Tuesday, September 15, 2009

Lump Sum vs. Income Stream

Peter decided to take a lump sum of approximately 500K, pay his capital gains and depreciation recapture of close to 150K and invest the 350K he had left over after the sale of his investment property. Peter was 64.

Peter paid off credit cards and bought some purchases he had been putting off such as a new car and gave some money to his kids and put the remainder into some investments his financial advisor recommended. That was two years ago.

Peter is now out of work and has been selling stocks and mutual funds at a loss to cover his bills. He lost a good deal in value on his investments over the last year. He has about 120K left of that 350K and it is dropping fast.

If Peter had taken a 20 year income stream from a self directed installment sale, he would be receiving about $3500.00 per month or 42K per year for another 18 years. After paying his taxes on this it would still be about $2450. per month he could count on coming in.

If he had simply used this income to pay off his credit cards over the last couple of years he would be out of debt. He may not have the new car or his kids may not have gotten the monetary gifts but he would have an ongoing source of income when he lost his job and would have a means of support going forward if he is unable to find another.

His investments would not have lost value and over the 20 year period he would have received about 110K more using the compounded earning power of the money that went immediately to taxes when he took the lump sum.

Which would you rather have, the lump sum or the income stream?

Paula Straub

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