Why Do People Choose a Lump Sum Over an Annuity?

Shawn Plummer

CEO, The Annuity Expert

Advantages of Taking a Lump Sum

  1. Immediate Liquidity: A lump sum provides instant access to the entire money. Retirees often prefer this for immediate financial needs or opportunities.
  2. Investment Flexibility: Receiving a lump sum allows retirees to invest the money as they see fit, potentially leading to higher returns than an annuity’s fixed payments.
  3. Transfer of Wealth: Lump sums can be passed on to heirs, whereas annuity payments typically cease upon the death of the annuitant.
  4. Avoiding Company Risk: A lump sum eliminates the risk of a company’s inability to make future annuity payments due to bankruptcy or other financial troubles.

Advantages of Choosing an Annuity

  1. Steady Income Stream: Annuities provide a consistent, predictable income, which can be comforting for retirees who worry about outliving their savings.
  2. Simplicity: Annuities remove the need for ongoing management of the funds, which can be advantageous for those uncomfortable with managing large sums of money.
  3. Inflation Protection: Some annuities offer inflation protection, which can increase payments over time to keep up with the cost of living.
  4. Longevity Insurance: Annuities act as a form of insurance against living longer than expected, ensuring a steady income regardless of lifespan.

Comparison of Lump Sum and Annuity Options

FeatureLump SumAnnuity
LiquidityHighLow
Investment ControlFull controlNone
Risk of Outliving FundsHigherLower
Potential for GrowthDepends on investmentsFixed, limited growth options
Inheritance PotentialYesTypically no
PredictabilityVaries with marketHigh
ComplexityRequires active managementSimple, hands-off

Conclusion

Choosing between a lump sum and an annuity depends on individual financial goals, risk tolerance, and the need for either immediate liquidity or a guaranteed income stream. Retirees often opt for a lump sum for its flexibility and investment potential, while others prefer the security and simplicity of an annuity. Understanding these differences is crucial in making an informed decision that aligns with one’s retirement goals.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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