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The Pros and Cons of Receiving a Lump sum

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The Pros and Cons of Receiving a Lump sum

In the recent factors involved in the time value of money, many employees or

tradespeople are given the option to receive a lump sum instead of the traditional monthly

payments. Nevertheless, since receiving a lump sum may be beneficial, it still has pros and cons

in the financial market. The pros and cons of receiving a lump sum may be well analyzed using

the fundamental principle of the risk-return relationship. According to the principle of the risk-

return relationship, there are various cons of accepting payments in a lump sum. First, when an

individual accepts a lump sum, he attains total control over the received money. According to the

Ghysels et al. (2016), in as much as the lump sum may expose to the risk of total or partial loss,

still according to the risk-return principle, an increase in the risk involved in the lump sum would

result in to increase in the returns on investment of the lump sum amount. The second advantage

of receiving a lump sum is that the individual may end up paying little tax because he would be

only taxed on the monthly withdrawals.

In addition, the precept of finance, which states that the value of a cash flow is inversely

related to its perceived risk, may add to the pros of accepting a lump sum. Accepting a lump sum

today will increase the worth of the whole money compared to receiving monthly payments of

the same amount. For example, accepting a lump sum of $50,000 today may have a great value

than receiving the same amount twenty years from now (Mellichamp, 2013).

Concerning the cons of receiving a lump sum, there is a bigger possibility that all the

lump sum may be lost. For instance, after depositing the lump sum in the bank, there are chances

that there may be a decrease in the investment risks of the money, which may, in turn, contribute

to a lower return because banks do not have total control of inflation. In addition, the financial

principle of the risk-return relationship may result in an individual receiving fewer amounts in a
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lump sum than when receiving it in monthly payments (Ghysels et al., 2016). There is a greater

risk that the accepted lump sum may not match the monthly payments because it may be

insufficient to reflect the monthly payments.

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References

Ghysels, E., Plazzi, A., & Valkanov, R. I. (2016). The risk-return relationship and financial

crises. Available at SSRN 2776702.

Mellichamp, D. A. (2013). New discounted cash flow method: Estimating plant profitability at

the conceptual design level while compensating for business risk/uncertainty. Computers

& Chemical Engineering, 48, 251-263.