The Strategy for Retirees Who Receive a Lump Sum

December 05, 2019

Well, I don’t know what happened to fall, but winter certainly seems to have arrived early.  This kind of weather makes many retirees consider abandoning Indiana in favor of a warmer climate until spring.  Unfortunately, sometimes real life encroaches on retired life, and today we are going to discuss one of those times, when a retiree finds himself with a lump sum of money.

Just to be clear, we are not talking about the usual lump-sum, like you might receive from a pension plan or 401k.  Those kinds are more common, frankly, but they are a subject for another time.  What we are talking about today is when you receive a lump sum through the sale of a business or farm, or the sale of a house when you aren’t reinvesting the proceeds or a portion of the proceeds in a new home. 

One potential way to use that money is to pay off any outstanding debts.  This is often a great use of capital in any stage of life, but it might be particularly important for retirees, because they no longer have the earnings or earning power they did when they were working.  Avoiding interest you would otherwise pay is analogous to earning a return on the money and is likely a better return than you might earn by investing the money in some other way. 

If your debts are paid off and you are looking for ways to invest your money, the first step you should take is to determine your timeframe.  If you are going to need to use the money in less than a year, it should be invested differently than if you aren’t going to need it for one to five years, or even longer.

For short term needs, preservation of capital should be the primary concern.  In other words, focus less on the return you receive and more on maintaining the principal.  Typical investments for this timeframe include savings accounts, certificates of deposit, and Treasury bills.  Savings accounts generally allow you to access the money at any time, giving you the most flexibility.  CDs and Treasury bills can be purchased with maturity dates that match up with your intended use of the money.  Usually these types of investments won’t pay you very much, but will help to ensure that your money is available to you when you need it.

If your timeframe is a little longer, like one to five years, your investment choices may expand a little bit.  You can still use CDs and Treasury bills, but ones with longer maturities, which, under normal circumstances, should carry higher rates than shorter maturities.  You might also consider short-term bonds whose maturities match up with your needs for the money.  Bonds may carry a higher interest rate, but also more uncertainty.  Avoid investments with costly exit fees and focus less on chasing the highest rate and more on having the money available when you need it.

If you have more than five years until you’ll need the money, or if you never expect to need to access the principal, you have more options.  Perhaps you’ll want to generate some spendable income that you can use each month, quarter, or year.  A portfolio of various fixed income instruments might help you to do just that.  Of course, you’ll want to integrate it with your current holdings to make sure that everything works together to help you meet your goals.  A longer timeframe also opens up the possibility of investing for growth, especially if you’re income needs are already being met.  Stocks and stock mutual funds may provide better potential returns over the long-run.

Regardless, of where your lump sum came from, whether it was expected or unexpected, it’s important to look at it in the context of your overall financial situation and plan. 

To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Stock investing involves risk including loss of principal.

Investing in mutual funds involves risk, including loss of principal.

Asset allocation does not ensure a profit of protect against loss.

Securities and financial planning offered through LPL Financial, a registered investment advisor.  Member FINRA/SIPC