have left the labor pool. There are a lot of options available to us that will help us address this concern, and among these options is to invest some money that will grow as we wait for our retirement. Once we retire, we can either receive the return of that investment as a lump sum or annuity.
However, that leaves us with this question: Which is the better option, receiving the money as a lump sum or as an annuity? Both options have their advantages and disadvantages, and it is important that you are aware of them before you make your decision.
Getting a Lump Sum
When your investment has matured, you can choose to get your money back in a lump sum. That means all the money you have initially invested as well as the interest by which it has grown during its maturation period. The beauty of getting a lump sum is that you can do whatever you want with the money and you can direct the money towards other investments. You can also leave it with your heirs after you have passed on.
However, the problem with getting your money in a lump sum is that it is all too easy to spend it all. You may develop the mindset that you have so much money that it won't run out, but in reality, if you don't reinvest your money, it will all disappear. You can also lose everything if you don't make wise decisions regarding the reinvestment of your money.
Getting an Annuity
In contrast to your getting back your investment as a lump sum, an annuity means receiving earnings from your investment on a monthly or quarterly basis. It is just like getting your paycheck at work, except that your paycheck comes from your investments this time rather than from your employer. This is an income that you cannot use up all in one blow, one you can rely upon for the rest of your life.
But then again, purchasing annuities can be a complicated process. You have to choose among many features to make sure that you are getting an annuity that exactly suits your needs. Also, if you have not named any beneficiaries for your annuity, the payments will stop coming when you die even if there is still some money left to the principal investment.
In the end, the choice between getting paid for your investments in a lump sum or annuity entirely depends upon you. If you have the financial savvy to continue reinvesting your money or if you have someone you trust to do it for you, you can go for getting your return on your retirement investment as a lump sum payment. But if you want the financial security that an annuity can provide, you can opt for it instead. Either way, you will have something to rely upon to support you financially when you reach retirement age.
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