I inherited a non-qualified annuity from my mom. I am on SSDI and I receive $1,800 per month. The annuity is worth $100,000. I am trying to decide whether to take monthly payments for the rest of my life, which should be about $450 a month, or take the lump sum (between $80,000 and $90,000 after taxes) and put the money into my high-yield savings account. The interest rate for my account is about 4%, which would give me around $300 extra per month.
I am 54 years old and single. I do have quite a few chronic health conditions so I don’t expect to live to 100 or anything like that. I’m also trying to decide whether to rent a place or buy something. I am living in my mom’s apartment after her passing. I’m not sure which makes more sense for someone in my situation: a lump sum or monthly payment.
– Anisa
There are a few things to consider here, but your living situation is perhaps the most important variable. Settling where you will live and whether you want to buy a home may help clarify which option – the guaranteed monthly payments or a lump sum – is best for you. Let’s break it down to review each of the main areas individually.
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Perhaps the simplest and most conservative option is the lifetime payout. The biggest upside to this choice is that you get the guaranteed income, which isn’t a small thing.
However, your health may make that option somewhat less appealing as you point out. Instead of choosing a lifetime payout option, you may want to consider a “period certain” payment. These will pay for a fixed number of years, such as 10, 20 or even 30 years. The tradeoff is that your payments will be higher if you choose a shorter period. So, choosing a period that more closely matches your life expectancy may make this option more beneficial. Just understand that you’d be giving up the protection that comes with the lifetime payout option.
And you don’t have to annuitize with your current carrier. You can take the lump sum and use it to purchase an annuity from another carrier. You may even be able to do it tax-free using a 1035 exchange.
Considering those two ideas above, I’d at least look around for what your payout might be if you go that route to give you a better comparison. (And if you need additional help weighing your options, speak with a financial advisor.)
If you take the lump sum, you will have more financial flexibility, which could be helpful if you are looking for a new home. This is a personal choice about what you value more about what you value more – liquidity for a potential home purchase or steady income.
I think deciding whether you will buy a place is the fork in the road. I would focus on settling that decision, or at least really defining how important that option is to you, before making any financial moves.
Some things I would consider in regard to the lump sum include:
If considering the lump sum option, think about how tight your budget is and how helpful the money may be in the future. If you end up spending most of this money – whether on a new place to live or something else – will you be financially stable? If not, then an income option may be a better choice.
I wouldn’t focus too much on the current rate of your high-yield savings account, as these rates fluctuate frequently with overall interest rate movements. For example, if a 4% rate seems appealing but you’d be hesitant if it dropped to 3.5%, this might not be the best option for you. Instead, you may want to consider a bond or certificate of deposit (CD) that offers a more favorable rate and allows you to lock it in for a longer period.
If you invest in the market, even if it’s a well-diversified portfolio appropriate for your situation, that will fluctuate much more than the other options. However, you would likely earn a little more on your money over a sufficient period of time. This might be a better option if your risk tolerance supports it, and you value the possibility of growing your money. (And if you need help selecting investments or managing your portfolio, consider working with a financial advisor.)
Of course, this isn’t an all or none proposition. You can take any amount as a lump sum and then annuitize or invest the rest.
You may want to start by taking out enough to establish an emergency fund if you don’t already have one. Then, consider how much you might need to keep liquid in order to move out of your mom’s apartment. The remainder you could then annuitize or invest. (These are just some potential options. A financial advisor can help you take an even deeper dive into your financial situation and ways to pursue your goals.)
Understanding that some of the financial tradeoffs discussed above may influence your decision, I think you should spend some time zeroing in on whether you want to buy or rent before you make any choices about the money. Once you settle that, it may help you narrow down your options or make the your eventual decision clearer.
If you’re starting your search for a financial advisor, it’s important to first assess your needs. Are you looking for someone to simply give you investment advice or do you have a more complicated financial situation that may require holistic financial planning. Advisors have a range of service offerings and areas of expertise, so it’s best to evaluate your needs and find someone best suited to meet them.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article.Some reader-submitted questions are edited for clarity or brevity.
