Where to invest severance pay

[davemartin88]

I'll be leaving my job at the end of September and starting early retirement. I'll receive just over one year of severance pay and want to invest this separate from my retirement savings and provide an income and delay dipping in to the retirement funds as long as possible.

I estimate my expenses will be about 75 to 80% when I stop working, given I won't be putting 8% of my salary in to savings and other lower expenses. My initial thinking is to invest the money in CD's where it will earn about 4% (ING?) and I should be able to make the money last for about 16 months or so. Health benefits are paid for 12 months and will get benefits through my wife's employer so no worry there.

Any other thoughts on a better approach to have these funds earn more but remain available with minimal risk? Have looked at TIPS and some Vanguard funds but given the short timeframe to use these funds, nothing jumped out at me.

Thanks in advance.

[d]

given the time-frame, stick to cds, mm and the like

[Alan]

I agree with D, stick to CD' and MM's.

Since you are going to be using the money immediately here is what you could do using a CD ladder. I currently have a MM account paying 3.4% and I don't see a 3-month CD paying higher than that on Bankrate.com. I see 3.78% for a 6 month CD which is not much better but you could put 6 month's expenses in a MM and buy a 6 month CD for the period month 6 thru 12 and with what you have left from your lump sum you can buy a 1 year CD at 4.1% for month 13 - ?. Rates change of course so you'll need to make your decisions when you get your lump sum.

[honobob]

Only being slightly silly but I think you'd do better putting at least half in CG's.


Canned goods!

[youbet]

Originally Posted by davemartin88

I'll be leaving my job at the end of September and starting early retirement. I'll receive just over one year of severance pay and want to invest this separate from my retirement savings and provide an income and delay dipping in to the retirement funds as long as possible.

I estimate my expenses will be about 75 to 80% when I stop working, given I won't be putting 8% of my salary in to savings and other lower expenses. My initial thinking is to invest the money in CD's where it will earn about 4% (ING?) and I should be able to make the money last for about 16 months or so. Health benefits are paid for 12 months and will get benefits through my wife's employer so no worry there.

Any other thoughts on a better approach to have these funds earn more but remain available with minimal risk? Have looked at TIPS and some Vanguard funds but given the short timeframe to use these funds, nothing jumped out at me.

Thanks in advance.

What percentage of your "retirement funds" that you want to delay dipping into are in deferred accounts (401k and IRA)?

What advantage do you think you are gaining from keeping your severance separate from your other retirement funds?

[davemartin88]

Originally Posted by youbet

What percentage of your "retirement funds" that you want to delay dipping into are in deferred accounts (401k and IRA)?

What advantage do you think you are gaining from keeping your severance separate from your other retirement funds?

Youbet, beyond psychological, probably no advantage to keeping it separate! Guess my thought is to ease in to this a bit and the thought of "paying myself" made some sense for at least a while as I adjust. Until Friday, I had thought the severance payment was going to be paid monthly over the severance period but found out there had been a change in policy and it's paid in a lump sum- better for me, just a bit of a surprise. Won't see this for about 6-8 weeks so interest rates will obviously be different then- ING has 3.75% (yield) on 6 and 9 month CD's and 4% on 12 and over so just seemed a good spot to park the cash.

Doing a lot of reading and studying right now to sort what changes we need to make to our investments, about 35% of our retirement is in tax deferred accounts and the bulk of the rest in equites, individual stocks or or other funds along with an emergency cash reserve. I think we need to simplify and will do this over the next few months but still getting used to this not going to the office idea!

Really trying to sort out the best way to change from a growth approach to needing to replace income and there is an awful lot to consider with tax and asset allocation strategies, withdrawal rates, and all the rest, a bit overwhelming at this point. I'll also have several other lump sum payments coming in from my former employer over the next 3 years as well so think the point that it's all part of the overall picture rather than partitioning some funds separately is a good one (if that was your point, LOL)!

Thanks for the responses so far and appreciate alternative views!

[Alan]

Originally Posted by davemartin88

Doing a lot of reading and studying right now to sort what changes we need to make to our investments, about 35% of our retirement is in tax deferred accounts and the bulk of the rest in equites, individual stocks or or other funds along with an emergency cash reserve. I think we need to simplify and will do this over the next few months but still getting used to this not going to the office idea!

Really trying to sort out the best way to change from a growth approach to needing to replace income and there is an awful lot to consider with tax and asset allocation strategies, withdrawal rates, and all the rest, a bit overwhelming at this point. I'll also have several other lump sum payments coming in from my former employer over the next 3 years as well so think the point that it's all part of the overall picture rather than partitioning some funds separately is a good one (if that was your point, LOL)!

Thanks for the responses so far and appreciate alternative views!

I think you are right to do a lot of reading and research before you make a move and you probably should be looking to use cash reserves first (given that equities are down a lot), regardless of the source unless drawing from retirement accounts triggers penalties or is subject to taxes on withdrawal. Sounds like this year will have you in a higher tax bracket than subsequent years so you would want to use after tax money initially.

[youbet]

Originally Posted by davemartin88

Youbet, beyond psychological, probably no advantage to keeping it separate! Guess my thought is to ease in to this a bit and the thought of "paying myself" made some sense for at least a while as I adjust.

Sounds like you have a very reasonable outlook on this as you head into RE Dave!

My situtaion was somewhat similar to yours....... Booted from MegaCorp with a reasonable severance package and some misc income from delayed bonuses, stock options, unemployment benefits, etc., in the year or so after that.

Despite the fact that I am a strong proponent of a "one portfolio" approach to managing my investments, I did find it convenient to put a chunk of cash aside to fund the early stages of RE while I got my act together. I used a ladder of short term CD's.

The days of pleasant surprises ("gee..... another check from MegaCorp..... forgot I had that coming") are over and I've transitioned to my RE withdrawal plan...... which I do manage as "one portfolio."

So, yeah, by all means I'd agree with having liquid cash for the first year or so. After that, cash is just another allocation category in your overall portfolio.

Congrats on the parachute and on RE and ENJOY!

[Walt34]

Originally Posted by davemartin88

I estimate my expenses will be about 75 to 80% when I stop working, given I won't be putting 8% of my salary in to savings and other lower expenses.

One of the things I found was that because there is so much more free time after retirement there is also much more opportunity to spend. Even simply going to a park takes some gasoline to get there. So now I tell prospective retirees that 75 to 80% doesn't cut it. You'll want 120%!

My situation is probably somewhat unusual since I had virtually no employment-related expenses. Even the clothes I wore and the car I drove to work were furnished by my employer and I brown-bagged lunch ~90% of the time.