Glossary
Lump Sum
A lump sum is a single one-time payment of a full amount — such as a pension payout, severance, inheritance, or settlement — as opposed to a stream of smaller payments over time.
The choice appears at pivotal moments: pensions may offer a lump sum instead of lifetime monthly income, and windfalls arrive as lump sums that must then be invested or spent. Comparing a lump sum to an income stream means weighing interest rates, life expectancy, inflation protection, and who bears investment risk.
Why it matters in practice
Trading a lifetime pension for a lump sum moves longevity and market risk from the plan to the individual — sometimes sensible (poor health, strong other income, estate goals), often not, and generally irreversible. For investing a windfall, the evidence favors prompt investment over waiting, but the behavioral risks of large sudden money — overspending, pressured sales pitches — are frequently the larger threat.
Related terms: Pension · Defined Benefit Plan · Rollover · Dollar-Cost Averaging · Longevity Risk