What would you do if you had a choice to take a lump sum of money or a weekly paycheque for life?
That was the challenge a Quebec teen faced after buying her first lottery ticket on her 18th birthday – and won. Given her age and the amount, she decided to take the $1,000 weekly lifetime annuity, which works out to an annual salary, without taxes, of $100,000, over the $1-million payout. Most would agree this was absolutely the right decision for her.
While most of us would like to win the lottery, the reality is winners are few and far between. However, that doesn’t mean we won’t be faced with the same decision at some point in our lives – likely around retirement.
Lump sum or annuity?
A lump sum generally gives you more control over the asset, whereas with a lifetime annuity, you are opting for a lifetime of cash flow.
To assess the situation further, begin by asking yourself a few questions pertaining to your lifetime expectancy, return on the investment, and the certainty of that return. Your current income requirements, health, tolerance for risk, inflation projections, convenience, and ease of management, taxes, and estate planning can all tilt the scale.
Decision making: The pros and cons
Considering a lifetime pension monthly benefit:
- It is simple and easy to manage and administer
- Payment is guaranteed for life and reduces fear of outliving your money
- Payments are spread evenly throughout your life, but you do lose the flexibility of altering those payments
- Spreads out the tax over your lifetime
- You can spend right up to the very end of your life
Weighing in on a lump sum payment:
- If you believe your life expectancy is compromised, a lump sum payment makes sense
- More money paid earlier in retirement allows for more flexibility and lifestyle decisions
- Once the tax obligation is paid, the future tax obligation is only on the growth portion of the payment
- There will be funds for an inheritance should that be your intention
- If you need cash for living expenses or to deal with a market downturn you will have it
- You need to manage the money and be reasonable in terms return expectations
It doesn’t have to be an either/or scenario — it can be an “and.” You could choose to take a lump sum payment and use a portion of it to purchase an annuity to cover off your fixed expenses while giving you the flexibility to have a little more money to enjoy life or even grow your nest egg.
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