Sizeable Lump Sum...what to do?

[SarahW]

I'm taking my pension as a lump sum at the end of August; naturally will rollover into an IRA and don't plan to touch it for 6-10 years if ever. I'm trying to decide the safest place to stash it since my savings are mostly medium to high risk investments. What say you?

 

[LOL!]

Safest means "lowest return", but if that's what you want: US treasuries. You won't need FDIC insurance because you would be using US Treasuries. Of course, you will lose out on inflation, but that's your choice and comes with "safest".

 

[SarahW]

Right now, hanging onto the money is the most important consideration to me; ROI is secondary.

 

[freebird5825]

Send it to MEEEEEEEEEEEE
I'll keep it nice and safe for ya.

After last year, we will all be at a loss to say what is totally safe anymore.
EDITED: Money market funds (not FDIC insured) or plain jane bank money market account (FDIC insured up to what these days?)

 

[SarahW]

FreeBird--I was thinking money market, but I have so much to learn about investments.

 

[Koolau]

I suppose it depends on what you mean by "safe", but you can always open IRA accounts with CDs at a bank. Not sure if that's a good idea or not. I've done it before as sort of a holding action before moving funds elsewhere. You'll probably have to have at least a 1 year CD to qualify. If, as everyone seems to think, inflation is negative, then the ridiculously low rates now don't sound so bad - at least not for a year or two. After that, you could change your mind and go to equities, bonds, whatever. Just a possibility to think about. YMMV

 

[freebird5825]

FreeBird--I was thinking money market, but I have so much to learn about investments.

Ah, don't we all.
Check this out... Where to Put the Emergency Fund
This may be too basic for you, but M*s Investing Classroom is an excellent (and relatively unbiased) overview of all things investing. It is where I started out back in 1997 before I got serious and started reading books. I still return to the M* classroom to refresh my memory.
Main page for classroom is
Stock Investing Education & Courses

 

[ziggy29]

I'm taking my pension as a lump sum at the end of August; naturally will rollover into an IRA and don't plan to touch it for 6-10 years if ever.

If ever? First of all, unless you roll this over and then convert to a Roth, you'll *have* to touch it starting at age 70 1/2 in RMDs.

Second of all, based on the "if ever" comment, it sounds like you really don't plan to *need* this money in your lifetime and your "time horizon" might as well be infinite or at least very long (i.e. you're like my mom's IRA). If that's the case, why get so conservative and all but guarantee you'll lose to inflation? Is it to make sure you have *something* to pass to heirs? Nothing else makes sense to me, frankly, unless there are circumstances not mentioned. I'm not talking about an aggressive allocation, but it doesn't sound to me like a situation where absolute preservation of capital should be the goal.

[Edit to add: Having said that, I'd be looking at a CD ladder starting at 5 years and going out, most likely, if capital preservation was paramount in this account.]

 

[OAG]

Long term CD's (5 & 7 year) at Pentagon FCU ($20 to join unless otherwise qualified) are paying 4% APY, are NCUA (same as FDIC) insured. Depending on the amount of the 401k and how you want to structure the ownership of the Certificates you can get well in excess of $100K covered (remember the $250K insurance reverts to $100K on 1/1/10).

 

[clifp]

I am pretty much with Ziggy here. If you roll over into an IRA (generally good advice) you will eventually need to withdraw much of it once you turn 70 1/2.

If you are concerned about having too much money in risky investment (e.g stocks), than one approach might be to sell stocks in your regular accounts and stick the money in money markets or CDs. While buying stocks with your new lump sum money in an IRA.

In general, money that you don't think you will need for a long time (or forever) should be invested in riskier investments.

The bigger question I have if you are so concerned about losing the money why take your pension money as a lump sum in the first. Do you know what the implied interest rate of the annuity is? How safe would the annuity be. If you don't know the answer to these question, the board can often help you figure them out.

Finally, it is worthwhile exercise to consider situation where you might need the money. (e.g. Medical emergency, family emergency, and my personal favorite an extended period of double digit inflation)

 

[Dennis]

With 4% Real Inflatiion, one best make at least that or your In trouble.. + whatever your Reg. Income Taxes ( Fed and State) are..you will have to pay them when you start having to WD it..

Whenver I have doubts?
I just put it in Vanguards Total Bond Fund> VBMFX & It's GNMA ( VFIIX) Funds.
until I do further Research that may take the rest of the yr or longer or just leave it in them..
Treas ( VUSTX and VFITX) might Drop Rtns, but Yields Shoud Go Up..

A Very Conservative Bal. MFund > HSTRX ( ave 20/80 )
has done very well by me since inception in 03'...

another is Harbor Funds> HABDX.( Made 3.3% in 08' ) with higher Yields.

and FYI? Unless I have at least 25% more Income comming in for my Financial Retirment Planning? I don't have enough $..and have to Either Get more or Move $ from Very Conservative to my Conservative or Moderate Investments to make up that difference.. and keep a Min. of 3 yrs $ on hand in Shrt. Term Investments to pay my Bills... Yr #1 in my Banks MMF paying 2%, Yr #2 is In FFRHX and #3 is in VFSTX this yr.. Last yr, yr's #2 was in Int. Treas ( VFITX) and Yr #3 was In LT Treas ( VUSTX) .

I won't be touching CD's Until they pay at least the same or more than My Bond Funds and the last time was when I got 7.5% on them in early 2000..for 5 yrs..

I and My Aunt had $ in a Bank that went Bust in the 80's S&L crash and it took 3 wks to get the principal and 6 mos to get the interest..Things maybe different Now But I don't want to find out..

 

[LOL!]

If you are concerned about having too much money in risky investment (e.g stocks), than one approach might be to sell stocks in your regular accounts and stick the money in money markets or CDs. While buying stocks with your new lump sum money in an IRA.

This is backwards as far as taxes go. You want your equities in your taxable accounts where they are (a) tax-deferred, (b) you can deduct your losses, and (c) after the tax-deferal they are taxed at a low rate.. You want your CDs and other fixed income in your tax-advantaged accounts since otherwise all the income would be taxed yearly at your marginal income tax bracket.

Remember: money is money. It doesn't really matter whether it is in your taxable or tax-advantaged accounts except for how it is taxed.

If you are worried about too much money in stocks, then simply reduce your allocation to stocks, but try to keep your fixed income out of taxable accounts.

The problem with CDs for substantial amounts is that you have to divide up your money into various banks to stay under FDIC limits. That would not be the case with treasuries. That's probably why the Chinese government likes Treasuries so much.

 

[SarahW]

If ever? First of all, unless you roll this over and then convert to a Roth, you'll *have* to touch it starting at age 70 1/2 in RMDs.

Ya, hopefully I'll have many years before 70 1/2, so I'm looking for a place to stash the money till things recover a bit. I'm not comfortable discussing personal finances, but I have a lot of money in higher risk investments (read: stock market) and have taken a hit on that money in the past year, but I'm still buying...lol. I receive a tidy sum in dividends each quarter which I will have dispersed to me instead of rolling back into investments after I ER.

Our home is paid for, we have no debt, and my hubby has a secure career with no plans to ER for at least 6 more years.

We both work for the same large corporation and will have excellent health coverage and other retiree benefits (life insurance, etc). So, to answer why I may never touch the pension money...yes, I plan to leave it to my kids unless something unforeseen happens.

 

[SarahW]

This is backwards as far as taxes go. You want your equities in your taxable accounts where they are (a) tax-deferred, (b) you can deduct your losses, and (c) after the tax-deferal they are taxed at a low rate.. You want your CDs and other fixed income in your tax-advantaged accounts since otherwise all the income would be taxed yearly at your marginal income tax bracket.

Remember: money is money. It doesn't really matter whether it is in your taxable or tax-advantaged accounts except for how it is taxed.

If you are worried about too much money in stocks, then simply reduce your allocation to stocks, but try to keep your fixed income out of taxable accounts.

The problem with CDs for substantial amounts is that you have to divide up your money into various banks to stay under FDIC limits. That would not be the case with treasuries. That's probably why the Chinese government likes Treasuries so much.

LOL!...thanks for this info. I know very little about Treasuries but this sounds like the way to go for me. I don't want to have to scatter the money between several banks...plus doesn't the $250k FDIC insurance expire this December? IIRC, that insurance amount drops back to $100k at that time unless it is extended. Ugh.

 

[FIRE'd@51]

FreeBird--I was thinking money market, but I have so much to learn about investments.

There's nothing wrong with parking your money in a money market fund temporarily. If this is your instinct, I would go with it until you come up to speed on other investments. I think with a 6-10 year horizon you will find that you can be more aggressive than a money market fund.

I agree with LOL that it makes eminent good sense for tax reasons to hold equities in a taxable account and fixed income in a tax-deferred account, which appears to be the way you are moving. If you need some of the interest for income, you can always take it out of the IRA and it will be taxed the same way (as ordinary income). In the fixed income world, you might want to take a look at investment grade corporate bond funds, which currently have very attractive yields relative to Treasuries. You might even want to consider putting a portion of your bond holdings, say 10-20%, into a high-yield corporate bond fund.

 

[LOL!]

FIRE'd@51 ran the gamut of risk levels with the kinds of bonds that were mentioned. While Treasuries are the safest and the lowest yield, investment grade corporates carry more risk (a fund of short-term investment grade corporates dropped about 10% in 2008), and high-yield (or junk) bond corporates are about as risky as stocks.

In fact, the high-yield bonds are correlated with stocks, so have no special diversification benefits, so you might as well own stocks instead of junk bonds.

So one has decide where one fits on the risk spectrum. I think there is probably less risk in the stock market than 6 to 12 months ago, so I myself do not invest in Treasuries. I'm a step up from that risk level and use the Vanguard GNMA fund which hold government-backed mortgage bonds for some of my fixed income and short-term investment grade corporate for another portion. There is some risk there which I find acceptable. Yield is about 4.2% for GNMA and 5% for STCorp nowadays which is above Treasuries and most CDs, but it is not riskless.

 

[clifp]

This is backwards as far as taxes go. You want your equities in your taxable accounts where they are (a) tax-deferred, (b) you can deduct your losses, and (c) after the tax-deferal they are taxed at a low rate.. You want your CDs and other fixed income in your tax-advantaged accounts since otherwise all the income would be taxed yearly at your marginal income tax bracket.

Remember: money is money. It doesn't really matter whether it is in your taxable or tax-advantaged accounts except for how it is taxed.

If you are worried about too much money in stocks, then simply reduce your allocation to stocks, but try to keep your fixed income out of taxable accounts.

Under normal circumstances I'd agree with you, but in this market and the fear I am sensing in the OP. I think taxes are largely irrelevant.

My vanguard MM has a yield. of .71%. Even if the amount in the lump sum is substantial say $500K, total interest earned would be only $3,500 a year. it just doesn't matter that much if the income is taxed at 25-28% in regular account, or allowed to compound tax free in IRA and than latter taxed when the OP turns 70 1/2. Taxes are well under a $1,000 in any case and the difference between being taxed at capital gains vs ordinary income is only a few hundred dollars.. We don't know much about the OP situations, but in my case I have a plenty of tax losses going forward, so the incremental benefit of holding stocks in taxable account, just so I can sell them if they go down is minimal.

When I say riskier investment, I am not just talking about stocks. Corporate bonds, and possibly REITs I think are reasonable investments and would benefit from the more favorable tax being held in IRA. But their price certainly could drop a lot in the next couple of years.

I think the fundamental question Sarah needs to think about and answer are.
1. Why are you electing a lump sum instead of an annuity?
2. If you don't think you'll need the money, than why are you concerned about having it drop in value over a relatively short period of time like a few years.
3. What are you assets/income outside of this pension and how are the allocated.

There are lots of sound reasons for electing to take a lump sum distribution
instead of pension. But I think it is almost certainly a bad idea to take a lump sum, roll it over into an IRA, and the stick into a money market earning <1% and let stay there for many many years.

 

[SarahW]

I hope I don't sound fearful; I'd prefer "cautious." Since I only have a few months to decide, I need to do some serious studying. Thanks to all who responded.

 

[DblDoc]

I hope I don't sound fearful; I'd prefer "cautious." Since I only have a few months to decide, I need to do some serious studying. Thanks to all who responded.

For your studying pleasure I would recommend starting here: Bogleheads :: View topic - Books

A list of highly recommended investing information and the forum is a good place to ask questions.

DD

 

[LOL!]

....
My vanguard MM has a yield. of .71%. Even if the amount in the lump sum is substantial say $500K, total interest earned would be only $3,500 a year. it just doesn't matter that much if the income is taxed at 25-28% in regular account, or allowed to compound tax free in IRA and than latter taxed when the OP turns 70 1/2. ....

I see taxes lots differently than you do. The bond funds that I used last year paid out about 5% in dividends. On a $500K investment that would be $25,000. If held in a taxable account, all would be taxed as ordinary income, so say 33%. That's more than $8,000 of taxes if held in a taxable account. If one had $500K of stocks, they would pay out about 3% in dividends or $15,000. If one used index funds, almost 100% of those dividends would be qualified and taxed at 15% or let's say $2500. The difference of $5500 in taxes is substantial to me.

And the more income you have, the better the chance of landing on an AMT square. While the lower the income you have, the better chance you have of converting traditional IRA to Roth IRA in a low tax bracket.

I do concur with your other thoughts in this thread, but not with location of assets.

 

[Dawg52]

I hope I don't sound fearful; I'd prefer "cautious." Since I only have a few months to decide, I need to do some serious studying. Thanks to all who responded.

Many of us are. I endorse OAG recommendations.

 

[DayDreaming]

This is backwards as far as taxes go. You want your equities in your taxable accounts where they are (a) tax-deferred, (b) you can deduct your losses, and (c) after the tax-deferal they are taxed at a low rate.. You want your CDs and other fixed income in your tax-advantaged accounts since otherwise all the income would be taxed yearly at your marginal income tax bracket...

I understand this logic, but one thing I don't understand: To have CDs in my tax-advantaged account, I'd need to buy them in my IRA at Vanguard - I haven't done that yet because CD rates at Vanguard always are lower than I can get from banks directly. So the lower interest rate cancels out any tax savings, and I'll have to pay taxes on that Vanguard CD interest someday in the future anyway. Am I missing something here?

 

[LOL!]

You are missing all the years of tax-deferred compounding of interest. I hope you understand that you can have many IRAs split among many banks and each of those bank IRA can have any kind of CDs of your choice in them. That is: you don't need to have your CDs in an IRA at Vanguard.

 

[OAG]

I understand this logic, but one thing I don't understand: To have CDs in my tax-advantaged account, I'd need to buy them in my IRA at Vanguard - I haven't done that yet because CD rates at Vanguard always are lower than I can get from banks directly. So the lower interest rate cancels out any tax savings, and I'll have to pay taxes on that Vanguard CD interest someday in the future anyway. Am I missing something here?

DW and I have IRA's (both Roth and Traditional) at a "bank" actually Credit Union. We used to have them scattered at other Credit Unions and Banks but a few years ago (in preparation for RMD's) we "consolidated" them at a single Credit Union solely for conviencience. Very simple to do, just do custodial transfers on redemption dates for the CD's. They are all currently earning 6.25% (and will be for a tad over then next 5 years). RMD's will occur but not impact the underlying interest rate on the particular CD they come out of.

 

[Urchina]

I'm curious -- I've seen Treasuries recommended, but not TIPS. Why not? (To add more confusion for SarahW).