Recently a friend posed a hypothetical question for me to answer. He asked, “If you won a lottery, what would you do with the winnings–take cash or opt for an annuity?” Without hesitation I replied that if the jackpot were large (multi-millions) I would choose an annuity. He said, “I find that to be an incredible answer; you are 82-years old and there is little chance that you will live the 25 or 30 years necessary to collect the full payout. Why not take the cash?”
I explained that if I took cash I would have to manage a large amount of money–far beyond my needs–or hire someone to do it for me. The annuity takes care of this and without charge or risk. I would also have to make provisions for distribution of the residue at my demise. This would be done automatically through the annuity with payments continuing on to my named beneficiaries, which incidentally could be changed, if necessary, prior to my demise. What a simple way to distribute part of an estate. The funds are professionally managed, not only during my lifetime but also for my heirs. If I had concern that the heirs might sell the income entitlement for cash, I could run the proceeds through my family trust and head that off.
There have been many horror stories of lottery winners squandering their cash payments, being victimized, or developing bad lifestyles from too much ready cash. I know of no such instance where the annuity was selected.
Well, all this is purely hypothetical, because the likelihood of one ever hitting such a jackpot is extremely remote. Unfortunately, though, too many people plan their financial lives as if they will someday be rescued by a lottery win. They are also the same people who would likely take the cash and run.
However, many people do create their jackpot, albeit smaller than a mega-bucks lottery win. Through IRAs, 401(k)s, company pension plans, personal savings and investments, a sizable sum may be created during a person’s working lifetime. Then comes retirement and earnings from our labor cease. What do we do with this carefully created jackpot or nest egg?
Many of the assets may have been growing in value, but it may all be on paper. It is not income and what has been growing may mature and shrink–or worse yet–die. Unless the nest egg is huge it is not likely that it will generate sufficient interest or dividends to replace a sizable portion of one’s former earned income. Therefore, changes need to be made to assure adequate income that will last for one’s entire life. You can’t live on paper profits, and speculation with retirement funds can be a recipe for disaster. The greatest unknown is, of course, how long the income must last; none of us knows when our time is up.