Do you handle lump sums differently?

[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]

Quote:

Originally Posted by 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 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]

Quote:

Originally Posted by TomG 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]

Quote:

Originally Posted by SecondCor521 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.

[Rich_by_the_Bay]

Quote:

Originally Posted by 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.

I always found Solin's books interesting. Click here for an example.

[SecondCor521]

In my case it happens to be a work-related variable pay bonus. I wasn't really expecting it at all.

I did find out that it will probably be a little bit less than I originally stated above; probably about 8% or so, but that is still effectively a month's salary, gross.

I wouldn't use it to increase my lifestyle at all. Mainly there were a few minor house and car repairs that are wants but not needs that came to mind. I might also go out to eat or something.

As far as the majority of the rest of it, I would probably apply it to my goals in order as most here have said. I already have life insurance, an emergency fund, adequate life insurance, am on track to be FI in a few years, and have the kids' college funds in place. At this point technically my next goal is paying down my modest student loan, although at a 3.5% fixed rate with a really low payment, I'm finding that a little hard. The other options are increasing my emergency fund further (already at 5 months), dumping it into the kids' college funds (already funded through October 2022), or dumping it into the taxable account.

I appreciate all the comments. I am a little surprised that most here handle them in fundamentally the same way.

2Cor521

[SecondCor521]

Followup for anyone who might care:

About 1/3 went to taxes. This probably means I will see about 15% of the total back in the form of a tax refund next April.

20% went to 401(k) contributions.

I spent $5.50 at the work cafeteria to celebrate.

I paid off the balance on my credit card ($21.45).

The rest went towards my student loan, which knocked multiple years off the end of the payment plan.

Coincidentally I also got a modest raise, which moved my FI date up by a months or two.

2Cor521

[Alan]

The only lump sum I normally have to deal with is the annual bonus of which there was none in 2008 and 2009, and I'm now retired. I've never counted on a bonus and always put it into the retirement funds into the target AA.

This is our first year of retirement and we are about to receive our 3rd unexpected 5 figure lump sum.

1. My megacorp decided to reward it's employees for 2 years of frozen wages and lack of bonuses with it's biggest bonus pay-out ever, including retirees that had worked for the whole of 2009.

2. We completed the sale of my Dad's house after he died in December and split the estate between the 4 children.

3. FIL died in June and his house has now been sold and his estate settled and split between the 4 children.

The bonus went into the savings into the target AA but the 2 inheritances are in the UK so we haven't fully decided what to do with the monies yet. We spent some of it over the summer with our 10 weeks in England and since we plan to spend about 6 months in England / Europe next year we'll leave a big chunk of it in place for those expenses.

Interest rates are very low in the UK at present, particularly for non-residents (all the higher rates including Bank of Baroda have UK residency as a requirement). I looked at the possibility of putting some into UK mutual funds but their rates are MUCH higher than the USA plus there are hidden fees as well as the stated fees.

£7billion a year skimmed off our savings - Telegraph

If exchange rates improve greatly in our favor then I'll see about transfering a chunk of the loot over before next year otherwise I'll leave it where it is in our UK bank earning about 0.9%.

[bbbamI]

Quote:

Originally Posted by SecondCor521 I spent $5.50 at the work cafeteria to celebrate.

You darlin'....are out of control.

[jebmke]

Quote:

Originally Posted by Koolau 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.

Stocks are up 7-12% (12% for Small Cap Value, 7% for broad market)
Bonds are up 8-14% depending on your holdings.

Unless you are sitting on a boatload of cash or energy stocks, you should have been able to get 3.6% this year easily, even with a 25/75 allocation.

[Midpack]

Quote:

Originally Posted by Rich_in_Tampa 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.

I've done exactly the same, except my numbers are 15% funny money and 85% toward retirement savings.

[obgyn65]

Hello Koolau - Well I have been buying CDs for the last few years until a few weeks ago (expiration dates up to 2020). I also have municipal bonds, up to year 2030 but my statements say "callable" before (not what that means, sorry !). Not sure either of my bonds tax status... I do not owe equities (i.e. shares) because I am financially illiterate, very little time to handle banks paperwork and very risk averse. I can confirm my overall my average return is 3.6%. I would like to explore annuities further but some participants on this website have advised against them, so I feel stuck... any advice is welcome.

Quote:

Originally Posted by Koolau please let us other "ultra-conservative" investors know how you have maintained 3.6% return during these unusual times.