A lump sum may come as a pension strategy option from work, the result of your organization 401(k) savings, or your own IRA savings, and possibly as an inheritance. Your choice on how to handle retirement funds has a lot to do with your psychological makeup and risk tolerance.
Numerous retired people face the 'Lump Sum' challenge when retiring from their organization: 'Do I Need To take a lump sum which I'll manage for all or portion of my retirement funds - or simply annuitize it (like a retirement annuity) for a lifetime revenue and be done with management worries?' Let us consider a few of the benefits and drawbacks of each option for this pot of retirement funds.
Directly managing earnings from the lump sum through your own investment options and purchasing a set annuity signify two polar options for retirement funds. Examining the pros and cons of each will help you position yourself for a possible intermediate strategy.
Managing retirement funds demands time and effort. You need to research and select investments that will both develop your money to offset inflation, reduce loss to prevent market downturns, and include income creating investments that will permit monthly and emergency withdrawals that don't force untimely investment losses.
You achieve these goals by properly allocating your retirement funds between equity and revenue investments, along with keeping some money equivalents including Certificates of deposit or cash market funds. Continually rebalancing your collection can help you capitalize on any benefits as well and keep you in accordance with your goals.
You must keep your withdrawals low - perhaps 3% to 4% in the early years - to make sure you will not consume your retirement funds as well quick. You do not want to use up all your assets in the event you face a serious market down turn and/or you live a long life.
The worry about running out of retirement funds - or nearly so - frightens a lot of people. That is exactly where your mental health makeup will come in and what tends to make an annuity always a reasonable option.
Taking a fixed annuity or buying an annuity relieves you of investment management worries by transforming your retirement funds into a fixed monthly payment for life. That payment may be for your life or your spouse's as well. Inflation, sadly, will erode the worth of your payments. Even at only a 2% inflation rate, a $2,000-a-month payment would lose a third of its buying power in twenty yrs. Also, taking an annuity limits access to your principal. That is a problem if urgent matters or for sudden expenses crop up.
The table summarizes the pros and cons of each. You are able to always discover an intermediate strategy that satisfies some worries of both extremes
|
Manage Retirement Funds or Annuitize it? |
||
| Manage Your Lump Sum | Buy a Fixed Annuity | |
| Pros:
|
More potential for growth | Income assured |
| Can offset inflation | Lifetime payments | |
| Withdraw at your own rate | Fixed income payments always | |
| Cons: | Risk: Possible loss in investments | Inflation erodes payment value |
| Unpredictable markets | No access to principal | |
You are able to split your retirement funds in 2 parts and purchase a fixed annuity with half and handle the rest. Your fixed annuity allows you to be more 'growth' oriented in your portfolio to counter the inflation results on your annuity payments. You can continually select later on to transform the self-managed portfolio to an annuity as well if you're sick and tired of controlling it.
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