Many retirees deal with the 'Lump Sum' issue when retiring from their company: 'Should I take a lump sum which I will manage for all or part of my retirement savings - or simply annuitize it (as a retirement annuity) for a life time income and be done with management concerns?' Let us consider some of the benefits and drawbacks of every option for this pot of retirement savings.
Managing retirement savings demands time and effort. You should study and select investments that will equally grow your money to offset inflation, minimize loss to prevent market downturns, and incorporate income producing investments which will permit monthly and emergency withdrawals that do not force untimely investment losses.
A lump sum can come as a pension plan choice from work, the result of your company 401(k) savings, or your personal IRA savings, and perhaps as an inheritance. Your choice regarding how to handle retirement savings has a lot to do with your psychological make-up and risk tolerance.
Directly managing earnings from the lump sum through your own investment choices and purchasing a fixed annuity represent 2 polar choices for retirement savings. Analyzing the pros and cons of each will help you place your self for a possible intermediate strategy.
You accomplish these goals by properly allocating your retirement savings between equity and revenue investments, together with keeping some cash equivalents such as CDs or money market funds. Continually rebalancing your collection will help you capitalize on any benefits as well and keep you in accordance with your goals.
You must keep your withdrawals low - maybe 3% to 4% in the early years - to ensure you will not consume your retirement savings too quick. You do not want to use up all your resources if you encounter a serious market down turn and/or you live a long life.
The worry about running out of retirement savings - or nearly so - scares plenty of individuals. That is where your psychological makeup comes in and what tends to make an annuity usually a reasonable alternative.
Taking a set annuity or purchasing an annuity relieves you of investment management worries by transforming your retirement savings into a fixed month-to-month payment for life. That payment can be for your life or your spouse's as well. Inflation, unfortunately, will erode the worth of your payments. Even at only a 2% inflation rate, a $2,000-a-month payment would lose a 3rd of its buying power in 20 yrs. Additionally, taking an annuity excludes access to your principal. That is a problem if urgent matters or for sudden expenditures crop up.
The table summarizes the pros and cons of each. You can constantly discover an intermediate technique that fulfills some concerns of both extremes.
|
Manage Retirement Savings 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 savings in 2 portions and purchase a fixed annuity with half and handle the remaining. Your fixed annuity allows you to be more 'growth' oriented in your portfolio to counter the inflation results in your annuity payments. You are able to continually select later on to transform the self-managed portfolio to an annuity too if you're tired of managing it.
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