How to Invest a Lump Sum for Retirement

US News

Retirement can be a stressful time of transition, but it doesn't have to be. Your routine will change and you might not know what to do with all your spare time. On top of that, you will need to figure out how to make your money last throughout retirement. One big situation many of us will face is how to invest a lump sum from our 401(k) or pension payout.

Of course, you may choose not to rollover your 401(k) and leave it in your company's plan, which has some downsides, including 401(k) fees and restrictions. On the pension side, many financial advisers recommend that you choose an annuity payout instead of a lump sum. For the purpose of this article, let's assume that you just received a big check from your retirement plan and that you are ready to invest. Here's how to decide what to do with that lump sum:

Review your financial plan. First of all, this is the perfect time to schedule an appointment with a financial adviser to review your financial plan and asset allocation. Many investors have too much money in the stock market during their working years, and this will need to change after retirement. Retirement can last around 30 years these days, so you will still need some investment in equity, but the maximum you should have in stocks is 40 to 50 percent.

Don't wait to invest. Most of us like dollar cost averaging because we are familiar with it and it gives us a sense of security when investing in the volatile stock market. However, if you are rolling over your 401(k), it could wreak havoc on your asset allocation when you dollar-cost average.

For example, let's say your target asset allocation is 50 percent equity and 50 percent bonds, and you get a rollover check worth 50 percent of your total portfolio. The rest of your portfolio is half in equity and half in bonds, but now you have way too much cash sitting on the sidelines. Your asset allocation is now 25 percent equity, 25 percent bonds and 50 percent cash. The longer you take to dollar-cost average, the longer your asset allocation will be out of whack.

It's best to put the lump sum back into your retirement portfolio as soon as possible. One recent study from Vanguard showed that dollar-cost averaging just means taking risk later. This is especially true if you are rolling over your 401(k).

It can be difficult to let go of a big check when you have it in your hand, but it's best to get it invested right away. If you are nervous about investing in the stock market because it's too high right now, it probably means you need to adjust your asset allocation to reduce your equity exposure. If you need help, don't hesitate to talk to a financial adviser. A fee-only adviser can do a one-time review of your portfolio and help you come up with a plan. It shouldn't cost too much, and they shouldn't be trying to sell you any financial products.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing, and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.



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