Lump sum payout versus annuity payments

While visiting John in STL recently, his girlfriend regaled with me a tale of a man (we’ll call Fred) who received a large settlement from his wife when they divorced. Fred then proceeded to move to Thailand (a lifelong dream of his) where he started a resort and began construction on a mini-mansion. Unfortunately he ran out of money shortly afterwards and is apparently now destitute ūüôĀ

These types of stories, with variations, are surprisingly common: someone wins the lottery and shortly afterwards they are filing for bankruptcy… sports start signs a multi-million dollar contract and a couple years later is broke…

So, this post is meant to briefly touch on a few definitions and topics. Specifically, what are the pros/cons of lump sum payments and annuities?

The definitions

(A) lump-sum – a single amount of money, paid at one time, that serves as complete payment

(B) annuity –¬†The annual payment of an allowance or income /¬†A contract or agreement by which one receives fixed payments on an investment for a lifetime or for a specified number of years.

How do these options play out in the real world?

When you choose between the two options, it generally boils down to:

(A) get less total money, but get it in one somewhat large payment right now
-or-
(B) get more money overall, but receive it in smaller payments over a longer period of time.

More examples and application…

[to be continued…]

Related info:

Lottery - Payment_of_prizes - Wikipedia, the free encyclopedia

Lottery – Payment_of_prizes – Wikipedia, the free encyclopediahttp://en.wikipedia.org/wiki/Lottery#Payment_of_prizesWinnings (in the U.S.) are not necessarily paid out in a lump sum, contrary to the expectation of many lottery participants. In certain countries, mainly the U.S., the winner gets to choose between an annuity payment and a one-time payment. The one-time payment (cash or lump sum) is a “smaller” amount than the advertised (annuity) jackpot, even before applying any withholdings to which the prize is subject to. While withholdings vary by jurisdiction and how winnings are invested, it is suggested that a winner who chooses lump sum expects to pocket 1/3 of the advertised jackpot at the end of the tax year.

How to Make Lump Sum Divorce Settlements Last | First Wives World

How to Make Lump Sum Divorce Settlements Last | First Wives Worldhttp://www.firstwivesworld.com/resources/resource-articles/how-make-lump-sum-divorce-settlements-lastMany women will receive one lump sum payment in a divorce settlement. After selling the house and dividing the savings, this payment often totals at least $50,000 and can climb…

 

 

 

 

(more to be added)

This post is a placeholder for the eventual discussion of lump sum versus annuities…

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