Do you handle lump sums differently?

[SecondCor521]

Hi all,

My plan all along has been to set prioritized goals and then work towards them one at a time. Things have been going well; I inch closer to those goals with each paycheck.

I may soon be receiving a profit sharing bonus that represents about 10% of my annual salary. Even after taxes, the leftover amount is a relatively large amount of money to receive at once.

My thought had always been to just accelerate achieving my goals with such lump sums -- it makes logical sense to do so. However, I find myself doubting that this is the best course of action or that this is what I want to do. Part of me wants to spread the lump sum across several goals. Part of me wants to use some of it for non-goal purposes.

So do you handle larger lump sums differently than the money that comes in on a regular basis or smaller lump sums? How? Why? Does it depend on the size of the lump sum? The source?

2Cor521

 

[traineeinvestor]

It depends.

In early 2009 I received to material lump sum payments as a result of changing jobs. I thought equity markets looked cheap and invested all of it into equities over a period of a few months.

The income from my current job tends to fluctuate a bit, with the final payment after year end being the biggest. This year I just invested it straight away.

If the markets had been higher when I received these payments I would have been more cautious.

In case you couldn't guess, I have (or believe I have) a fairly high degree of risk tolerance.

 

[obgyn65]

I have not had many unexpected large lump sums in the past. But to answer your question, I have not treated them differently than the money that comes in on a regular basis. Being risk averse, I mainly have CDs scattered over the next 10 years.

So do you handle larger lump sums differently than the money that comes in on a regular basis or smaller lump sums? How? Why? Does it depend on the size of the lump sum? The source?

2Cor521

 

[chris2008]

Whenever there is a lump sum we treat it just like normal income.
It will go towards our goals.
Then, once a goal is achieved we allow ourselves to celebrate a bit.

 

[Htown Harry]

I look first to proceed with significant lump sum expenses that are coming anyway, mostly home- and car-related.

I have a 10-year-old house that was built with quite a few "builder grade" materials. Also an eight-year-old car with 80,000+ miles. I like them both, but it's time for some renewal.

Since w*rk and weekend obligations limit my DIY time, there's a growing list of near-mandatory expenses coming up in the next year or two: paint, roofing, carpet and kitchen flooring for the house, some front end working for my car's squeaking and thumping front end. DW also has requested a new washer and dryer (the current set is over 15 years old and has been repaired a few times).

If I received a low-five-figure lump sum tomorrow, I would prioritize the to-do list and knock out as many as I could in a short period of time.

In other words, on the rare occasions my income stream has a short-term bump upwards, I look to smooth out some of the bigger bumps in my expenses to increase the certainty that saving for my goals will continue uninterrupted at a steady pace.

 

[Moemg]

The few lump sums that I have had come my way I handled by skimming a small amount off the top for a treat . It was usually a special trip that I wanted . The rest I just add into my investments .

 

[Rich_by_the_Bay]

Being risk averse, I mainly have CDs scattered over the next 10 years.

Not to hijack the thread, but that sounds pretty risky to me - hate to see you watch in vain as inflation reduces your real net worth by 3% or more per year long term. Your call, of course, and one never knows, but unless you are very old, you might consider diversifying.

But back to the OP: I always put about 75% of windfall earnings (after taxes) into retirement savings but used the other 25% on hedonism. It made me feel rewarded, a pat on the back as most of such earnings were intended, yet I still felt like a good saver from the 75% socked away.

 

[Ed_The_Gypsy]

I have screwed up lump sums in the past. This is what I have learned:

If you can restrain yourself, pretend you didn't get one.

Pay off debts first. Then allocate the rest per your asset allocation. (You do have an assett allocation, don't you?)

 

[Gone4Good]

No.

I used to get a lump sum every twelve months as part of my normal compensation. I used it to rebalance the portfolio.

 

[MichaelB]

The few lump sums that I have had come my way I handled by skimming a small amount off the top for a treat . It was usually a special trip that I wanted . The rest I just add into my investments .

That's what we did and it worked well.

 

[bbbamI]

The few lump sums that I have had come my way I handled by skimming a small amount off the top for a treat . It was usually a special trip that I wanted . The rest I just add into my investments .

I did the same thing....however, I'd skim more than a small amount for a treat.

Hmmm...I haven't received a lump sum in a long time....

 

[Prime]

At the end of every month we sweep whatever is left into a few different accounts based on our current goals. If we get a lump sum of any kind it is just treated like normal income and is split along with any additional money at the end of the month. Of course we have never had anything extremely large. All of our experience is with things 4 figures or less.

 

[Koolau]

I used to get compensation we called a "bonus", but in reality, it was a hold-back which we got if the company met or exceeded "plan". It usually varied from 10% to 25% of our total compensation, so it could be significant. I say "hold back" because I was in an industry/profession which was easy to rank one's salary vs others in the same industry. To be competitive, the "bonus" had to be included in total compensation. Thus, even though there was a sudden chunk of money available, it was difficult to think of it as a windfall.

I soon developed an attitude and practice of all but ignoring it. It, along with my monthly salary was direct deposited. Most of my saving was done through automatic deductions, so the only real "evidence" of having received a "bonus" was a bit higher check-book balance and an extra pay "advice" in the mail.

Whether from the "bonus" or from lower expenses, when the check book balance built up, we made (I suppose you could say) lump sum "investments" whether that was a CD, an extra couple of mortgage payments or adding to an existing investment account.

Perhaps memory fades, but I can't think of any truly "unexpected" low-five-figure lumps sums I ever received (except a small pre-inheritance). Unless it was unexpected, it was treated the same as any other source of income. Fill the check book, disburse, rinse, repeat.

 

[Katsmeow]

It depends. From my work, when I was working full time, I usually received a bonus around Christmas time of about 5% or so of my salary. We usually took a part of it for fun money and the rest just treated it like any other income.

For many years, DH received a similar type bonus handled similarly.

A few years ago his employer changed the compensation system and his bonuses changed to being anywhere from 20% to 40% of annual compensation. We basically budgeted based upon the idea of him not receiving these bonuses (and they were heavily dependent upon company goals being met so were by no means guaranteed).

Usually we picked some amount (a relatively small percentage) that we allocated to fun money or new computers and then the rest we just treated like any other income. One year we had been considering saving up to buy a new car and the bonus was much higher than we had anticipated so we actually just went ahead and bought the car for cash.

 

[obgyn65]

Thank you Rich for your kind words and helpful advice as always. I also have municipal bonds and money market - that's about the most diversified portfolio of investments I feel comfortable with... On average this year I am getting 3.6% return.

If you have a better idea about safe products with the same level of return over the next 10 years, please let me know. Thank you kindly.

Not to hijack the thread, but that sounds pretty risky to me - hate to see you watch in vain as inflation reduces your real net worth by 3% or more per year long term. Your call, of course, and one never knows, but unless you are very old, you might consider diversifying.

 

[FreeAtLast]

I try never to let the sun set on a undeposited check. Once it is in the bank I eventually figure out how to fit it into my plans.

 

[GoodSense]

I get a "bonus" every spring for the previous year, but it's very much like Koolau's situation, so I consider it a part of my compensation and not a windfall. It goes straight to my retirement savings.

The one occasion when I blew the money was with a tax refund. I went to Mexico for a few days for a much-needed change in environment. The money would not have made a material difference in my portfolio. I don't regret the trip at all.

So, it depends...

 

[TomG]

Biggest lump sum I've ever seen has been worth about two months paychecks and living expenses. A few years later saw the same amount, except by then it was only worth about six weeks. First one went into a checking account and covered daily living without any changes in lifestyle. Second one was put into a CD (and really serves the same purpose)

If I were to see six or 12 months it would be more of the same. Funding checking accounts, CDs, Roth, etc., except my work hours would change a lot

After accumulating eight months of paychecks from Basic Training and AIT, it felt like a huge lump sum. Even at 23 the couple of trips to the stripclub were a poor choice

 

[FIREd]

DW gets lump sums several times a year, mostly bonuses and deferred compensation. The lump sums are fully part of her compensation package, so they are not unexpected though the amount she receives is always a surprise. Since we can live comfortably on her base income, lump sums go straight to investments, no skimming off the top.

Until a few years ago bonuses were used to pay for large purchases (cars, new roof, etc...) but those are now part of our budget and paid from her base income.

 

[Onward]

The percentage of a windfall that you put toward FIRE depends on the urgency with which you need to achieve FIRE. For me, 100% of every windfall went directly and gloriously to the FIRE fund. This was one of my cardinal rules. Fun stuff came out of my regular budget.

 

[MichaelB]

I worked in Venezuela, where labor law requires companies to pay 14% (eq. to 2 months salary) as a “year end bonus” (which was really no such thing). Companies just paid out the same old yearly amount in 14 payments instead of the usual 12. Most folks spent that money during the year, ran it up in credit card bills to be paid off at year end. Others used that money to finance Xmas spending and vacation travel.

We used this as an opportunity to save. It was always just enough - to pay for 3 babies, then some major unplanned medical expenses. Then a new car.

When I reached middle level mgmt positions up to 50% of my total yearly compensation became variable – and the discipline we acquired by living only on the regular monthly salary paid off. We were able to save a significant part of my total compensation.

There was always a fair amount of peer pressure to spend, often not easy to deal with. Because I earned in a foreign currency I also had the pleasure of watching it lose value in many different ways – slowly to inflation, suddenly and dramatically to maxi-devaluation, and for many years had to use risky methods to convert it to hard currency.

There is no doubt, however, that saving is a great enabler in life, and bonuses are an excellent opportunity to save.

 

[Koolau]

Thank you Rich for your kind words and helpful advice as always. I also have municipal bonds and money market - that's about the most diversified portfolio of investments I feel comfortable with... On average this year I am getting 3.6% return.

If you have a better idea about safe products with the same level of return over the next 10 years, please let me know. Thank you kindly.

Not to further hijack the thread, but, someday, if you don't mind, please let us other "ultra-conservative" investors know how you have maintained 3.6% return during these unusual times. Personally, I've hovered around 25% equities and that portion of my port have done some interesting gyrations like everyone else's. But long-term, my "cash-like" investments have easily exceeded 4%. Unfortunately, I've taken a big hit on return (no losses, mind you) recently as many of my old stand-by's have dropped in return. Some "guaranteed" 4.5%-return SPDA's have helped a bit, but my biggest investment - a Guaranteed Income Fund (GIF) has dropped to about 2% return - ouch!

If I could maintain about 4 to 5% return or more (during these times of 1-3% or so inflation) I'd feel fairly comfortable. (My personal way to deal with inflation in addition to my relatively small equity stake) is to take considerably less than 4% SWR. Any "tricks" you've learned to maintain relatively good returns now that cash isn't doing that well would be helpful.

edit to add: I reread your entry and wondered if you count your municipal bond's return based on the tax advantage. i.e. 3% return becomes about 4% if you are in the 25% tax bracket. Wondered how you handle this in over-all return. Thanks!

 

[Koolau]

After accumulating eight months of paychecks from Basic Training and AIT, it felt like a huge lump sum. Even at 23 the couple of trips to the stripclub were a poor choice

So, uh, Tom, where did you get the REST of the money for the 2 trips to the clubs? Heh, heh, heh.

 

[Nords]

So do you handle larger lump sums differently than the money that comes in on a regular basis or smaller lump sums? How? Why? Does it depend on the size of the lump sum? The source?

When I was earning the submarine nuclear bonus in the early 1990s, every October I'd get a whompin' $7200 check. ($10K minus 28% witholding.) I'd scamper over to the credit union and deposit it, then that night I'd write the checks to Fidelity. I'd try to hold down the gleeful Montgomery-Burns cackling & hand-rubbing, but I'd be pretty happy with all that "free" money.

We saved every penny of it and lump-sum rebalanced our asset allocation.

The idea was that it was "found" money above & beyond our regular paychecks, and someday that gravy train would end. Which it inevitably did a few years later, and because we'd never spent any of it I never had to adjust our spending to account for its absence.

 

[RunningBum]

I remember the first year I got a bonus at my current job. I had already gotten a 20% raise from my last employer, plus stock options were already looking good, and I either didn't know about bonuses or figured they'd be 5% or so. They were over 30%. I took a friend and my daughter out for ice cream, and much like Nords, gleefully dumped the rest in my investment account.

I also remember a couple of years later when someone else got their first check and talked about getting jet skis, or something like that, and asked me what I was doing with mine. I said I was investing it, and she looked very surprised, but to her credit said she admired my discipline.