How to Manage a Financial Windfall

Ryan: When was the last time you gave your retirement plan a checkup? No, seriously. Well, there's no time like the present and Sandy and I are here to help you get started in our main segment. On today's show we discuss what I'll do with the money when ... Okay. If I went on Jeopardy and I explained the basics of market index is to Sandy, like she's five. That's all ahead on this episode of Your Money's Worth. Stick around.

• Episode Length: 00:27:08
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Ryan: Welcome to Your Money's Worth, I'm Kiplinger staff writer Ryan Ermey and I'm joined by senior editor Sandy Block. And we have a more intimate episode of Your Money's Worth today. It's just going to be the two of us in our main segment. Sandy is sgoing to talk about checking up on your retirement plans. But first some big news and if I was like a professional, I probably would have saved this to tell you Sandy on the podcast, Sandy already knows, but I am going to appear on Jeopardy. A lifelong dream.

Sandy: Which is so exciting. And I can say this, Ryan because I've been watching Jeopardy sense Art Fleming was the host. I used to watch it with my mother and I watch it every night and yell all the answers at the television and chastise the players when they get them wrong. So I could not be more excited to see you up there jostling around with Alex Trebek.

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Ryan: But I thought we would take this opportunity because before I go on, I can daydream about winning all the fabulous well from having a big run on the show. And this is something that we talked about and Kiplinger what's do with a big financial windfall.

Sandy: That's right. And even though that your chances of winning the lottery or matching Kenjin on Jeopardy are very small. Many people do come into a large amount of money sometime in their lives, often it's maybe a buy out from their jobs. They might receive a modest inheritance. And one of the problems we see is that people overestimate how far that money will go.

Ryan: Right? So I guess the number one piece of advice is if you come into some money, don't quit your job.

Sandy: That's right. Don't quit your day job, unless you win the Powerball. Even say you, if you win a million dollars or inherited a million dollars, if you're in your 30s or 40s, that has to last you for the rest of your life and you will run out. You might be able to retire a little earlier, but people overestimate how much they spend, how much they need to live on. And if nothing else, just keeping your day job gives you more time to review your options.

Ryan: So yeah, So one of the pieces of advice that I see out there that we've had in Kiplinger is that if you win a big win or come into or whatever, a big amount of money you should take maybe even like six months before you really do anything. And if you win or come into, I keep saying win, most people aren't going to win money, but if you come into a lot of money you should probably think about hiring people to help you.

Sandy: Right? Because, and the other reason to put it into a safe place for six months or even a year is you're going to be taxed on. You're going to be taxed on that money. Even if you win illegal gambling that's considered taxable. Certainly your Jeopardy winnings will be taxable, not only by the feds but by the state of California.

Ryan: That's right.

Sandy: So putting the money in a safe bank account for several months will ensure that you don't spend it before you have to pay your taxes and hiring professionals will help you figure out not only how much you will have to pay, but the best way to deploy it. And another advantage of hiring a financial planner an accountant, probably a lawyer if it's a lot of money, is you're going to be approached by a lot of people with investment ideas or schemes or scams. And if you have a team in place, you can say, well, you really need to talk to my man or my woman here, my advisor, and he can help you. Help us review your options. And that's a really polite way to get rid of people.

Ryan: Now. So even in my wildest dreams on Jeopardy, I don't think I'm going to win, I think Ken Jennings One, somewhere in the neighborhood of 70 something games in a row, which is mind boggling if you think about it. But if I have modest winnings or let's say someone has come into a $10 to $50,000, probably not enough to be a sort of hire a lawyer, hire everyone, makes sure that you're not getting sucked into pyramid schemes kind of money. What are the ways that people should deploy this money? Because I think the natural instinct is to think of it as this money that's different than all your other money. But really it's the same.

Sandy: Yeah. People think it's found money. And so they immediately start thinking of all the things they want to buy that they haven't had before, but really the smart way to deal with this is to invest in yourself, first of all, pay off all of your debts, your student loans, your credit card debts. You're going to get a better investment return paying off your debts and you can get anywhere else and you will free yourself from these obligations. And another smart thing to do with this money is think about investing in perhaps education or job training, professional training that will help you make more money. The best thing to do with this money is to figure out how you can get more of it.

Ryan: Right? And yeah, just to sort of reiterate if you pay off a debt with that comes with an interest rate of say 6.5%, that's the equivalent of earning a 6.5% return on an investment. They tell you in the Jeopardy tryout process to not tell them that you're going to use your winnings to pay off debts because given the opportunity, I think that's just about what everyone would say and it's also kind of...

Sandy: It's boring.

Ryan: ... Boring, but we're in the business of urging people to be boring first and then if you have money left over from your winnings, then you can go on your fabulous cruise or buy your cheetahs or whatever you're going to do.

Sandy: Yeah. When I did that, one of the first stories I wrote for Kiplinger was about what to do with a windfall and some of the planners, I said, go ahead and put aside some, a small amount of money for a splurge. That way you kind of get it out of your system. Go ahead and take a trip, do something fun, and then use the rest of the money wisely. I interviewed a woman Jeopardy Julia, the highest earning in Jeopardy's history a few years ago. She went over $400,000. She had already paid off her student loans. But she said she, she took a trip to Paris and spent a month there which had been her lifelong dream, but then she said she was going to use the rest to build up a retirement savings and do all the other smart things that you should do.

Ryan: How incredibly sensible. So I'm not allowed to say how I did, first of all, I haven't recorded yet. I'm recording here in the next month or so, and then I'll be sure to let our dear listeners know when I'm going to appear. Of course I'm not going to be able to say how I did.

Sandy: And if I'm here by myself, you'll know that Ryan did really, really well.

Ryan: And for those of you who are going to want to get early notice in talking about splurge is I'm sure I'm going to have like a watch party. The more extravagant the watch party.

Sandy: The better you did.

Ryan: That's exactly right.

Ryan: When we come back, it's time to give you a retirement plan a check up. Don't go anywhere.

Ryan: All right, we're back and our main segment today is about checking up on your retirement plan and I think a lot of times people, this is something that they're told to do at the end of the year. Why is this something that they maybe should be thinking about now?

Sandy: Well, I think at the end of the year there you've got a lot going on. It's the holidays you're traveling, you really not in the mood to do this, but now it's January. Here in DC it's cold. We had a snow day on Monday. You already starting to your financial documents together for your taxes, so why not take a look at how much you save for retirement and how you portfolio is doing.

Ryan: So what's the first thing that people should be checking on when it comes to their portfolio given where we are?

Sandy: Well, one thing people should be doing is making sure that their investments are still where they want them to be. Their asset allocation, the amount that you have stocks, bonds, and cash is where you want it to be. If you're a young person or you have a target fund which does this for you, you probably don't have to worry about this because he got most things in stocks anyway, but say you're a little older, getting closer to retirement and your goal is as 60% in stocks and 40% in bonds and cash. After the prolonged bull market that we've seen. You might actually have more in stocks that you're comfortable with, so one thing that you might want to think about doing is reallocating, getting back to your target goal and happily in a retirement plan of 401(k) or an IRA. You can do this without having to worry about paying any taxes so you can sell some of your really high performing stocks and move that money into a safer place.

Ryan: Right. And it's certainly worth seeing not only if your investments align with your tolerance for risk, but also to see whether you're sort of on track to retire when you want to and with the kind of income that you're looking for. And there are a number of tools and calculators online that are available. I use personal capital to keep track of my retirement investments. A lot of brokerages have tools for this and we have some tools for that in our website as well. So we'll put that in the show notes. But if I'm looking to get professional help in retirement planning. What should I be looking for?

Sandy: Well, if you want an ongoing handholding relationship, look for a fee only certified financial planner. These are planners who usually charge you by the hour or if you have a lot of money, maybe they'll charge a percentage of your assets, but the key is they're not getting paid to recommend a specific type of investment. They're looking at your total and they can help you in other ways as well if you want to figure out estate planning or taxes or all kinds of things and we can put in the show notes where to find one. If you were not as far along, not that well off, but just want a checkup. Just want someone to say you're on the right track. A lot of financial institutions will do this for free.

Sandy: We have most of our savings in Vanguard because that's where our 401(k) is. And my husband and I put most of our money there. And we got a really comprehensive analysis from a fee only planner named Jason, who basically looked at everything we had made some recommendations for moving things around. And more importantly, did a long-term projection to help us figure out if we'd saved enough to retire comfortably. And it was really helpful and it didn't cost us anything because Vanguard does this for people who have a certain level of assets. So I would certainly look at that.

Ryan: So when you say fee only because in the world of people who don't have financial advisors, they may be wondering, well, what's the alternative? And so when you say fee only, you mean someone who isn't getting paid to sell certain financial products on a commission basis?

Sandy: That's right, because the problem with someone who's selling financial products on a commission basis is the inherent conflict of interest in that individual will want to sell you the product that delivers the biggest commission. Now I've talked to some planners who work on a fee and commission basis. Maybe they sell something like long-term care insurance and they get a commission if they sell it. Sometimes that can result in a lower cost for you. And I think if they very upfront about it, that's not necessarily a bad thing, but in general we like feel only planners because then that your planner, isn't getting paid to recommend a particular product or investment.

Ryan: So let's say you either consult your brokerage website or you consult with a planner and maybe you're not quite on track or things aren't going exactly as planned, if that's the case, then what's your next step?

Sandy: Well, this kind of depends on to some extent on where you are on your journey towards retirement. If you're getting up there, this may mean that you have to work longer. You should go to socialsecurity.Gov and figure out, get an estimate of how much you're going to get in social security benefits that will help you figure out how much of that income you can count on. But a lot of people, particularly if they've had disruptions in their work years or haven't been able to save ... The conclusion may be you need to stay on the job a little longer.

Sandy: If you are still many years from retirement, you've got all kinds of time to catch up and the advice then is look at ways that you can save more. A lot of people are going to be getting a big refund this year because of the tax overhaul. Think about putting that money into an IRA or increasing the amount that you contribute to your 401(k). This year you can put $19,000 in a 401(K) plan that's up $500 from last year and if you're 50 or over, you can put an additional 6,000. Now, most people don't even come close to that, but it's a worthwhile goal. The more you save, particularly when you're young, the more you save now, the less you'll have to save later.

Ryan: And of course, as we always say, make sure you get your match. If it's, this is ... I think mostly a problem among young people, but if you at least contribute enough to get whatever your employer's willing to match because that's free money.

Sandy: That's free money and you're just leaving it on the table if you don't take advantage of it.

Ryan: And we always talk about another mistake that young people make with their retirement, which is?

Sandy: Cashing out. When people leave their jobs, they oftentimes if they have small balances, they'll just decide, well it's not very much money. I could use it to pay off my student loans or paid off my car or something like that.

Ryan: Buy a couple of cheaters.

Sandy: And this is really common among people who have $5,000 or less. There's a labor department ruling recently that's going to make it easier for companies to automatically transfer your 401(k) from one plan to another. And that will help. But you don't have to wait for that. You can ask your new employer if they'll let you roll your former employer's 401(k) plan into the new one, which I think is optimal because it keeps everything in one place. If that's not an option, you can always roll it into a Roth IRA. The key is by doing that, you avoid paying taxes and an early withdrawal penalty that can eat up to a quarter of your money. So you're already slashing that small amount and putting yourself even farther behind the goal of saving enough for retirement. So take your retirement savings with you when you go and put it in another plan. That's the most important advice I think I could give for young people.

Ryan: Alright. So to sort of wrap it up we need to make sure that our portfolios are in shape. We need to get help if we need it. We maybe need to boost our contributions and we need to avoid any penalties.

Sandy: That's right.

Ryan: All right, there you have it.

Ryan: Do you know the difference between the Dow, the Nasdaq and the S&P? Well I do, and I'll explain to Sandy, like she's five next.

Ryan: All right, before we go, we did want to bring back the explain like I'm five segment. And today we have a writer from New Jersey -- I mean it's still one of my friends from Jersey. Please send in your emails to podcast@Kiplinger.com. If you'd like to be featured in this or any other segment, we're happy to answer any questions you have. But in the meantime, we have a question from one of my friends from Jersey, which is, what's the difference between the Dow Jones industrial average, the S&P 500 and the Nasdaq?

Sandy: Yes, and I think a lot of people do wonder what the difference is because particularly on a volatile day, they'll hear on the radio or the television or on the internet that each of these indexes has gone up or down a particular percentage point and they wonder which one should I care about?

Ryan: Right. So if you don't mind, Sandy, I'm going to explain to you like your five.

Sandy: Okay, good.

Ryan: You know your stuff, for the sake of my buddy from Jersey, here we go. So when we refer to the broad stock market in Kiplinger, we typically mean the S&P 500 and the S&P tracks the performance of just about the 500 largest companies on the market. There's a little bit more nuance there, but that's basically the deal and the companies in the index are weighted by market value. So in other words, the more money that's invested in a company, the more that movement in that stock impacts the performance of the index, which makes sense. That's sort of how things work. The more money is moving, the more the index moves. The Dow Jones industrial average is the oldest of the indexes and tracks only 30 stocks which are chosen by a committee based on factors such as industry, leadership, company rather reputation and investor interest.

Ryan: So they want big companies that people care a lot about. And in contrast to the SMP, the index is weighted by stock price because it's really old and see now you can track things instantaneously via computer things like market value but before they had to go by price. So the highest priced stocks in the Dow Jones Industrial Average command the biggest portions of the index. And the Nasdaq, which there's a Nasdaq market, which is sort of like the New York Stock Exchange. It's all electronic. It was the first electronic we can call it an exchange or not, but regardless, it has an accompanying composite index. That's what people are referring to when they talk about the Nasdaq. It attracts some 4,000 or so stocks that trade on the Nasdaq market. And because the index is currently dominated by tech names at the moment, it's considered essentially a proxy for how tech stocks are doing. So there are all measures of how this sort of scare quotes market is doing, but they you some different flavors.

Sandy: Right? So Ryan, what should I do with this information? Because very often what you'll hear at the end of the day is that one of these indexes fell or rose a certain number of points and sometimes that can be seen very alarming. How should I process these numbers?

Ryan: Yeah, it's going to be difficult if you're like sitting in the back of a cab and they tell you that an index fell a certain number of points unless you can do some like really impressive mental math. So generally what you want to do is get out of the cab or get on your phone or get on your computer. Don't like shoulder roll out of the cab. But what I mean is what you want is to focus on the percentage gains or declines in an index. The points these days are pretty meaningless. And so like for instance, when you talk about what a correction is, that's generally considered a 10% decline from the top of one of these indexes. Whereas if a bear market is considered a 20% decline. So the percentages are what's really.

Sandy: Yeah, I was just looking up, on in 1987 market crash. The Dow fell 500 points and we thought. And I was around, I remember that we thought it was the end of the world now because the index is so much higher. 500 points. It's like a Tuesday. So you really, that's why the percentages are really much more relevant. I think unfortunately a lot of news reports kind of focuse on the points because they're easier to digest, but they really can't. They and they, but they can be meaningless. I mean, 500 points is, like I said, couch changed these days.

Ryan: This is very sophisticated for a five-year-old must be smart.

Sandy: Smart five-year-old takes who takes cabs.

Ryan: So the only other thing that I would sort of want to put on people's brains is when looking at these indexes, first of all, the S&P 500, there are a million STFs and index funds that follow it. There's billions upon billions of dollars invested in these index funds. So when they move, it's a lot of money moving. And if investors are putting money in or taking money out of these funds, it's going to move the market.

Ryan: The other thing I would want to point out is tech has done so disproportionately well over the last few years here during this bull market that not only is the Nasdaq heavily weighted toward tech but so is the S&P. I mean you have Microsoft, Apple, Amazon, this sort of the stocks that are thought of as these big tech behemoths command such a huge portion of these indexes because they've gone up so much, they're worth so much money.

Sandy: The thing I would add, Ryan, going back to the top of our podcast today, is that you're saving for retirement. A lot of funds do you benchmark is particularly the S&P. They benchmark their returns, the S&P. But your own plan may not follow that because you may be more conservative if you have 60% in stocks and 40% in bonds. Which is a reasonable allocation for somebody who's closing in on retirement. You're not going to get the same results as the S&P. The good news is if the S&P takes a big downturn, you're not going to fall as much. So these are useful numbers, but they may not necessarily apply to you.

Ryan: Correct. Okay. So like we said, if you have any questions, please email us and to my friend Beast who asked.

Sandy: Beast, who is not five years old.

Ryan: No, he is not.

Sandy: Because that would be sad.

Ryan: No I hope no five-year-old is called a Beast.

Sandy: I think I do know a five-year-old Beast actually.

Ryan: I think I do a five-year-old Beast actually.

Ryan: That's it for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show. Visit Kiplinger.com/links/podcasts. You can still connect with us on Twitter, Facebook or by emailing us at podcast@Kiplinger.com.

Ryan: And if you like the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.

Links and resources mentioned in this episode

• 5 Smart Steps to Manage a Financial Windfall
• How Jeopardy! Champion Julia Collins Will Spend Her Windfall
• 8 Steps for Your Annual 401(k) Checkup
• Kiplinger's Retirement Savings Calculator
• What's My Social Security Full Retirement Age?
• Vanguard's Asset Allocation Questionnaire
• Are You on Track to Retire?
• 3 Good Reasons to Invest in the Dow