So, I’m currently in the process of divorcing my husband, and one of the issues to settle is alimony. I can choose either a lump sum payment or monthly checks (indefinite unless I remarry, with adjustments for inflation). Opinions from people around me vary: some say the lump sum is better because it’s guaranteed, secure, and puts all the money in my hands right away. Others argue the monthly payment is better because it provides stability and consistent support. Personally, I’m leaning toward the monthly option, since I married young (at 20), never worked, and haven’t had much experience managing money. I worry I wouldn’t be “proficient” enough to handle a lump sum wisely.
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Let’s say your monthly is $1000 and the lump sum is $100000. Let’s say you need that $1000/mo to fund your lifestyle.
January you get $1000 under the monthly plan. Or, you withdraw $1000 from your lump whilst the remaining $99000 easily earns 5% in dividends/interest.
After 1 year under monthly payments you have $0 in liquid equity.
After 1 year under lump sum you have $93000+ in liquid equity.The monthly payment scheme might work out better from the 15 year point onwards.
The lump sum IS better for at least the next 15 years.That’s such bs. You don’t know how old OP is so you don’t know her expected lifetime. You’re advising her to take on longevity risk, specifically the risk that she runs out of money when she’s old and probably unable to work.
Living off the lumpsum only works if her drawdown is 1% a year, not 1% a month.
lol. OP gets $210,000 today but in 25 years is fucked for life under your scenario!
You don’t know what my scenario is. I didn’t say in this comment what I recommend, only that his advice is poor, which it is. This stuff is literally what I do for a living.
I feel sorry for your clients.
You feel sorry for insurance companies? Huh.
Your clients.
Huh.
For your situation maybe monthly is better since you’re concerned about managing money, but for me I’d 100% go for the lump sum and then invest whatever portion of it I don’t immediately need in a safe investment like a CD or something where there isn’t any chance of losing anything. You already have the money why not have it grow while you’re not using it.
There are a lot of questions that would influence my answer.
For example: Who did the calculation? Do you trust them to have calculated the lumpsum as a fair representation of the payments?
Who is carrying the death, disability and unemployment risk? In particular, if your ex-husband dies or becomes unable to work, who will continue to make the payments? What if he married in the meantime and his new wife fights the settlement due from his estate? (Happened to someone I know. She won eventually but had a very hard time for years until the money was released.)
How large an amount are we talking about? Can you survive on 1% of the amount per year? For example, if the lumpsum is USD 10m, then hire a wealth manager to invest it and have yourself paid 1% a year, in this case USD 100k a year, or USD 8.3k a month. The invested lumpsum will increase with inflation and so your 1% will also increase each year. This setup will allow you to live off the lumpsum indefinitely.
Based on the limited information you provided I assume the amount isn’t that big, in which case I would advise that the monthly amounts are paid via an annuity purchased in your name from a life insurance company.
This solution has a number of advantages:
- The insurance company will calculate the lumpsum (which would be the price of the annuity)
- You aren’t subject to any risk from your ex-husband’s life
- If this is payable for life, the life insurance company takes on the risk that you become very old and run out of money.
You will have the risk that the insurer goes bankrupt but provided you select a reputable, well-funded company that’s been around a long time, the risk is relatively low - life insurance companies are heavily regulated. Also, you would get some money back from a bankruptcy. Many annuity products also pay back part of the annuity price if you die within the first few years, so in that case there should be something to inherit for anyone you leave behind.
How many months would the lump sum be equivalent to?
The lump sum would be equivalent to approximately 210 months. We agreed on this amount because we were married for 17 years and 6 months at the time of our divorce filing. I’m saying approximately because in reality it’s a bit more than that since it’s the “clean cut” option.
In that case I’d personally take the lump sum and invest as much as possible of it into something like an ETF.
Lump sum. If you die tomorrow, it also becomes void, so any living family will get nothing.
Use that money to help you get by until you have a job, or a skill that someone will pay you for (like Etsy).
The longer you go without work experience, the less hire-able you will be, so what will you do when you run out of money again?
IMO the lump sum is the better option for these reasons; a lump sum could be invested in a way that could give you a source of passive income, or grow into a sizeable nest egg. Monthly payments will by and large go to living expenses, and yeah, that will make things easier, but when the payments run out, you may be SOL.
Also, a dollar right now is always worth more\has more purchasing than a dollar in the future due to inflation. By taking monthly payments, you will ultimately get ‘less’ overall. What seems like a nice monthly alimony check today, may not even be able to cover rent 10 years from now.
Reading other comments, I see this amount would equal to 17 years of payments. There is no right answer. If it were me, I’d go for the lump, but I’m well aware that I am good at managing my own money in the sense that I don’t overspend, no matter what the bank account says. I’m naturally frugal.
I think the main considerations you need to take are: your personality, which you suggest you can’t trust yourself with that much money; on the other hand, the payee’s personality and the unexpected, ie., are they reliable enough to pay monthly or will they owe you? What if they die in a couple years? What if they go bankrupt? Etc. (not sure if there are system failsafes for these scenarios where you live).
I would suggest get the lump, deposit 80% of if or so in a fixed account with a high rate that won’t let you withdraw in a couple years, use the remaining 20% to keep yourself alive until you find a job. Once you get a bit more used to managing your own money you can decide what to do with the rest.
