Annuities are financial products typically offered by insurance companies. They are designed to provide a regular income stream to an individual over a specified period of time, often during retirement. For this reason, they are favored greatly by senior citizens or those planning for their income during old age.
In 2022, annuity sales added up to over $310.6 billion, a 22% increase from 2021’s $254.9 billion in sales. It’s fairly obvious that buying annuities is one of the most effective retirement options.
They are relatively easy to set up and offer a lot of peace of mind. However, when it’s finally time to cash out, which way should you go? Lump sum or periodic installments?
In this article, we are going to be exploring the case for either option and hope to make the choice a little easier for you.
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Conduct Enough Research Before Investing in Annuities
As you reflect on your financial investments, it’s natural to ponder, “What annuities do I have? Should I be looking for other options?” In fact, this is a question that even the agent who sold to you should be clear on.
A lot of times, people get sold annuities from agents with ulterior motives. They may be getting a commission or some form of benefit by choosing to sell you a certain type of annuity.
The end result? You end up with an annuity that doesn’t exactly meet your needs. You don’t want to get pressured into buying a plan with more risk, like variable annuities, if your priority happens to be stability.
If you are unsure about annuities and don’t know where to start, you should definitely do some research first. You want to have a clear understanding of the benefits and drawbacks that different annuity plans have. Some areas to pay close attention to will include:
- The different types of annuities
- Annuity providers
- Annuity fees and charges
- Annuity rates and returns
- Tax considerations
- Guarantees and rider options
- Surrender terms and liquidity
- Risk considerations
A clear understanding of the above points is all you need to make the right investment choices.
The Case for Periodic Payments: Reliable Income
Choosing regular payments in perpetuity is a great choice for a number of reasons. Annuity Straight Talk believes that an ideal retirement strategy involves you not having to worry if your money will have the same spending power due to inflation. Essentially, you want to ensure that your returns are at or even above the rate of inflation.
There are annuity plans that offer inflation-adjusted periodic payments, where the income increases over time to keep pace with inflation. This feature ensures your initial investment keeps its value even if the cost of living rises.
Periodic payments are also a lifesaver for those who are unable to work and maintain a steady income.
With regular payments, you can manage your cash flow, plan your expenses, and make sure that your long-term needs are met. Moreover, as only a portion of each payment is typically taxed, annuity payments received over time have tax benefits. This is a nice bonus to have.
The Case for Lump Sums: Immediate Satisfaction
Individuals who choose a lump sum payment have instant access to a large amount of money immediately. This allows them to pursue several financial goals, such as debt repayment.
In addition, choosing a lump payment allows you to pass on any residual cash to your heirs, potentially providing tax benefits and greater control over estate distribution.
If you have prior investing knowledge, you can opt to put the entire amount in potentially higher-yielding investments to maximize your gains. Of course, you want to be careful with this since a wrong choice could wipe out your entire life’s savings.
Make The Right Decisions By Asking Yourself the Right Questions
If you feel like you are leaning toward one option due to the benefits lining up with your priorities, that’s great. However, before you make any decisions, here are some questions that can help you gain even more clarity.
- How comfortable am I with managing a lump sum of money and making investment decisions?
- How important is it for me to have a guaranteed income during retirement? Does the security of knowing I will receive regular payments outweigh the potential risks associated with managing a lump sum?
- What is my risk tolerance? Am I willing to take on the responsibility of managing investments and potentially facing market volatility, or do I prefer a more stable income source?
- How concerned am I about inflation eroding my purchasing power over time? Would periodic payments adjusted for inflation be more suitable for ensuring my financial stability in the long term?
- Do I have dependents who would benefit from any remaining funds in the annuity? How important is it for me to leave a legacy or have control over the distribution of my estate?
- What is my tax situation? How would receiving a lump sum or periodic payments impact my tax liability, both in the short term and over the course of retirement?
- How long do I anticipate needing income from the annuity? Does a fixed-term or lifetime periodic payment option align better with my retirement plans and financial longevity?
- Have I sought professional advice from a financial advisor or planner? Have I considered discussing my specific circumstances, goals, and concerns with a knowledgeable expert who can provide personalized guidance?
You might already have asked yourself some of these questions, but there are sure to be some angles that you haven’t considered. No matter what you choose, do your best to diversify your investments so that you aren’t severely affected by one bad decision.
Conclusion
Annuities are one of the most popular ways that people plan for their retirement. They offer either steady payouts for the rest of your life or a single lump sum that is often tempting to many people.
People love choosing lump sums because it feels like they are getting their investment back. If you have other income sources besides your annuity, then yes, go ahead with the lump sum option. Buy a holiday home, or treat yourself to long vacations every year.
On the other hand, if you hope to actually live off the money, it might be a better choice to take regular payments.
