Personal Finance Q & A
Taking Your Lump Sums
Q I have to make a decision soon between taking a lump sum distribution now, or waiting to take an annual pension at age 65. I'm 56 and plan to work six or seven more years, maybe longer. Suggestions?
- J.M. (via e-mail)
A You face a "very unusual," but very happy, situation, says Peter Elinsky, a partner at accounting firm KPMG Peat Marwick LLP in Washington. You have three main options, Mr. Elinsky says:
1. Roll the lump sum directly into an individual retirement account. The distribution is not taxed, and will grow tax-free until withdrawn. Years later, you could either begin gradual distributions from the IRA or take the lump sum and buy an annuity.
2. Take the pension at age 65. The advantage: It's fixed, so you can't outlive the proceeds, as can occur with IRA money. (In rare cases, the insurance firm or company handling the pension might go belly up, Mr. Elinsky says.) But it's "more than likely" that careful investing in an IRA will yield more money over time, he says.
3. Take the lump sum now, pay taxes on it (using five-year tax averaging), and then do whatever you want with the money. Here you fail to shelter the entire distribution from future taxes, as you do in option 1.
Q My husband and I plan on retiring in the next seven to 10 years and have $51,000 to invest. Should we divide the money between two, three, or four different mutual funds? Should we buy the funds all at once, or buy monthly? And since the market is at an all-time high, should we wait?
- E.B. (via E-mail)
A "Don't wait," says John Markese, president of the American Association of Individual Investors (AAII) in Chicago. He suggests you buy into funds, and spread your purchases over two years, investing quarterly. "Diversify through at least three mutual funds," he says.
Some experts recommend a conservative mix of 50 percent stocks, 50 percent bonds.
Dr. Markese sees the greatest return in stocks, so he suggests putting 40 percent into an index fund that tracks the Standard & Poor's 500; 40 percent into an aggressive-growth fund that invests in small or mid-size companies; and 20 percent into a foreign-stock fund. You can set up a money-market fund to hold your cash.
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