A common folktale shares the story of a young girl who earns a favor from her village’s greedy king. Amidst a famine, she asks him for a single grain of rice to double every day for 30 days. The king willingly obliges, only to find that by the end of the 30 days, the girl has earned over half a billion grains of rice—saving her family and other villagers from starvation.
Or, you may have heard a similar story, which begins with the question, “Would you rather be given a million dollars right now, or a penny that doubles every day for 30 days?”
While the million dollars may be tempting at first glance, it only takes some simple math to realize doubling a penny every day will equate to just under $5.4 million by the end of 30 days.
These stories are meant to demonstrate some important lessons on patience and the power of small steps compounding over time.
Yet, in the real world, you may come to a crossroads where you must choose between a lump sum payment (i.e. the million dollars upfront) or distributed payouts over time (which don’t typically double every day, but may grow or fluctuate depending on the circumstances). When the math isn’t as cut and dried as our favorite fables, how do you choose the best option for you?
Let’s talk through some important considerations to help you decide.
When are you most likely to encounter this scenario?
There are several situations in life when you may have to decide if you’d prefer to receive an upfront lump sum or a series of smaller payments over time. Sometimes, these payments can last for life.
These scenarios include, but certainly aren’t limited to:
- Pension plans: If you're a government worker or employee of a non-profit, you may be entitled to a pension plan (also called a defined benefit plan). Most pension plans will offer employees the option to either collect a lump sum upon reaching retirement age or receive monthly benefits for life.
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Annuities: Annuities are a popular choice for creating guaranteed income in retirement, especially as pensions continue to fall by the wayside. While annuities are commonly associated with distributed payouts throughout retirement, there is usually an option to take an upfront lump sum payment as well.
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Lottery winnings: While the chances might be one in a million (or less), there’s still the possibility you could hit it big with the jackpot someday. Lottery winners have the option to either receive their winnings as one lump sum or as annuity payments over time. Typically, the lump sum will be less than the total annuity payout amount.1
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Business sale: If you sell your business, or even a piece of investment property, you may have the option to complete a structured installment sale. In doing so, the buyer would make periodic payments to you directly, rather than purchase the property with a lump sum payment upfront.
Determining which option is right for you
Choosing to double a grain of rice every day may be an easy decision, but of course, real-life scenarios look a little different. Here are some factors you can consider when deciding if a lump sum payment or payout schedule is better for you and your long-term financial well-being.
Tax liability
Taxes have the potential to greatly reduce your earnings, particularly when they aren’t considered ahead of time. Worst case scenario? A surprise tax bill may lead to hefty penalties or tax debt.
Whether you’re receiving a lump sum payment or smaller payout installments, you may be required to pay tax on the amount received. The type of tax and tax rate will vary, depending on factors including how long you’ve held the asset and your other taxable income.
Your potential tax liability could include:
- Ordinary income tax: If the lump sum or payouts count as income, they could increase your total taxable income for the year. This is taxed at your marginal tax rate, which ranges from 10% to 35% for the 2025 tax year.2
- Capital gains tax: If earnings or growth are included, they may be subject to either short-term capital gains or long-term capital gains tax. The former mirrors your ordinary income tax rate and applies to income earned from assets held for less than one year. If you wait a year or longer to sell an asset and realize a capital gain, the tax rate is generally capped at 20% depending on your total taxable income.3
- Net investment income tax (NIIT): If you earn net investment income, namely from selling a business or investment property, or have a modified adjusted gross income (MAGI) above $200,000 (or $250,000 for joint filers), you may be required to pay a 3.8% NIIT.4
So from a tax standpoint…
If tax liability is incurred, a lump sum payment could result in a significant tax bill for the year, potentially pushing you into a higher—or even the highest—tax bracket, and/or triggering additional tax liability (like the NIIT).
Smaller lump sum payments may not create such a sudden spike in tax liability, but they could potentially keep you in a higher tax bracket than you’re used to for a prolonged period of time.
Payout period
If you do opt for distributed payouts over time, it may be worth considering just how long the payout period is intended to last, and if that addresses your needs or concerns.
For example, taking the pension payout option may enable you to enjoy a steady, reliable retirement income for the rest of your life. If you value that peace of mind, it might make sense to opt for this instead of the upfront lump sum payment.
On the other hand, guaranteed lifetime income may mean forgoing some opportunities for growth. If you’d rather maintain full control over how your future retirement income is invested, taking the lump sum and reinvesting it as you see fit could better address your desires.
Keep in mind not all distribution payout periods last a lifetime. Lottery winnings, for example, are typically distributed over a finite period of time (typically 29 years). Individual lotteries vary on how the funds are distributed. Some will provide equal payments across the full pay period, while others will gradually increase payments over time.1
Personal goals
If you were to take a lump sum payment (or adversely, take the regular payouts), what would you do with the funds? The answer to this simple, yet critical, question can help you decide which avenue best aligns with your financial goals and needs.
For example, if you’d like to use the money to fund your next business venture, buy a house, pay for college, or otherwise accomplish a high-ticket goal, it may make the most sense to pursue a lump sum payment.
But, if you don’t necessarily need a large amount of cash upfront—or your goal is to create steady income for a long period of time—regular payouts may better suit your needs.
Life expectancy
Regarding retirement income and lifetime payouts, keep in mind that life expectancy can play an important role in your decision. If you come from a long line of centenarians and have no serious health concerns, you may need to prioritize longevity in retirement.
On the other hand, you may have a chronic condition or family history of disease that impacts your anticipated timeline. If that’s the case, is it better to take the lump sum now and reinvest based on your expectations for retirement? Along the same lines, you may want to consider how your lump sum or periodic payouts could be used to cover anticipated expenses, such as long-term care or ongoing medical treatment that may not be fully covered by Medicare or supplemental insurance.
Your other resources and income sources
Take into consideration the rest of your financial life and available resources when making this decision. If you opt for annual smaller payouts (though remember, they may equate to more over time), can you leverage your other income sources to fully address your financial obligations and needs each year?
Or, are you better off leveraging a lump sum now and allowing your other sources—like a 401(k) or IRA—to grow and compound for longer? This decision may also be impacted by market conditions. If your portfolio is plagued by persistent volatility, you may be more inclined to keep your capital invested for longer and ride out the turbulence as much as possible.
Lump sum or regular payouts? The choice is yours to make.
Chances are, you may need to navigate this decision at some point in your life—particularly as you near retirement (or hey, win mega big bucks in the lottery!). While either option can be used to better your financial well-being, being strategic in how you choose between a lump sum or annual payouts can help you make the most of your financial resources over the long run.
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