Five Common Financial Questions: What is the Most Suitable Answer?

Five Common Financial Questions: What is the Most Suitable Answer?

May 11, 2022
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At every stage of life, you may have financial questions that you don’t know the answers to. But not every question has a definite right or wrong answer because the correct answer depends on your unique situation. Here's a look at five common financial questions and possible answers to each:

Question #1: Should I pay off my mortgage early with my cash windfall?

Yes: Paying off your mortgage early frees up the money for other uses, such as saving for retirement or paying off debt. Since a mortgage payment is divided between principal and interest, paying off your mortgage early can save you thousands on interest charges depending on the term of your loan.

No: When you pay off your mortgage early, you're locking in a return that’s equal to your mortgage interest rate. The windfall could have been invested for retirement savings or other financial endeavors for the mortgage's remaining term, possibly producing a better rate of return.

Question #2: I am receiving a pension payout. Should I annuitize it or take a lump sum?

Annuitize it: If you take a lump sum, you may deplete the money prematurely, causing financial hardship during retirement. Annuitizing the pension provides you with a monthly benefit for the rest of your life. However, if you die earlier than expected, your heirs may receive less than the lump sum benefit.

Take a lump sum: If you annuitize your pension payout, your former employer manages it, and your monthly benefit will never increase. Investing the lump sum allows you to control the investment and may provide a higher rate of return over time.

The pension annuity or lump-sum decision can be life-altering if made quickly and before understanding how it will impact your situation. Therefore, it is essential to discuss your options and how it affects your financial plan with a financial professional.

Question #3: I left my employer. Should I rollover my 401k?

Yes: Rolling your 401(k) into another employer's plan is possible if the new plan accepts rollovers from another 401(k) plan. This option may make it easier for you to track the performance of your assets, but be sure to evaluate your new employer's plan by examining the investment choices and fees first.

You can rollover your 401(k) into your existing IRA or open a new IRA and initiate transfer paperwork with the help of your former retirement plan administrator or HR department and your financial professional.

No: If the retirement plan permits, you can choose to leave your 401(k) in the plan when you terminate employment. The HR department or retirement plan administrator is an excellent place to start to see if this option is available. Why would you choose this option?

  • The new employer may have a waiting period before enrollment, and you want to roll over the assets to your new employer's plan.
  • The old 401(k) plan has investing options that align with your investing strategy.

Note: Your retirement plan may also allow you to cash out your 401k account. Please consult with your financial professional to determine which option may be appropriate for you.

Question #4: Should I save for my retirement first or my child's education?

Save for retirement: Save for your retirement first, then assess if additional financial resources are available for education savings. Remember that a solid long-term retirement savings plan along with a financial plan can help you save for both.

Save for your child's education: Student loans may increase the likelihood that your child starts their adult life with debt and holds off on life milestones such as getting married or buying a house. Investing in a 529 college savings plan can help relieve some of the financial burdens that today's youth may face when borrowing money for college.

Question #5: Is now the optimal time to invest, or should I wait?

Invest now: Now may be a good time to invest in sector-specific stocks that may be at low valuation or invest in index funds due to the market's volatility. Invest consistently through dollar-cost averaging to make purchases to mitigate the impact of volatility on the overall investment.

Wait to invest: Waiting to invest should be based on your financial situation. However, waiting due to trying to time the market can be a risk in itself if you don't think long-term since markets go up and down every day.

Bottom line? Work with a financial professional.

A financial professional can help you navigate significant life events and market volatility and help you think long-term as you develop strategies for your unique situation. Please contact us if you have any questions or need assistance.

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual or individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing involves risks including possible loss of principal.

All indexes are unmanaged and cannot be invested into directly.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.