What To Do With That Lump-Sum Distribution?

For many Americans, a comfortable retirement is the reward for years of long work hours, bumper-to-bumper traffic and endless staff meetings. Finally they have more time to travel, play golf, visit with the grandchildren, or just do anything they like-they're retired!! However, with these new opportunities come additional financial challenges. According to the Center for Health Statistics, an individual retiring today at age 65 can expect to spend 15 to 20 years in retirement. Therefore, it is important to plan wisely so that during retirement you don't outlive your retirement income.

Retirement income is mainly derived from three sources: personal savings, social security and employer-sponsored qualified retirement plans. Unlike our parents and grandparents before us, many of us no longer spend most of our lives working for the same employer. In fact, according to the Department of Labor, over a 40-year career the average American will change jobs 11 times. With many companies today offering a 401(k) plan which provides 100 percent immediate vesting of employee contributions, many of these "transient" employees are receiving retirement benefits in the form of a lump-sum distribution on average every 3.6 years.

Determining what to do with a lump-sum distribution from a qualified retirement plan is among the most important financial decisions one can make, as it will clearly have an impact on future retirement income. Options include: maintaining the tax-deferred status of this money by rolling it over into an IRA, rolling it into the new employer's plan (if this is allowed by the new employer), keeping it with the current employer (if allowed), or using the distribution for current expenses, thus incurring potentially significant tax consequences, plus the loss of tax-deferred growth and any future retirement income.

When faced with the myriad decisions surrounding a lump sum distribution from an employer-sponsored retirement plan, it may be best to rely on the advice of a financial professional. He or she is trained to help you create a plan that makes the most out of what may clearly be an important source of your retirement income.



Advisor is an independent financial planner based in Manchester, NH