If I were asked, “What do you see as a financial advisor that makes you shake your head?” I would have to say it’s that big purchase within the first few months of retiring, and taking a large lump sum from your retirement account right away.
Author – Leanne Kampeter, CFP®, Senior Vice President & Financial Advisor, LPL
If I were asked, “What do you see as a financial advisor that makes you shake your head?” I would have to say it’s that big purchase within the first few months of retiring, and taking a large lump sum from your retirement account right away.
Picture it: retirement in May with a 401(k) or IRA balance of $300,000. A few months go by, restlessness sets in, and you decide you’re finally going to remodel your kitchen. You’ve been batting the idea around for a few years, and now seems like the time. But you haven’t saved for this big expense, and of course, it’s an expensive proposition. The bid comes in at $40,000, but then there are “overruns” and unexpected issues your contractor runs into...now that expense is $50,000.
Where do a lot of people turn? Their retirement accounts.
As an advisor, I think about the amount of time it took that retiree to diligently save that $50,000, paycheck by paycheck, to accumulate that balance. And now it’s gone in one fell swoop. It makes me sad. Because often these lump sum distributions come from pre-tax sources, the retiree also faces taxes on the withdrawal, meaning more than $50,000 must be taken from the account just to net $50,000.
Now that retirement account balance is down more than 15%, and there’s so much more pressure on what remains, especially with many years of retirement still ahead and “regular” monthly expenses to cover. With better planning prior to retirement, this situation could have been avoided. And that retiree could enjoy the years ahead with a lot less anxiety.
If you are approaching retirement, or already there and thinking about a large expense, it may be worth having a conversation before making a big decision. Our team at Central Investment Advisors can help you think through the timing, tax impact, and long-term effects so you can move forward with more confidence and fewer surprises.
Category: Retirement
