On Lump Sum Distributions

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In general, people don’t do well with amounts of money significantly larger than they are used to handling.  The most obvious example of that is people who win lotteries. The money typically gets wasted — bad purchases, bad investments.

Thus I would encourage you to be very careful with any large distributions of money that you might receive.  Examples include:

There are three problems with lump sums — receiving them, investing them, and rate of their use for consumption. Let me take these topics in the order that they should occur.

Receiving a Lump Sum

Let’s start with the cases where you have a stream of payments coming where a third party comes to you and says that you can get all of the money now. I am speaking of structured settlements and inheritances where trusts have been structured to dole out the money slowly. There is one simple bit of advice here: don’t do it. Take the payments over time. None of the third parties offering to give you cash now are giving you a good deal, so avoid them.

Then there are the cases where an insurance company is making the payments from a disability claim, a structured settlement, a lottery, a pension buyout, or an annuity that someone bought for you on your life. The insurance company will be more fair than any third party, because they aren’t usually looking to make an obscene gain, just a big one, because it reduces their risk, and cleans up their balance sheet, so they can do more business. One simple bit of advice here: still don’t do it. You can do better by taking payments, and building up money for larger purchases.  Be patient.