Three Ways to Generate Income From a Lump Sum of Money
If you've come into a lump sum of money it is wise to first and foremost acknowledge that “God owns it all”. This money may have come from a business sale, inheritance, settlement, or years of disciplined saving, and now you may be asking: “How can I steward this money well and turn this into reliable income?”
It’s a smart question. A large sum can provide real financial freedom, and opportunities to show generosity but only if you make the correct decisions. You need to decide how much use towards generous giving, how much to put to work, and how much to use to establish / build your emergency fund. Since these lump sums of money can come without much notice, you may need to find a place to “park” the money while you think things through. A good place to start is to get the money deposited into a high yield savings account so that it isn’t just idle cash losing value to inflation. This isn’t a long term solution - however, it does give you some time to process and plan.
Once you have decided on how much will go towards generous giving and how much is needed to establish your emergency fund, the question becomes, how can I generate income and/or growth from the remaining dollars.
So, while not a complete list, there are three practical and popular ways to generate income from a lump sum:
Invest the Money and Generate Income from Investments
Buy a Single Premium Annuity
Buy Real Estate and Generate Income from Rental Payments
Each approach has pros and cons, and the right choice depends on your financial goals, risk tolerance, and how involved you want to be in managing your money.
1. Invest the Money and Generate Income from Investments
Investing in a diversified portfolio of stocks, bonds, ETFs, and other assets is one of the most flexible ways to generate income.
This method can include dividends from stocks, interest from bonds, and even systematic withdrawals from your portfolio.
How It Works
You invest your lump sum in a balanced, diversified portfolio aligned with your time horizon and risk tolerance. Income can come from dividends, interest, or scheduled withdrawals using a strategy like the 4% rule.
Pros
Flexibility: You can adjust your investments based on changing goals or market conditions.
Liquidity: Most investments are easily accessible if you need cash.
Growth Potential: You benefit from capital appreciation in addition to income.
Tax Efficiency: With proper planning, investment income can be taxed favorably, especially qualified dividends and long-term capital gains.
Cons
Market Risk: Investment values fluctuate, and income is not guaranteed.
Emotional Strain: Managing a portfolio (especially in volatile markets) can be stressful.
Requires Oversight: You’ll need to review your plan regularly.
Is This Right for You?
This method works well for people who are comfortable with some level of risk and want control over how their money is managed. It also appeals to those who prioritize long-term growth alongside income.
2. Buy a Single Premium Annuity
A single premium immediate annuity (SPIA) is an insurance product where you exchange a lump sum for a guaranteed income stream. Payments begin immediately and can last for life (which is most common) or a specified period.
How It Works
You give an insurance company a lump sum. In return, they promise to pay you a fixed amount regularly: monthly, quarterly, or annually.
The amount you receive depends on your age, gender, interest rates, and whether the annuity covers one or two lives.
Pros
Guaranteed Income: Payments are predictable and not affected by market fluctuations.
Simplicity: Once set up, there's nothing to manage.
Longevity Protection: If you choose a lifetime payout, you won’t outlive your income.
Peace of Mind: For many, knowing that a portion of their income is locked in offers emotional comfort.
Cons
Lack of Liquidity: Once you buy an annuity, you can’t access the lump sum.
Inflation Risk: Unless you buy an inflation-adjusted annuity (which costs more), your purchasing power erodes over time.
No Growth Potential: You're trading growth for stability.
May Not Leave a Legacy: Annuity payments usually stop at death unless you select specific riders or periods.
Is This Right for You?
Annuities are well-suited for people who value certainty over flexibility and don’t want to worry about market swings.
They can also serve as a “floor” of guaranteed income to complement other sources like Social Security.
3. Buy Real Estate and Generate Income from Rental Payments
Real estate investing can turn a lump sum into a steady flow of income through rental properties. You could buy residential or commercial property and rent it out to tenants.
How It Works
You use your lump sum to buy one or more rental properties. These can generate monthly rental income and may also appreciate in value over time.
Pros
Tangible Asset: Real estate is a physical asset that often holds its value.
Steady Income: Rent payments can provide consistent monthly cash flow.
Tax Benefits: You can potentially deduct mortgage interest, property taxes, depreciation, and other expenses.
Inflation Hedge: Rents often rise with inflation, helping maintain purchasing power.
Cons
Hands-On Management: Even with a property manager, real estate requires oversight.
Upfront Costs: Besides the purchase price, there are closing costs, inspections, and possible repairs.
Vacancies & Maintenance: Tenants come and go, and properties need ongoing maintenance.
Illiquidity: Real estate isn’t easy to sell quickly if you need cash.
Is This Right for You?
Real estate can be a great income source for those who want a more active investment and are comfortable with the responsibilities of being a landlord. It can also work well in a diversified income strategy.
A Balanced Approach
There’s no one-size-fits-all answer for how to turn a lump sum into income. Each method (investing, annuities, and real estate) offers different benefits and trade-offs.
If you value flexibility and growth potential, investing may be your best route.
If you crave simplicity and guaranteed income, an annuity could provide peace of mind.
If you’re open to a hands-on approach and like tangible assets, rental real estate may be a strong fit.
It can also be a great idea to combine two or more of these methods to balance risk, income, and liquidity.
Ultimately, there is no “perfect” way to generate income from a lump sum of money. But the most important thing is to choose the strategy that is aligned with your life and your preferences.