If you are in debt and considering selling your structured settlement as a “get relief quick” solution, you may want to consider the full repercussions of such a decision. If you are considering the possibility that you could make more money with your own investments, then waiting around for the full brunt of your settlement to reach your bank account, you may want to consider the true long-term benefits. Here are a few important things to consider:
In this article, we will be discussing the option of selling a settlement early, taking the penalty, and investing what is leftover, versus, waiting to invest the full amount of the settlement one small chunk at a time.
Get a Quote
There is never any harm in getting several quotes from structured settlement companies, as different settlements will net various lump sum payouts. Some settlements are just more valuable and easily transferred then others, and you may not know its true value until you seek a professional opinion.
Consider Your Tax Umbrella
Thanks to Uncle Sam, you have been basking underneath a protective tax shelter with your structured settlement. However, once you cash in for a lump sum, you may owe both state and federal tax, which will reduce the already reduced lump sum you have coming to you.
The Reality of Debt
Many settlement holders will consider selling their remaining payments for a reduced lump sum payment to payoff a portion of their debt. I can tell you from experience, that debt is debt, and reducing your numbers may not be as effective, as finding better ways to budget and save. Consider using your remaining payments as a means to start building that nest egg you keep promising yourself.
The Value of Compounding Interest Rates
In certain situations, the value of the lump sum of cash for your structured settlement payment may compound under moderate interest rates to result in a greater profit, than if you had waited to receive each scheduled payment. This is known as the time value of money, and has been proven effective by a number of successful entrepreneurs. The fundamental reasoning behind this thinking, is that while your payments have been adjusted for inflation, your money has greater potential (buying power) today, than it will tomorrow.
With that said, if your settlement is reduced to pennies of its original value as a lump sum payout, then you might have a greater return if you planned to have a certain amount of each payment placed in a Roth IRA. You can nearly double your remaining payments with a five percent interest rate over the next 20 years. The catch is, you’ll have to allow this money to age like fine wine. For those of you who prefer the “hands on” approach to compounding the value of your return, you may have entertained the notion of investing your structured settlement.
The Draw of Self Investments
Selling a portion of your settlement to invest in various markets can be a great opportunity. However, you’ll notice I said, a portion, as for the average investor, it is practical to save a portion of payments for a rainy day. For instance, if your future financial status looks good for the next year, you can sell the coming years earnings, and use that money to strengthen your investment portfolio. If things work out, you can sell another portion, and so on. If your assumptions prove wrong and your investments fall flat, your payments will resume and you will still have the opportunity to take advantage of that Roth IRA I mentioned earlier.
A few investments that the average person may want to explore are common stocks and commodities (gold, silver, wheat). Common stocks can become a full-time job with the necessary re-positioning required to see returns greater than your standard interest earnings. Commodities can offer better than average payoffs. They require patience, and work best for those who have one ear pressed to the grapevine of an experienced professional.
What About Equity?
Investing your settlement in equity is not often recommended. Your quick calculations may be suggesting a much higher return on investment, but considering its long-term uncertainty, it may not be the best way to secure your retirement.
Help For Your Decision
For more help on deciding what is the best way to use your remaining settlement payments, contact the National Foundation for Credit Counseling, or there are also a number of qualified structured settlement companies who offer financial advice as part of their working relationship with you.