Designing a new life – lump-sum retirement packages

Designing a new life – lump-sum retirement packages – Brief Article

Carolyn M. Brown

What one family should do with their lump-sum retirement package

Like many American workers, Debra K. Gay is trying to ride out the tumultuous wave of corporate downsizing. Once employed by the oil giant AMOCO, the former human resources professional is now trying to figure out what to do with her lump-sum retirement package–$134,000 in her 401(k) account and $25,000 in severance pay.

She is busy hunting for new employment prospects since her husband, John, is a self-employed architect. The challenge: the Chicago-based couple must restructure their finances, seeking the right mix of investments for their retirement dollars so that they don’t reduce their standard of living–or deal with major tax consequences.

Debra, who joined AMOCO shortly after completing her graduate studies at Purdue University in 1991, contributed the maximum amount to her 401(k) account–15% of her salary. The company matched up to 7% of the funds. Outside of her retirement funds, John and Debra, who are both 33, have over $45,000 in savings and investments, including CDs, mutual funds and stocks.

They have faithfully invested $500 a month in five mutual funds–two are designated for John’s retirement nest egg and one is earmarked for the college education of Murphy, their 16-month-old son. The Gays also own shares in five stocks: 3Com (Nasdaq: COMS); Dell Computer (Nasdaq: DELL); Qwest Communications (Nasdaq: QWST); Zoom (Nasdaq: ZOOM) and Atrix Laboratories (Nasdaq: ATRX).

“When I started working for AMOCO, I was making more money than I had ever before in my life,” says Debra. “I decided to max out my 401(k) contribution. I was a big saver. I didn’t carry any credit card debt. I wanted to do something

with my [newfound] disposable income that would earn interest.”

It’s been two years since John quit his full-time job and launched his own firm, which caters mostly to private clients. As a result, the couple has had to make a big adjustment to their financial life because of John’s sporadic income. A major issue: collecting from customers who don’t pay on time–or at all. To offset his business income and expenses such as rent and salaries for part-time workers, John recently took a part-time position teaching architectural design at a local college. As John’s income fluctuates, Debra has yet to figure out how long it will take her to find another job.

The Gays, who consider themselves aggressive investors, have been active in the stock market for roughly four years. The catalyst for the interest in investing was their marriage in 1993. The couple saved up enough in nine months to finance the nuptials. “We realized then that if we could save that amount of money over that short period of time, imagine what we could save by setting aside money each month over the long haul,” Debra says.

For the Gays, it will be a long haul, indeed. If they aren’t blindsided by emergencies, they will have to make sure that they have enough available cash for themselves and their child–or children–for several decades to come.

Financial Snapshot:

Household income $107,000(*)

(Debra & John’s

combined salaries)

Household expense $39,600

Business expenses $218,700

Investment portfolio

(inc. 401(k), IRA/

severance, CDs mutual

funds & real estate)

Debt/liabilities $220,800

(mortgage, student loan,

cars & credit cards)

(*) Reflects gross income

COPYRIGHT 1999 Earl G. Graves Publishing Co., Inc.

COPYRIGHT 2000 Gale Group