Lump Sum Payout vs. Monthly Payout: What is the right option for you?

Imagine you inherited a large sum of money in the form of a retirement account. Or you won the lottery. Or maybe you have been offered a lump sum pension payout. You now could be faced with a choice between a lump sum payout vs. monthly payout. Which one would you choose? 

Both options come with advantages and drawbacks, and the right choice ultimately depends on your circumstances and financial goals. In this article, we’ll guide you through the world of lump sum payouts vs. monthly payouts, discussing their pros and cons and offering guidance on which option may be best for you.

Lump Sum Payout: The Ups and Downs

A lump sum payout involves receiving a one-time payout in full. Let’s look into the advantages and disadvantages of this option.

Pros:

1. Immediate access to funds: A lump sum payout gives you access to the entire amount right now. Having all the funds immediately can be helpful if you are looking to pay off debts, make a down payout on a property, or invest in new opportunities. 
2. Potentially higher investment returns: You can explore various  (like value-averaging) that may yield higher returns than monthly investments. This makes more sense for younger recipients than for older recipients. As always, check with your preferred investment professional before making investments.
3. Simplified financial management: Receiving a lump sum payout means there are no monthly payouts to worry about.

Cons:

1. Risk of overspending: Receiving a large sum of money can be tempting, especially if you struggle with budgeting. Overspending or making poor financial decisions can lead to future financial difficulties. Most people who receive a large payout lose that payout within five years and usually end up in worse financial situations. If you know you are getting a lump-sum payout, please surround yourself with financial professionals and listen to their guidance!
2. Tax implications: Large lump sum payouts may be subject to taxes. This can reduce the overall amount received, and tax laws vary from state to state. A large inflow of cash may also move you into a higher tax bracket for the year. It’s essential to consult with a tax professional to understand your situation better.
3. Reduced cash available: You may have limited cash available after using a lump sum payout for investments or paying off debts. This can be challenging when facing unexpected expenses or emergencies. A financial coach can help you make the right decisions for you right now.

Monthly Payout: The Good and the Bad

A monthly payout involves receiving portions of your payout over a specified period. Let’s understand the benefits and drawbacks of this option.

Pros:

1. Steady income: Monthly payouts provide a consistent income stream, which can be beneficial if you need a regular source of funds for living expenses or during retirement.
2. Easier cash management: Monthly payouts help you understand your cash flow, making it easier to manage your living expenses.
3. Lower risk of overspending: Receiving smaller monthly amounts reduces the likelihood of overspending or making impulsive financial decisions. It also encourages better budgeting habits.
4. Deferred taxes: You will only pay taxes on the money when you receive it. You may have some tax obligations immediately, but then you will pay taxes on the total amount you receive each year. This may be the way to go if you anticipate falling into a lower tax bracket. Deferred taxes means that recipients usually come closer to receiving the total amount. Make sure you coordinate with a tax professional to understand the implications. 

Cons:

1. Interest charges: Monthly payouts may come with monthly expenses (like management fees), which can decrease the overall payout.
2. Possible lower overall value: In some cases, monthly payouts may be lower than a lump sum payout due to potential fees or interest charges imposed by the entity making the payouts. This could result in less money over time than a lump sum payout. It is essential to note that not all monthly payout plans include fees or interest charges.

Making the Decision: Lump Sum Payout vs. Monthly Payout

When choosing between a lump sum payout and a monthly payout, consider the following factors to make the best decision for your financial situation:

1. Your purpose for the payout: What you plan to use the payout for plays a significant role in your decision. A lump sum payout might make more sense if you want to pay off debt or make a large purchase. In contrast, monthly payouts may be a better choice for steady income, such as during retirement, after a divorce, or when receiving disability payouts.
2. Future income expectations: Consider your financial goals when deciding between lump sum payouts and monthly payouts. A lump sum might suit short-term plans like paying off debt or funding a vacation. At the same time, monthly payouts can be ideal for long-term financial goals like retirement or buying a home. 
3. Tax implications: Assess the tax implications of lump sum payouts vs. monthly payouts. Depending on the payout source and your tax situation, each option may have different tax consequences. Consulting with a tax professional can help you make an informed decision.

Deciding between a lump sum payout and a monthly payout requires carefully assessing your circumstances and financial goals. 

By understanding the pros and cons of each option, you can decide which choice best aligns with your needs. If you’re still unsure or want more guidance, consider seeking advice from a financial coach. Financial coaches can provide valuable insights to help you achieve your financial objectives.

Remember, whether you are single or have a family, managing your wealth effectively is crucial for your peace of mind. So, take the time to understand your options and make the best decision for your unique situation. 

You are not alone; working with a Financial Coach will help you gain clarity on the right decision for you. Schedule a consultation with Jen today.