Lump Sum or Payout: How to Withdraw When You Retire

Lump Sum vs. Monthly Payments

This week, your Money Guys tackle a question often asked by their clients in regards to retirement planning: “Should I take a lump sum payment, or a monthly pension payment?”

While the question seems simple on the surface, the decision involves more factors than you might think.

Brian and Bo walk listeners through the same decision-making process they offer their clients. They cover the pros and cons of each option, as well as the factors (and math) you need to take into consideration when making the decision.

This discussion was inspired by a Fidelity article on the lump sum vs monthly payment debate. The Money Guys are adding their own valuable thoughts and experiences on the subject today.

The Monthly Payment Option

The clear benefit of this option is that you’ll be guaranteed a stable source of monthly income from your date of retirement until you pass away. You also have the option to include your spouse in the deal so that they continue to receive payments after you pass away.

There are a few downsides, though:

  • You need to be able to count on the company continuing to exist, and we’ve already seen many companies struggle to continue paying pensions for their employees.
  • You need to take inflation into account!
  • Receiving a monthly payment limits your ability to afford an unexpected, large expense.

The Lump Sum Payment Option

The clear benefit here: flexibility. You receive a large sum of money and are free to invest some of it, take some of it to fund your monthly retirement expenses, or assign the money to be left to your heirs.

But there are downsides here, too:

  • You’re responsible for making this money last throughout your retirement.
  • Your money is then subject to market fluctuations (if you invest it), so therefore not as stable as monthly payments.
  • You’ll need to roll your payment into an IRA or employer qualified plan to avoid the distribution being taxed as ordinary income.

How to Decide? Do the Math

This is an extremely individualized decision, but Brian and Bo do their best to generalize the factors you need to take into account. You have to ask yourself if you have enough guaranteed monthly income for retirement, what your life expectancy is, and whether or not you want to leave an inheritance behind.

You can also use the formula Brian and Bo use for clients to help you decide — they share it within the episode.

Again, there are many factors to consider but by staying informed, you’re better equipped to make this decision. It’s one many people face, and this episode is a must-listen if you’re close to retirement and figuring out how to fund it.

Rethinking Your Wants and Needs

Wants and Needs

We’re constantly bombarded with messages from the media, telling us we need to buy this or that. We start believing those messages, too, because they also warn us that, unless we purchase the latest and greatest — we’re missing out.

And when we look at our social media accounts, we see the lives our friends and family are living. It’s so easy to forget all we have to appreciate when we think, “so-and-so has more fun/money/friends/stuff” and so on.

From advertisements that push us to mass consumption, to financial products like credit cards that allow us to acquire stuff without actually paying for it, our society encourages instant gratification.

It makes sense that people favor convenience over frugality and simplicity. We no longer care to differentiate between wants, necessities, and wishes, because we can just charge everything and think about it at a later date.

It’s easier that way.

But it’s also led us to think common discretionary expenses such as cable, coffee, new cars, and dining out are things we can’t live without. These are 100% wants, not needs.

People are simply too accepting of the fact that everyone else pays for it. It’s easier to think, “why not me too?” than it is to question what truly make up your wants and needs.

Let’s Set the Record Straight on Wants and Needs

True necessities never change. We all need water, food, clothing, and shelter to survive.

Our ancestors didn’t get to live a life of luxury with cable, smartphones, or fast food restaurants. Those are conveniences, and we pay a hefty premium to enjoy them.

In order to cut back on spending, it’s important to remember that. If you were to lose your job tomorrow, would you continue spending on these luxuries? Chances are, you’d cancel your cable subscription before you’d stop shopping for groceries.

It’s obvious that as a society, we need to change our financial priorities. We need to start rethinking wants and needs.

Wants Disguised As Needs That You Can Learn to Live Without

Because of our culture of convenience, we started to believe that some wants are vital to our being. They’re not!

Even though it might seem like living without TV is impossible, we’re confident you could if you had to. Keep this in mind the next time you want to buy something you think is a necessity.

When you want that shiny new car with a $30,000 price tag, ask if something cheaper could do the job. The answer will be yes. You don’t need a top-of-the-line vehicle to get around.

Let’s look at some other wants that are worth rethinking:

Daily Lattes: Yes, it’s an overstated fact that buying your overpriced coffee is a habit that’s expensive. And perhaps this one habit won’t kill your finances for good — but unless a daily latte is the only indulgence on this list, you may want to consider cutting back. You’re looking at over $1,000 spent on expensive coffee each year.

Cable TV: There’s next to no excuse for still having a cable subscription when there are so many alternative streaming services out there. Get Hulu+, Netflix, or Amazon Prime for less than $10 per month, instead of paying $100, $150, or $200 plus for a cable, Internet, and phone package.

Cell Phone: And speaking of phones, you can probably cut back in this area too. Start by not buying a new smartphone every six months to a year. Sure, technology gets outdated fast — but a 2 year old iPhone that was taken care of will still function just fine. Space out your cell phone purchases. Or consider switching to something like Republic Wireless, which offers smartphone plans from $5 to $40 per month.

Beauty Routines: While getting your hair done, going to the spa, getting a massage, or treating yourself to a manicure/pedicure on a weekly basis sounds nice, it’s hurting your wallet. Try cutting down on how often you go to start. Then take a good hard look at what you could do yourself at home for a fraction of the cost (think doing your own nails).

Anti-Aging Solutions: All of these products and surgeries come with a high price tag. Embrace aging, because it’s not going to stop. You might be temporarily delaying things, but sooner or later nature will catch up with you. It’s an invitation to a round of endless spending.

Bottled Water: Did you know they have Brita water bottles now, as well as pitchers? If you fill them up with tap water, they’ll automatically filter out the harmful chemicals. It’s a one-time investment as opposed to constantly buying a $4 or more pack of bottled water. There are also many filtration systems you can get built into your faucet. You don’t need bottled water anymore.

Plus, ditching the bottled water habit is eco-friendly, too! Waste less, save more.

Children’s Parties: The extent to which parents will go to celebrate anything involving their children can be great (and detrimental). We all love our children, but keeping your finances in order will be a better present for them down the road. Show your love and appreciation for them in a way that doesn’t involve pricey gifts or parties.

Gym Memberships: What’s the first thing you do when you commit to getting in shape? For many, it’s to sign-up for the gym. However, there’s no reason you can’t try getting into shape for free before making that commitment. There are plenty of YouTube videos out there that show you how to use bodyweight exercises (no equipment needed), and there’s always yoga, running, or hiking.

Pet Expenses: Pets are great family members, but they come with their own set of costs, too. Between food, grooming, and walking, you could be paying over $100 every few months. Instead, purchase a cheap pair of electric clippers to groom your dog, and make time to walk your furry companion.

Not to mention the pet itself. If you’re thinking of adding a four-legged member of the family, remember to adopt, don’t shop. Purebred pets can cost over $1,000. An animal from the shelter or a rescue group will likely cost about $100 in adoption fees — and you’ll give a loving animal a well-deserved forever home.

Further Items to Strike from the Budget

If none of these apply to your own spending patterns, consider these additional costs that many people classify as “needs” when they’re really just wants:

  • Single-purpose kitchen tools and appliances
  • Most technology (sure, Fitbits are cool. But do you really need to spend $100 or more for a glorified pedometer?)
  • Designer furniture (or even new furniture, if hand-me-downs are available from family and friends)
  • The most expensive version of anything

If you have any of these items or indulge in anything on this list, that’s not necessarily a bad thing. But if you feel like you’re constantly short on money, or complain there’s nothing left over at the end of the month, or can’t make any progress on your goals to save and invest…

It’s time to take a good hard look at your spending and re-evaluate your wants and needs.

So, ask yourself: are there any wants you think you need to reconsider?

Reflect on your values in life and what you’re currently getting out of your expenses. Are they worth the money you’re paying, or would you be better off putting that money to use elsewhere?

Don’t fall for convenience. Always question why you’re spending your money, and you’ll stop automatically accepting that you have to buy things because you “need” them.

What to Do When Life Happens

Financial Planning for the Unexpected

This week’s Money-Guy podcast was inspired by the simple fact that life happens. Even though we try to plan for everything, we can’t possibly know what life is going to throw at us next.

So how can we financially prepare ourselves for life’s emergencies? How can we work in financial planning for the unexpected?

Brian and Bo are big on planning with an emphasis on being flexible, and they’re providing the steps you can take now to ensure you’re prepared for when life happens and you have to adjust.

How You Can Plan for the Unexpected

Brian has six recommendations on how you can get your finances in order before a major life event happens:

Create Emergency Savings

This is an absolute must — you need cash savings held in a liquid account that can help get you through any unexpected financial disaster. From an expense you weren’t prepared for to a loss of income, your cash reserve can get you through some tough times.

Brian and Bo recommend thinking about how long you might be out of a job to determine how much you need.

Maintain Insurances and an Estate Plan

Having an estate plan is especially important if you have children, as you want to assign guardianship for them. You should also have enough life insurance coverage that your family’s needs are taken care of in the event that you pass.

Avoid Being Life-Poor But Retirement-Rich

You should have some liquidity in the event that something unexpected does happen. While it’s great to fund retirement accounts, you’ll be glad to have extra reserves in a taxable brokerage account for when life gets hectic.

Be Flexible with Your Finances

You need to be flexible enough with your finances that you’re not committing to any one direction. Don’t be on the extreme end of the spectrum.

Know When It’s Okay to Scale Back

While Brian and Bo consider themselves hyper-savers and normally encourage others to save as much as possible, there are times when it makes sense to ease up. It’s more than okay to cut back on saving if your life circumstances necessitate it.

Find the Positives

When an unexpected situation arises, try to find the positive in it. As an example, think of the countless successful entrepreneurs out there that started their companies after being laid off. They decided to turn their unemployment into an opportunity. 

The most important thing when financial planning for the unexpected is to find the ability to pivot and adjust. We all will need to deal with some unfortunate situations and less-than-ideal circumstances throughout our lives. It doesn’t need to be the end of the world if you can prepare as best you can and maintain flexibility in your finances.

5 Investment Mistakes Couples Make

Investment Mistakes Couples Make

Have you talked with your spouse about your investment strategy, or what the purpose is for your investments? Investing can be tricky enough alone, but it’s extremely important to include your other half in investment decisions so that you’re on the same page about how your money is being put to work.

If you haven’t yet discussed investing with your partner, you should read on to be aware of the common investment mistakes couples make so that you can avoid them.

Mistake #1: Only One Spouse Has Contact with a Financial Advisor

It doesn’t matter if one of you is more comfortable with the idea of investing. Both of you should be attending meetings and calls with your financial advisor because you’re in this together. You both have an equal stake in how your portfolio performs.

In the event that something happens to the spouse handling investments, the other will be lost when it comes to picking things back up. Avoid this burden by working as a team.

Mistake #2: Not Being Clear on Common Goals

You should be investing with a goal in mind — whether you’re aiming for early retirement, funding your children’s college expenses, or saving up for a down payment on a house in five years.

Are you and your spouse in agreement on your investment goals? If you haven’t talked about investing beyond “it’s the right thing to do”, then you should. Otherwise, you might face an issue down the road where one spouse wants to withdraw money early from a retirement account for an expense that was never discussed.

Mistake #3: Investing Without Being Informed

Just because your investments might be managed by someone else doesn’t mean you should blindly follow their advice. You should absolutely know what you’re investing in and be a part of the decision process.

Never be afraid to ask your advisor questions. They should be able to answer them honestly, and they should want you to understand the reasons behind their investment decisions.

Mistake #4: Not Taking Advantage of Employer Matching Contributions

Do you and your spouse have a 401(k) retirement plan offered through your employer? Are you contributing enough to receive the amount your employer will match?

If you don’t know the answers or aren’t sure, you need to look into this. You could be leaving free money on the table. You should be able to ask your HR department about the details of your retirement plan.

If you’re not sure what matching contributions are, here’s an example of how they work: If your gross annual salary is $75,000 and your employer matches contributions up to 6%, then that means you have to contribute 6% ($4,500) of your salary for them to match that contribution.

If you only contribute $3,000, then you’re missing out on $1,500 from your employer. Likewise, anything above $4,500 won’t be matched, but you’ll still be funding your retirement.

Mistake #5: Being Unaware of How Your Advisor is Paid

One of the biggest mistakes you can make is hiring an advisor without knowing how they get paid. Are they fee only, do they get paid a commission, or a hybrid of both?

This is important because you want to ensure there’s no conflict of interest when your advisor recommends certain products to you. If they make a commission off of sales, then they might not be looking out for your best interests.

You should also check to see if your advisor is a fiduciary. If they are, then there’s no doubt they’ll be acting in your best interests, as financial fiduciaries are required to do so upon taking an oath.

To avoid these common investment mistakes couples make, remember that investing requires teamwork. Neither of you should be working alone when it comes to financial matters.

If you don’t have confidence in your knowledge of investing, you can always learn from the many resources available to you online. Building wealth through investing will ensure a successful financial future, and it’s not a matter to take a backseat on.