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Select personalised. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A lump-sum payment is an often large sum that is paid in one single payment instead of broken up into installments. It is also known as a bullet repayment when dealing with a loan. They are sometimes associated with pension plans and other retirement vehicles, such as k swhere retirees accept a smaller upfront lump-sum payment rather than a larger sum paid out over time. These are often paid out in the event of debentures. Lump-sum payments are also used to describe a bulk payment to acquire a group of items, such as a company paying one sum for the inventory of another business.
Lottery winners will also typically have the option to take a lump-sum payout versus yearly payments.
There are pros and cons to accepting lump-sum payments rather than an annuity. Annuities provide a degree of financial security, but a retiree in poor health might derive greater benefit from a lump sum payment if they think they will not live long enough to receive the entire benefit. And by receiving an upfront payment, you can pass on the funds to your heirs. Also, depending on the amount, an upfront payment might enable you to buy a house, a yacht, or another large purchase that you would otherwise not be able to afford with annuities.
Similarly, you can invest the money and potentially earn a higher rate of return than the effective rate of return associated with the annual payments. Or, of course, you could lose money on your initial investment. It is not always best to take the lump-sum payment in lieu of periodic annual payments; if offered the choice, consider taxes, investments, and the net present valuewhich s for the time value of money. If you took the entire winnings as a lump-sum payment, the entire winnings would be subject to income tax in that year, and you would be in the highest tax bracket.
However, if you choose the annuity option, the payments could come to you over several decades. Such tax questions depend on the size of the lottery win, current income tax rates, projected income tax ratesyour state of residency when you win, in which state you will live after the win, and investment returns. Another big advantage of taking the money over time is that it provides winners with a "do-over" card. By receiving a check every year, winners have a better chance of managing their money properly, even if things go badly the first year.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Retirement Planning Pensions. What Is a Lump-Sum Payment? Key Takeaways A lump-sum payment is an amount paid all at once, as opposed to an amount that is divvied up and paid in installments. A lump-sum payment is not the best choice for every beneficiary; for some, it may make more sense for the funds to be annuitized as periodic payments. Based on interest rates, tax situation, and penalties, an annuity may end up having a higher net present value NPV than the lump-sum. Article Sources.
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Compare s. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Lump-Sum Distribution A lump-sum distribution is a one-time payment for an entire amount due, rather than payments broken into smaller installments.
Understanding the Lottery Process, the Types of Lottery, and More A lottery is a low-odds game of chance or process in which winners are decided by a random drawing. Annuity Table Definition An annuity table is a tool for determining the present value of an annuity or other structured series of payments.
How Does a Pension Plan Work? A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. Secondary Market Annuity SMA A secondary market annuity SMA is a transaction in which the present owner of an income annuity trades future income payments for a lump-sum payment.
Retirement Contribution Definition A retirement contribution is a payment into a retirement plan, either pretax or after tax. Partner Links. Related Articles. Retirement Planning 10 Ways to Borrow in Retirement. Investopedia is part of the Dotdash publishing family.Need sum service
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