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The Advicer

I’m 61 with $1.4 million, but have $50,000 in credit card debt. I want to retire in a year, and a new adviser promises he can beat the old one’s returns by $300,000. Should I buy it?

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Question: I am 61, married and want to retire at 62. My husband is 63. We both can get pensions with either a monthly payment or lump sum, and we both have 401(k)s, while I also have a traditional IRA. Our portfolio is currently worth around $1.4 million, which includes the lump sum pension payout, and we have $59,000 in savings. But we also have $50,000 in credit card debt and owe $315,000 on our mortgage at a 2.25% rate. Should my husband and I both take the lump sums vs. the monthly pension amounts? We are both in relatively good health.

Secondly, my 401(k) is currently with a large registered investment adviser. I’ve been thinking of rolling it over — while I am still employed — to a large independent money manager, who is a fee-only fiduciary. He tells me that the current RIA has had flat returns, and he can do a much better job, ensuring me that my accounts would be worth about $300,000 more if his firm was managing it. I don’t know if I believe this and their fee is a lot higher at 1.25%. Is it a good idea to roll over before we retire, wait until after we retire, or do we not use this large independent money manager at all due to the higher managing fees?

Answer: Not only are you faced with a very big financial decision in terms of whether or not you should take lump sums or monthly pension payments, you’re also trying to figure out whether you’re making a wise decision to retire early and whether you need a new pro to help you. (Looking for a new financial adviser too? This free tool can match you to an adviser who may meet your needs.)

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One overarching thing to consider, especially because you are in good health: You “are young to retire. Consider that one or both of you might well spend 30 years in retirement, living into your nineties, and your portfolio would need to support your lifestyle for decades as living costs rise with inflation,” says certified financial planner Jim Hemphill at TGS Financial Advisors.

“If you don’t enjoy your current careers, you might be able to semi-retire to more rewarding part-time work, letting your investments grow,” says Hemphill. You’re at a point in your life where a wrong decision can be very costly.

Should you take lump sums or monthly payments?

This is a tough question to answer, and in order to determine the best path forward, certified financial planner Ryan Haiss at Flynn Zito Capital Management, says, “I would like to know how much the monthly pension options are. There are typically many options available and the amounts will differ depending on the terms. A single-life only pension covering only the life of the pension holder will be more than a joint-survivor pension, which will cover both husband and wife. Next, I’d need to know more about your sources of income and how much you expect you’ll need for your retirement budget,” says Haiss.

In the most basic sense, with a lump sum, you get the money upfront, which can be nice, but you risk running out of money if you live a long time. With the monthly income, you get that until you die, but if you pass early, you might end up with less. This guide from AARP can help you make the decision.

Pensions can be nice because they’re generally not subject to market volatility. But “they may not offer any protection against inflation, which is obviously a big issue right now. Depending on the pension, it may or may not offer survivor benefits, so if either party dies, those funds could stop. Also, the [monthly] pension cannot be left to heirs. It’s possible the best action is for one person to take the pension (usually the one with the longest potential lifespan) and the other to take the lump sum,” says John Eaton, certified financial planner at Avior Wealth Management.

When you do retire, Hemphill says, “Your adviser should determine whether your lump sum payment is actuarially equivalent to your pension. In recent years, we’ve found multiple cases where the pension is clearly more attractive.”

There are a lot of moving parts here and you might benefit from hiring a financial adviser to walk you through every nook and cranny of your finances, pros say. (Looking for a new financial adviser too? This free tool can match you to an adviser who may meet your needs.)

Should you pay off debt?

It’s concerning that you’re carrying a large credit card debt and a substantial mortgage. “With money market yields of 5% available on risk-free money market funds, it doesn’t make economic sense to pay off the mortgage. This is especially true given that most of your money is in pre-tax retirement savings,” says Hemphill. “On the other hand, paying off credit cards which are likely to charge higher interest rates, might be prudent using a portion of your cash assets,” says Hemphill.

Should you roll your 401(k) into an IRA?

As for whether you should roll over your 401(k), it may make sense to consolidate the 401(k) to an IRA. “401(k) accounts are typically limited to 15 to 20 investment options and they don’t always have the best choices. You should review these options with a financial planner and determine how you would like to proceed as the final decision will be up to you,” says Haiss.

Regardless, you may not be able to move your 401(k) account to your IRA until you retire or leave your job, unless your plan allows for in-service distributions, which is something you’ll need to clarify with your current provider, says Haiss. In-service distributions are funds that can be taken from a retirement plan while you’re still employed, though they’re usually reserved for those experiencing financial hardship.

Beware of advisers that make big promises

Proceed with caution when you talk to advisers who make big claims and quantify how much better they could have done had they been managing your money. “I’d be skeptical of this money manager. Would they be taking on more risk? What’s different for their investment strategy?,” says Haiss. 

What’s more, your current adviser’s past performance doesn’t necessarily predict their future performance. “The question you should ask is whether either of them is following best-practice investment principles of broad diversification, low cost funds with the core of the portfolio in equities,” says Hemphill.

Moreover, Eaton says he’s leery on any adviser comparing investment returns. “Without any additional information it’s hard to know if they’re comparing the same asset allocation and risk profile. A better exercise would be to do a risk adjusted return analysis [the profit from an investment that factors in the degree of risk needed to achieve it]. There can be some pitfalls leading up to and including distribution strategies where an independent adviser can be of help. I wouldn’t suggest [working with] an adviser that only manages money without a financial plan,” says Eaton.

Right now, Hemphill suggests finding a fee-only adviser who can help you develop a strategy to manage your entire financial picture including your debts and not just your investments. Working with a fee-only certified financial planner helps eliminate the potential for conflicts of interest because they’re typically only paid by the client and don’t receive commissions or kickbacks from the sale or recommendation of financial products. (Looking for a new financial adviser too? This free tool can match you to an adviser who may meet your needs.)

It may be advisable to work with a CFP, as they complete extensive education requirements and thousands of hours of work-related experience, pass exams and adhere to a fiduciary duty. “Working with a certified financial planner who doesn’t want to manage your money but instead gives you advice without conflicts of interest is the solution. You should work with someone who analyzes your case in detail and presents you with a written plan along the lines of action you should follow,” says certified financial planner Alonso Rodriguez Segarra at Advise Financial. 

Instead of focusing on the 1.25%, certified financial planner Mark Brinser at Stewardship Advisors, asks if you see value in the guidance you’d receive? “If the investment manager is going to do tax planning, help you think through things like Roth conversions, the effect large RMDs can have on future taxes and monitor the plan for future issues with planned distributions, the fee could be worth it. If, however, the fee only covers investment management, it may not be worth the cost,” says Brinser.

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Questions edited for brevity and clarity.