When To Consider Taking A Lump Sum Payment For Your Annuity

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When To Consider Taking A Lump Sum Payment For Your Annuity

27 August 2014
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In most situations, the penalties associated with cashing out your annuity make it a bad idea to try and get out early. However, even with retirement annuities that often carry a 10% penalty, early withdraw options can sometimes offer you a financial benefit. Understanding when this is the case involves placing a correct value on the options that a lump sum payment represents.

While there is no rule of thumb for making this decision, there are a number of situations where a lump sum payment is likely a smart decision. If you fall into any of the following categories, you would likely benefit from taking a good, long look at your cash out options.

You've Inherited The Annuity

An annuity is often a part of a specific retirement plan. Since an annuity guarantees a set amount of income in perpetuity, it is often highly valued by those looking to establish a set retirement income. However, these fixed payments come at the cost of expensive management fees and limited investment options.

If you've inherited an annuity, there's a good chance that it isn't already a part of your retirement plan. If you've been establishing your own retirement options, your plan will not include these payments. Often, a lump sum to make a major purchase or to set up another investment account is the best compliment to your current financial situation. 

You Have a Lot of High-Interest Debt

Revolving debts, such as credit card balances, carry a high monthly obligation. Unlike a mortgage, this type of high-interest debt carries a significant monthly cost for a moderate amount of principal. Annuity cash out options can be of great service in these situations.

With an average variable rate of 15.61%, credit card debt is worth a lot to an investor when it is paid off. Even with a 10% penalty, you would be making a profitable decision by cashing out the $20,000 to pay off such debt. You'll also free up the monthly payments that would normally have gone to the credit card company, making your immediate quality of life better.

Your Plans Change

Sometimes, life changes can make your financial needs vary dramatically from the time you purchased your annuity. For example, a marriage or a divorce can radically alter both your short-term and long-term goals. An annuity that made sense in the past might not be a great choice any longer.

If an annuity cash out option allows you to reach a major goal that would otherwise remain unmet, consider taking the penalty. Yes, you'll lose value in the long run. However, the short term benefit of reaching your financial goals could be well worth it.

You Don't Need The Money

If everything goes according to plan, you might find yourself well off at retirement. High performing investments and various pension options could set you up for the rest of your life. If you're fortunate enough to find yourself in this position, an additional $600 each month from your annuity might mean next to nothing.

On the other hand, a lump sum might be a completely different story. You might be able to take a trip that seemed out of reach on your monthly income. Maybe a retirement home on a lake is no longer a pipe dream. In these situations, it makes sense to take advantage of the purchasing power of a lump sum option—even with the associated penalty.

Above all, remember that an annuity is only worth the options and flexibility that it brings to your life. If monthly payments allow you to enjoy a lifestyle that you otherwise could not, then you should keep the annuity. If not, you'll have to consider the cash value of the annuity and determine how your life would look different with that amount in your account right now. Visit sites like www.mylumpsum.com for more information.