Lump Sum Payment

A Lump Sum Payment is the disbursement of an asset’s value as a one-time payment method. The motivation most people have to make Lump Sum Payments is primarily to reduce future risk. Companies sometimes make Lump Sum Payments to retirees. The individual is left with the risk involved in investing and distributing funds from those investments. As another example, a development company has secured an eight-year lease on a new building they built to suit for their tenant. They have secured the property with a ten-year commercial loan. They decide to pay a Lump Sum to accelerate the loan so the mortgage coincides with the lease. There is a big fallacy in the logic behind a Lump Sum Payment of this type because the payment is typically based on the present value of an annuity with low interest rates. The return on investment that the income property could generate should eliminate the financial risk much more quickly than a Lump Sum Payment. For the retiree, an investment of a large portion of a retirement Lump Sum Payment in an income producing real estate property could provide monthly income while the value of the investment grows. Real estate investments give the investor an opportunity to leverage cash to obtain an investment up to five times greater than the cash itself. The investor has the benefit of return on the full investment while paying interest on a mortgage at a lower rate than the return on the real estate investment.