Lump Sum Vs. Monthly Pension
When planning for retirement, one of the basic questions you might ask yourself is whether you prefer your retirement investments and savings to be paid to you as monthly incomes or as a lump sum. Some companies, such as insurance companies that offer you pension plans, sometimes provide the possibility of choosing the option that is best for you, and in some cases, you might even be able to choose a mix of both options.
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Function
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Whether you choose to receive a lump sum or a monthly pension, the purpose of your retirement plan is to help you to pay your living expenses once you reach retirement age and stop working. The primary purpose of a retirement plan is to substitute the monthly income you are used to receiving as a result of your monthly work. However, because this money is part of your own savings, it is more flexible than your normal income, and you might be able to use it for investment as well, depending on your choices.
Benefits: Monthly Pension
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To choose to receive a monthly pension instead of a lump sum payment of your benefits depends on your own goals for you and your family's future. Some of the benefits of monthly pension payments include the fact that it gives you a secure option of income for the rest of your life, and in some cases also of your spouse's. You do not need to worry about whether you will have a job next month or whether you will get paid. A monthly pension is safe option if you prefer stability and security.
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Disadvantages: Monthly Pension
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Monthly pensions also have their disadvantages. One of the main problems with monthly pensions is that your payments will not rise with inflation as your current income would. This means that your purchasing power for the months in which you receive your pension will be lower. Another disadvantage of monthly pensions is that the amount never changes. You always receive the same amount in benefits. If in a determined month you need more money, for medical reasons or simply because you want to take vacations, your monthly pension will not be enough.
Benefits: Lump Sum
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Whether you should choose to receive a lump sum payment instead of monthly pensions also depends upon your priorities and goals. If you want to invest the money in a better savings account or in a business, a lump sum is your best option, since it gives you flexibility in what you can do with your money, and it can produce returns (interest). Unlike monthly pensions, you manage how much you spend or need in a month, and you can withdraw the amount of money you need.
Disadvantages: Lump Sum
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Certain risks are also related to choosing a lump sum instead of monthly pensions. A lump sum does not give you the same security of monthly income that monthly pensions give you. If you are constantly withdrawing high amounts of money from your fund, you might run out of money more quickly than you would with the other option. If you invest your money but the market takes a downturn, you also might run the risk of losing part of your investment.
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