Saturday, March 8, 2014

Blessings in Disguise (Lump Sum Payouts)

Maybe it is a good thing that most of us will never see a huge pile of money in our lifetimes.  If we did, most of us would squander it all, in short order.

Kurt Vonnegut said it best, large sums of money, transferred at one time, to the plebes, is a really bad idea.  Some lawyer will take most of it away from them.

Getting your money in dribs and drabs, as a salary, or as a pension, or as Social Security, is not a bad thing.   When someone hands a million bucks to Johny Lunchbucket, it rarely works out well.

We are locked in, at the present time, by the rules of the 401(k) and IRA.   I was born in 1960, the largest year for births, for the baby boomer generation.   I graduated from high school, at age 18, and was briefly legal to drink alcohol, in 1978.  That same year, Congress passed new laws, allowing some newfangled retirement plans, called an "IRA" and a "401(k)."

Fast-forward 35 years, and we see how the baby-boomers are going to play out in retirement.  I harp a lot about this in this blog, only because the media ignores it.   What is going to happen in the next 10-20 years isn't going to be pretty.   A lot of people are going to retire with nothing, and nothing will be done about it.

But I am one of the "lucky" ones, having put aside money (is that luck or skill?  You decide) and having made some money, over the years.  But our money is "tied up" in tax-deferred plans, for the time being, so we can't touch it, without paying a hefty tax penalty.

And in retirement, we can only take out so much, before we incur the wrath of the IRS and the tax code.  The tax code, in retrospect, ends up acting as an incentive not to tap into our savings prematurely, and as an incentive to tap into them only as needed once we retire.

The heavy hand of "big government" in this instance, seems to have our best interests at heart.

Suppose it was different?  Suppose we got a lump sum payout instead?  I have written about this before, and how most "consumers" totally screw this up.   We get a million bucks, in an inheritance (or even a paltry half-million) and totally blow it on eye candy and junk.

You laugh.  I've seen it happen, again and again.   And recently, I've seen it happen again.

Suzie and Joe are your typical middle-class to upper-middle-class strivers, looking to get ahead in the world.  They made good money during their working years, and put some aside.  But Joe gives a lot of money to his siblings, convinced he is the "big man about town" and wanting to feel important.  Suzie spends her "excess" income on collectibles and clothing.   Going into retirement, they are a little panicked, as they have not put enough aside.

But Suzie inherits a "large sum of money" from her parents, perhaps in the low seven figures.   She is convinced her ship has come in, and they "no longer need to worry about money."

So they book an expensive ($50,000) vacation, and buy a new house ($500,000) that needs another $150,000 in remodeling, as well as serious foundation work.   They can afford it, now, right?  They are "millionaires" - or at least they were for a while.

Joe realizes quickly that they are going through a lot of cash in a short period of time - and that they have suddenly acquired a very expensive lifestyle with a high overhead, that is draining their cash resources.   Already they have decided to "put off" the remodeling of their new home, as they "can't afford" it, what with the expensive vacations and all.  A million bucks seemed like a lot of dough at first, but within a year, they have burned through nearly half of it.

Now they are talking about putting off the remodeling for a year or two, because they "can't afford it".  From filthy rich to poor - and almost overnight.  Now they are stuck with a home they can't even afford the upkeep on, much less their dreamed-of remodeling plans.

If Joe and Suzie were lottery winners from West Virginia, growing up in a trailer park, you might understand their lack of sophistication with money.  But they are both college graduates, and Joe actually has a job in the finance industry.   They should know better.   They didn't.

And as you might imagine, this causes a lot of stress in their marriage.  They now own three homes, partially occupied, with tax bills, utility bills, and even cable TV bills, that all have to be paid.  Don't even mention insurance!

Joe does mention it to Suzie, but she demurs, saying that "we have a million bucks now, and that is a lot of money."  Suzie fails to appreciate how much of her lifestyle is financed with Joe's income from working, and how, if they planned together, they could retire now, on their joint funds.   But to Suzie, the money she inherited is "hers" and hers to do with as she pleases.  And if they run out, well, Joe can support her.

Needless to say, they are in marriage counseling.  Needless to say, it ain't working.


As Bokonon says: "Peculiar travel suggestions are dancing lessons from God." (Kurt Vonnegut)

Kurt Vonnegut also coined the term, "Dancing Lessons from God", which I believe was from Cat's Cradle.  God presents examples in your life, like Joe and Suzie, and you can learn from them, or take away nothing.  It is all up to you.  God is showing you something here, if you pay attention.

And I pay attention.

What I take away is that lump sum payouts can be really evil, if you are not prepared for them.   For most of us plebes, anything six figures and over is "a lot of money" and we are unprepared to deal with it.  I had a number of these payouts in my life - small inheritances or sales of investment property.   Many of them I squandered buying boats, cars, or other stupid things, rather than paying off debts and investing.   Or if I did pay off debts with the windfall, I went right out and racked up new ones.  Stupid!   As I got older, I wised up.  I paid off my mortgage and put money in the bank, and stopped borrowing.

I learned to live on less and realized that if I could live a comfortable middle-class lifestyle in America (which is the envy of the world) I would be a very lucky man.   I didn't need luxury goods or luxury vacations - which are really only affordable by the very rich - but could get by very well on what I earned and saved on my own.   And knowing that I was "well off" by means of my own hard work (and not some inheritance or lottery winnings) made it all so much better.

The shackles of the 401(k) and the IRA seemed limiting at first.   But as I look forward to the remaining years of my life, I realize that smarter people than myself designed these plans with my instincts and actions in mind.  Preventing me from cashing it in too soon was a good move - as was preventing me from taking it all out in a lump sum.

Perhaps the limits of the 401(k) and IRA are a blessing in disguise.   I've seen what happens to middle-class people when they are handed a lump sum of money.  It isn't pretty.  In fact, it is pretty gross - watching people wallow in excess and squalor.  

Money changes people, and not for the better.   But more of that, in another posting