What to Do with a Lump Sum

There are two primary ways we receive money during our accumulation years: earned income or for those of us lucky enough, an inheritance. This month’s topic by request was what to do with a lump sum. Maybe you received an inheritance, maybe some life insurance money, or perhaps you earned a large bonus. Here are three ideas on what to do with this chunk of change.

Note, you will not see “pa

y off your house” anywhere in here. We have talked about this before, and it is typically not the best idea. Also note, if this IS an inheritance and it is qualified


(say an Inherited IRA) sometimes the best thing to do is leave it be or continue RMDs. Don’t pull money out of qualified accounts with early withdrawal penalties and huge tax bills to do any of the things I talk about in this article. With those prefaces, let’s jump in!

  1. Pay down high interest debt – Ok, MAYBE you have considered this one, but I am suggesting we be intentional about deciding what to pay down. Home mortgage rates are extremely low right now plus you are taking a tax deduction on the interest. If you have any credit card debt with those crazy 18% interest rates, let’s start there. Any debt that is more than 8% interest is probably smart to pay down or pay off. Anything less and you could be better off investing for growth instead and letting the interest service the debt down over time.
  1. Preserve it in a lump sum – One strategy I have used with clients is purchasing a single premium life insurance policy. Single premium life insurance policies typically purchase substantial death benefit in the range of $2 for every dollar paid in, plus the cash value is usually 90% or more of the initial lump sum and grows 3% or more a year with base guarantees and no loss provisions. Some insurance companies even offer long term care insurance benefits in the life insurance policy as well. For some clients, these triple duty policies are a great fit.


  1. Invest in you – This is very dangerous for me to even recommend. I firmly do believe in enjoying the journey to retirement as much as enjoying retirement itself. SOMETIMES it makes sense to invest in yourself. If you are already consistently saving for retirement, if you are on track to have enough income in retirement, if your debts are already paid off, etc. you could benefit from taking a sabbatical from work, take an exotic vacation, or some other splurge. Maybe with just a piece of the lump sum. What would I do if I received a lump sum? I would invest in a custom fit designer suit. The one I have eyed for eight years now runs $3,500. I know $3,500 on a suit sounds frivolous (maybe that is why I haven’t done it in the last eight years), but I know that wearing a great fitting suit boosts my productivity and confidence. Plus it would last for years. $3,500 for tangible productivity and confidence that pays dividends for the next 10 years really doesn’t seem to frivolous after all.

That is it for this month. If you see me around town in a perfectly fitted, Armani, black, two-piece, two button, slim cut suit, you will know that I went with number three.

How to Retire Early

The million dollar question these days is: “how do I retire early?”

Ironically this question seems to become more popular as life expectancies in the United States are increasing. This not only gives us the challenge of funding our retirement sooner, but also for a longer period of time! Approaching retirement can be daunting so let’s over simplify it and break down the three things you can be doing right now.

  1. Save more. This is a “duh”. Just remember there is no silver bullet for retirement. At the end of the day, you must save something. This is probably the most important on this list. You must have something to pull income from in retirement and you have to have something to earn growth on leading up to retirement.
  2. Spend less. This one is a bummer that I typically don’t talk about. There are three types of money: accumulated money, lifestyle money, and transferred money. I don’t ever like to touch or take away from lifestyle money. It is important to enjoy the journey to and through retirement. It is ALSO important to live within your means though, especially if you want to retire early and fully enjoy a long retirement.
  3. Earn a higher rate of return. This is last on the list. “Rate of return” gets the lion share of credit when it comes to finances, and it really shouldn’t. Let’s look at an example of a 50 year old making $100k a year hoping to retire at age 60 with $350k saved and $20k being saved annually. Let’s say their portfolio is earning 8% a year and they will retire on $70k a year. We aren’t considering social security or a possible pension, but this person would run out of money at age 75 as is. To stretch those dollars saved to age 90 would require a 16.79% annual rate of return. That just isn’t practical. If they didn’t have any return on their savings at all, the money would only last to age 67. Earning growth on your money is important like the other two points above, it just won’t get you all the way through retirement on its own.

We have obviously over-simplified how to retire early. There are other factors that go into prepping for retirement such as tax and debt service efficiencies, but these are the foundation of a sound retirement. These three components also work together in perfect harmony to give you the retirement you have always wanted.

What do YOU want to learn about your money? Let me know and I may write about it in a future post!

The 2 Worst Financial Mistakes Everyone Makes

Finance is often considered a taboo topic in our culture; we don’t like to talk about it. Some people hire professional advice, and some people prefer to go the Do-It-Yourself route. The commonality between all of us, is we have all heard advice from a friend, a family member, a radio personality, or a tv personality. Here is a list of the top four worst pieces of advice almost ALL of my clients have heard or taken from these outside sources.

  1. Pay off your mortgage as fast as you can

The idea here is that you can finance your house on a 15 year mortgage, or you can make additional principal payments on longer term mortgage and save on interest. Sounds innocent enough, doesn’t it? I worked with a new client recently that told me their investment portfolio was earning an impressive 8% a year. In the same breath they proudly told me they had no debt because they paid cash for their house. I was dumbfounded they just admitted that they pulled a sizeable chunk of money out of a portfolio earning 8%, to pay cash for a house that they could have financed for 3.25-4.25% easily. They gave up use and control of that whole chunk of money and their house will appreciate OR depreciate regardless of how much they have paid off. What if they financed the house for 30 years, kept their money in their investment portfolio, and let the interest earned make their house payment for them with money to spare?

I don’t have the space in this article to explain the math, but it wouldn’t surprise me if they got 15 years down the road and could pay off the remaining balance of the mortgage if it made sense at the time. With interest rates on the rise, I believe it would be far more valuable to lock in the low interest rate mortgage for the longest period of time possible and keep their money working for them.

  1. Stuff as much money as you can into your 401k

We have all heard this one. You will be in a lower tax bracket in retirement! Save in your 401k, you get a tax deduction! Sounds great doesn’t it? The highest federal tax bracket estimated for 2017 is 39.6%. The federal income tax started in 1913 and the the average highest federal tax bracket since is 58.24%. Historically there have been spikes in income tax rates to help pay off debt accumulated during World War I, World War II, the Korean War, the Vietnam War, and the Gulf War. We have been paying for a war and the United States deficit is growing at an insane rate. With some of the lowest tax rates in history right now, do you think tax rates are going up, or down? My guess is they are going up. A 401k and other tax-deferred qualified plans are indeed a tax deduction right now, but what they do is POSTPONE the tax as well as the tax calculation. Whenever you take money from your 401k in retirement you will then owe income tax on the full amount taken.

If I were to write you a check for a loan you would ask me two questions: “what is the interest rate, and when do I have to pay it back?” What if I responded “you know what, I am doing quite well right now so let’s figure out the details later. One day I will have a need for my money. At that time I will figure out how much interest I need to charge you meet how much money I need”. Would you cash that check? I don’t think anyone would, but that is exactly the deal we make when we save on a tax-deferred basis. Now saving in a 401k isn’t bad for everyone, but for the average American it makes more sense to pay the tax now and save on a tax-free basis for the future!

These mistakes can cost you in retirement. Unfortunately though, I can only write based on my experience and not based on your individual situation. My best recommendation for 2017 is to hire a trustworthy Registered Investment Adviser who is required by law to act in a client’s best interest. Get an unbiased analysis on these two topics and check out the math to see if there is a more efficient way to handle your finances.

All About That Opportunity Cost

What is opportunity cost? I get asked this all the time. Just kidding, nobody asks me this. But here is why you need to know what it is: opportunity cost directly impacts every aspect of YOUR finances. In your personal economy, lost opportunity cost is everywhere.

Opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen”. I break it down like this: opportunity cost is the potential future value of a spent dollar. If you buy a $25,000 car, that car didn’t just cost you $25,000. The lost opportunity cost is what that $25,000 could have earned if you had kept it and put it to work for you over a specified period.

It is very important to consider opportunity cost with big items. Many people look at the monthly payment of financing that car and don’t consider what else they are giving up having that car. Let’s say I bought that $25,000 car today and my hypothetical investment portfolio is earning just 5%. I reasonably have 40 years until retirement. The lost opportunity cost on that purchase would be the $25,000, plus the cost to finance it (let’s say $1,953 total of interest for a 5 year loan at 3%), plus the interest I could have earned, compounded each year for 40 years. That purchase would set me back $171,378 by the time I reach retirement.

What about multiple purchases? What if you bought a $4 fancy large iced green tea latte with no sweetener, extra matcha, two scoops of protein powder, light ice, shaken-not-stirred, every work day? That would be $20 a week, $85 a month, and $1,020 a year. That doesn’t seem harmful considering you are receiving value from enjoying the beverages. What does it look like over 40 years though? You will have spent $40,800 on delectable beverages and the lost opportunity cost on that chunk of change would be $88,577 for a total cost of $129,377! I personally don’t enjoy fancy drinks THAT much.

Keep in mind that my two examples above only assume a 5% rate of return. The higher the return you can earn, the larger the lost opportunity cost becomes. It isn’t realistic, nor would I ever recommend, that you stop enjoying your own transportation or fancy beverages. It is possible to have healthy finances and a secure retirement while still enjoying the journey to get there. I simply want you to recognize that your personal economy isn’t just effected by the cost to purchase, you have to consider the lost opportunity cost in addition!

The 3 Ways to Spend Your Tax Refund

Good morning, afternoon, or evening as the case may be! This months topic is tax related. What do you do with your tax refund?

First let’s talk about what a refund is just to set some perspective. Everyone I talk to gets so excited that they have a huge refund coming their way. Huge is relative by the way. Maybe the refund is $500, maybe it is $5,000, or maybe it is $10,000. The average refund is about $3,000. Many people receive this check in the mail and view it as free money fallen from heaven delivered from the mail gods. Let me just remind you that tax refunds are money the IRS is returning to you that you pre-paid, in excess, throughout the year. In other words, the federal government got to use your money throughout the year above and beyond what was due to them, and now they are giving it back to you. That is the mentality to look at your tax return with.

Now that we got that out of the way, what do we do with it? Here are some ideas:
1. Vacation – This is a very common option and I put it first because, let’s be real, this is the most fun. Tax refunds do go far towards a well-deserved vacation. Check out discount sites like Groupon and their air-inclusive travel deals. There are REAL discounts on flight/all-inclusive hotel packages. I personally want to book that trip to Paris and Spain for $799 in November.
2. Donate it – If you are anticipating higher income in 2017 vs. what you earned in 2016, consider donating it to a nonprofit organization for a tax write off when you file taxes in 2018. Plus it feels good to support worthy causes you care about. (insert shameless plug for Sierra Passport Rotary here)
3. Pay off high interest debt – Did you read the article in January? Please don’t pay down your mortgage with your tax refund… Do consider paying down high interest debt like maybe a credit card or a car loan. Start with the highest interest rate debt, not necessarily the smallest balance owed.

In closing, let’s talk about how to maximize your deduction next year. And by maximize, I of course mean minimize! Rather than setting yourself up to have a massive refund each year, consider working through (or hiring a tax professional) to calculate your right offs and adjust your withholdings on your W2 so that you have more cash flow all year long! My goal is to always have the smallest refund possible. I don’t know about you, but I like my money, and I like it working for me all year long rather than lending it to the federal government for free all year.

Exchange Traded Funds

I wanted to write about something year end related or maybe something related to the holidays. Then I met with not one, not two, but THREE clients who derogatorily said “yea, but they are ETFs…” when we discussed potential changes in their accounts. Therefore, this month is a crusade to educate on what an Exchange Traded Fund (referred to as an ETF) is. With that, how about we start with two big things you may not know about ETFs?

1. They aren’t just index funds anymore. I’ve heard people express that ETFs are just as overly diversified as mutual funds and can water down your returns as a result. Let’s start by saying, some of the first ETFs were products designed to mimic broad market indexes. However there are now hundreds of ETFs that range from index funds, to sector specific funds, to cross sections of indexes based on market capitalization, and with many other strategies and goals. Some even use custom indexes to benchmark against. Want to buy real estate, but can’t handle the liquidity issue it presents? There is an ETF for you. Want to buy into social responsible companies only? There is an ETF for you. This brings us to number 2.

2. The fees are lower than mutual funds because they are passive. Yes, mutual funds can be actively managed and ETFs still haven’t gained much traction in actively managed approaches. ETFs can be actively bought and sold by an adviser though and often the fee for hiring the adviser plus the fund fee is STILL less than the mutual fund. The reason ETFs have lower fees has nothing to do with management style and everything to do with how the products are created and offered. A mutual fund is a pool of money and you buy into that pool directly from the fund company. They have administration, operations, and other expenses they have to cover in addition to asset selection. An ETF is created by the fund creator and sold in a “Creation Unit” to an “Authorized Participant” which is a financial institution like a broker-dealer. Then the authorized participant can either keep those assets within the creation unit, or break up the unit into tens of thousands of shares in the ETF and sell it on exchanges to individual investors like you and I. This exchange of creation units between the ETF creator and the authorized participant makes the costs of creating shares in an ETF way lower than creating shares in a mutual fund and those savings are passed on to the investors in the form of lower expense ratios.

We went into a few more technical terms than I like to in this post. Hopefully I didn’t lose you and you learned something! ETFs can be used very effectively in a portfolio. They may not be of interest to you, but they can be very valuable to many investors from those just starting out to those well into retirement.

The 3 Financial Items on Your New Year To-Do List

Welcome to 2018! Hard to believe another year has already blown by. With a new year comes new opportunities, and I have compiled the three “C”s you may want to add to YOUR New Year’s to-do list:

1. Compile – The first financial move I like to make each New Year is compiling a summary of my finances. Things to include would be assets, debts, documents  (statements, estate docs, life insurance docs, etc), and a budget. This exercise serves multiple purposes. It is going to jog your memory on forgotten things from the year, like maybe that HSA account you made an opening deposit in and forgot about the last eight months. It is also going to help keep you organized for when you file your taxes or want to make sure you have gathered all tax related documents for your CPA.

2. Consolidate – In 2017 I had the privilege of meeting and working with many new people. I am always surprised by how many people come in with a 401k from their last job, 3 IRAs, and a SEP IRA for their consulting work that is easing them into retirement. Are you trying to make your life difficult? Who wants that many monthly statements and that many website logins? Why not roll over the 401k and consolidate the three IRAs into one account? The SEP IRA you may want to leave alone for now until you are done making contributions. Let’s simplify the next year for you! It will save you time, energy, space, and sometimes even money if your existing accounts have annual account fees or higher management fees on the separated lower balances.

3. Contribute – This was just the third word I thought of that started with the letter C. Let’s be honest, this article wouldn’t be complete without reminding you to check those contributions if you are saving for retirement. 2017 is gone and so is a year of potential for you to compound interest. If your employer offers a retirement plan with a match, consider taking advantage of or increasing contributions to get that match. It is free money. If you don’t have a retirement plan that offers a match, you need to evaluate if it makes more sense to save on a pre-tax or post-tax basis and consider setting up either automated contributions or at least reminders to make contributions to that account!