Lump Sum Cautionary Tale

Lump Sum Cautionary Tale

February 7, 2014 – You don’t have to look too hard to find stories about people who are worse off because they completely undervalued the concept of planning for the future.

People who choose today at the expense of tomorrow.

I’m talking about people who opt for a lump sum of cash instead of the periodic payment options available to them when they win the lottery, trigger their pension benefits or settle a personal injury claim.

For many, the allure of “having their money and having it now” is too powerful and they forfeit the overwhelming advantages that accompany guaranteed future income.

As we mentioned in one of our blogs last month, the completely independent, nonprofit, noncommercial National Endowment for Financial Education (NEFE) estimates that . . .

” . . . 70% of all people who suddenly receive large amounts of money will lose that money within a few years.”

Today, we have another one to add to our list of sources of lump sum misery courtesy of CNN/Money:

“Reverse Mortgages: Safer but far from risk-free.”

home_loanA few of our favorite quotes from the article:

” . . . many borrowers have run into problems because they took their payment as a lump sum and spent the cash too freely.”

” Homeowners who choose the lump sum option could see their payouts reduced by 10% to 18% . . . “

” Monthly payments usually work out better anyway, especially for those who live longer.”

Although Fred Thompson, Henry Winkler, and a host of other well-known paid endorsers are convincing when touting the benefits of reverse mortgages, the article does a good job highlighting the risks that remain.

Especially with lump sums.

Our firm does not offer reverse mortgages so we will refrain from advising on them other than to say make sure you understand what you’re getting into if you or someone you know is considering one.

We will, however, go out on a very sturdy limb reinforced by mountains of evidence to suggest that anyone choosing a reverse mortgage will be better off if they choose the lifetime income option instead of a lump sum.

Finn Financial Group