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The Pros and Cons of Lump Sum Distributions and Annuities

Posted by Brad Bridgewater on Sep 16, 2016 1:53:56 PM
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lump-sum-annuityAs you approach the end of your career, you must make several key retirement and investment planning decisions. One of the most important is whether to take a lump sum distribution offered by your airline or to purchase annuities for a predictable income stream.

A solid financial plan includes many variables such as tax rate consequences, income needs and expenses during retirement, and estate planning, all of which should be taken into account when making the choice between lump sum distributions and annuities.

A quick Google search on “lump sum distribution vs. annuity” yields hundreds of thousands of results. Some self-professed financial gurus claim lump sum distributions are the only way to go, while others swear by the power of annuities. The truth is somewhere in the middle, and decisions about the appropriate vehicle for your retirement should be dictated by your individual needs and circumstances.

Lump Sum Distributions

Lump sum distributions are quite common in the airline industry, and they’ve undergone some scrutiny in recent years. There are sometimes significant differences between airlines in how and when funds are made available for distribution. One of the biggest advantages of a lump sum distribution is that you have investment control over your plan funds. However, with that control comes enormous responsibility.

This is where a good financial advisor is invaluable, helping you manage your portfolio in a way that creates steady income payments to cover your expenses and obligations during retirement, while simultaneously managing your risk exposure. Another benefit of lump sum distributions is that investment proceeds can be passed on to your heirs as part of a comprehensive estate plan.

Annuities

Annuities provide a steady income stream, almost like a paycheck, for a specific period of time. Purchased from an insurance company, annuities offer several distribution options that include single-life and joint survivor payouts. Unlike lump sum distributions, no proceeds from annuities can pass to heirs other than a surviving spouse, which can be an important consideration for families.

The company selling annuities is responsible for managing the investment account. Of paramount concern for many investors purchasing annuities is company default risk. Annuities are only as good as the company from which you buy them, and if the company goes bankrupt, your investment could be at risk as well.

Ask for Help Choosing

As with many investment planning decisions during your working years, making the right choice between taking a lump sum distribution and purchasing an annuity can impact your financial security in retirement. Working with a skilled advisor who knows your individual circumstances and goals can help you choose your course wisely.

To discuss your unique situation and find out whether a lump sum distribution or annuity might be better for you, request a 20-minute Q&A session with a Certified Financial Planner (CFP) at Retirement Advisors of America.

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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by Retirement Advisors of America following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, Retirement Advisors of America accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security. 

Topics: Financial Planning