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 🙁
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?
(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
(B) get more money overall, but receive it in smaller payments over a longer period of time.
More examples and application…
[to be continued…]
(more to be added)
This post is a placeholder for the eventual discussion of lump sum versus annuities…