If you have a pension when you retire, you will most likely be faced with the choice of taking a lump sum annuity. While this may seem to have its advantages, you may be surprised at how much taking a lump sum payment instead of rolling the funds into a different investment can hurt you if you don’t know what you are doing with it. Here are some reasons why it is important to create a budget and speak with a financial advisor before you do anything with the money in your pension.
What are you Going to do with Your Lump Sum Annuity?
Deciding to take a lump sum annuity can be a wonderful thing, right? After all, there are so many projects, bills, and debts you can spend it on. You may use your cash for:
- Medical expenses
- A new house
- A new car
- That dream vacation
- A college education
Beware of this kind of mentality. Receiving a lump sum annuity is, for many, treated the same as a sudden windfall, a tax return, or a lottery winning. If you splurge foolishly, what will you be left with? You may have gotten rid of a few debts, but you have nothing to live off of. You then must either rely on credit cards to get by or work, just as you had before.
Financial Planning is Important
When you must decide whether or not to take a lump sum or annuity, it may be a hard decision to make. If you choose to accept a lump sum, you must be diligent about your expenses so you will be able to take care of yourself during retirement. There are a couple of paths that can make it easier for you to budget your money.
- Instead of spending all of your money at once, roll it over into a plan that offers you a monthly payment. This will allow you to invest your money in stocks or mutual funds, which will increase the amount of cash you have in the account, but still give you some income every month to pay your bills with.
- Purchase property and then rent it. You can live off of the extra money you make each month and when it comes time to sell your property, you can sell it for a profit.
These types of investments allow you to have monthly income while still being in control of the lump sum. You can decide how and when to invest your money.
However, even though you are in control of the lump sum annuity, you may need help choosing the best investments. This is where a financial advisor can come in handy. A financial advisor can help you budget your money so you have enough to live on while investing the rest of the lump sum. He or she will ask you questions in order to determine whether you are looking for a long term increase in the amount of your lump sum or a short term investment that will provide you with a steady monthly income. When the financial advisor has determined what investments will work best for you, he or she will explain how the investments work and help you get started.
When determining whether or not you want to take a lump sum or annuity from your pension plan for retirement, it is important to consider what you will do with your money. If you want to be in control of your own financial decision, a lump sum may be the choice for you.