We help our clients strategically reduce current and future taxation while increasing cash flow. We do not sell solutions, we create options. If you have financial options, you can always win.
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!
- 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.
- 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.
- 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.