Annuity or Lump Sum?

Many people with a retirement plan are asked to choose between receiving lifetime income (also called an annuity) and a lump-sum payment to pay for their day-to-day life after they stop working. An annuity provides a lifetime steady stream of income while a lump sum is a one-time payment.

Deciding which option works best for you takes careful consideration because there are many factors to think about, such as your health, cost of living, assets and savings, and any other income you may have.

Why is this important?

Your employer may ask you to choose between an annuity and lump sum. For example, your employer may ask you to make this choice (1) if you change jobs, (2) when you stop working, or (3) even after you have begun to receive monthly annuity payments.

When making this decision, explore the benefits and risks because whichever option you choose will affect your financial future.

What are the benefits and risks?

 AnnuityLump Sum
BenefitsYou will receive a steady income for the rest of your life, like keeping a part of your paycheck for life You may be able to provide a lifetime income to your spouse or to another beneficiaryYou can use the money to pay off large debts If you don’t spend all of the lump sum, you can pass it on as an inheritance
RisksAnnuities may give you less financial flexibility and may not pay benefits to your survivors If you are in poor health, an annuity may not provide enough money to cover medical billsYou may outlive your retirement funds It’s your responsibility to manage the money to provide you with future income

Factors you should consider:

  • Your health (and your spouse’s)
  • Your investment skills (and your spouse’s), and how they may change as you age
  • Your living expenses (now and future)
  • Your savings (and your spouse’s)
  • Other steady income (Social Security, pensions from other employers)
  • Debt (mortgage, car, credit cards, student loans, child support payments)
  • Taxes on the annuity or lump sum

Are there online tools that can help me calculate my lifetime income?

Yes. The Department of Labor has a lifetime income calculator that allows you to estimate the amount of monthly income you will receive when you stop working and start receiving monthly payments.

The results shown are estimates, not guarantees, of the level of the account balance or of the lifetime income streams of payments.

For more information, click here.

Teaching Suggestions:

  • Ask students to make a list of benefits that an annuity may provide.
  • Ask students to interview their parents or relatives if they had to make a choice between an annuity or a lump sum option.  If so, which option did they choose and why?

Discussion Questions:

  1. What are the benefits and risks of choosing an annuity or a lump sum payment?
  2. What sources are available if you need assistance in making a decision to choose annuity or lump sum option?
  3. Why is it important to discuss all of the possible options with a financial advisor or an insurance agent?

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