How Should I Invest Proceeds from Selling My Home?

In this episode, James tackles a listener’s question about investing a lump sum for his upcoming retirement. 

James analyzes one's situation and gives realistic insights on determining the right mix of stable and growth assets that will generate a rising income stream for the rest of your life. 

Tune in for tips on how to secure a comfortable retirement using a real-life example.

Questions Answered:
Should I invest lump sump sum or dollar cost average approach?
How do I invest a lump sum once I receive the funds?
What other planning points should I be aware of?

Time stamps
0:00 Intro
0:45 Listener Question
2:55 Summarizing
4:10 Will You Be Okay?
7:10 Make Sure That Number is Accurate
8:20 4% Rule
9:53 Guyton-Klinger Rule
10:53 Two Things to Note
13:30 You Need Income to Live on
15:15 Part 2 of the Question: How to Invest the Lump Sum
18:10 Dollar Cost Averaging
21:06 Using An Example
23:40 The Principle Is This
27:00 Properly Addressing Risk
28:50 Most People Do This…
30:25 Back to the Listener Question
31:00 Summary
32:20 Outro

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Transcript

 When you receive a lump sum of cash, should you invest it all at once or should you dollar cost average into the market? It's a big question that comes up over and over again, and in today's episode, we're not only going to address it, but we're gonna see how that potentially fits within the context of someone's actual financial situation.

This is another episode of Ready for Retirement. I'm your host, James Conole, and I'm here to teach you how to get the most outta life with your money. And now onto the episode, we're gonna explore this question of lump sum investing versus dollar cost average investing. But we're not just gonna do it in a vacuum, we will do that.

I wanna do it in the context of someone's actual financial situation. So today's episode is based upon a listener question. This question comes from Tyler, and Tyler says the following, he says, Hi James. I've truly enjoyed listening to your podcast and watching your YouTube videos. You're able to break down a variety of issues and explain them so well.

I've also recommended you to many of my friends who are approach in retirement like me. Thank you for all the useful content. I have a question and would really love to hear your thoughts if you have time. I am 44 and my wife is 43. I am a police officer and my wife is an at-home preschool teacher.

Combined, we make $250,000 annually. We would like to retire in two years or less. And I have a question of how do we invest a lump sum. And also your overall thoughts in our situation. We have $600,000 of equity in our current home, which we plan to sell in two years. When my youngest daughter graduates high school, we plan on moving to our vacation home, which is paid for and valued approximately 750,000.

Currently I have 400,000, my 4 57 account in 250,000 in a 401k of which I max up my contributions annually. Additionally, I have about 200,000 in cash slash individual stocks in a hundred thousand in a health savings account, and I've also been paying into social security. I know some police departments do not do that.

I'm currently enrolled in a deferred retirement program where I'm collecting my pension of $70,000, which goes into a 4 0 1 account with a guaranteed interest of 7.3%. I can stay in this program for maximum of five years, and I currently have been enrolled for one year. At the end of five years, there's a mandatory retirement.

However, I would like to leave sooner in two years or less. The value of this account in two years from now will be 230,000, and if I stayed for five years, it would be 417,000. The pension has a 2% cost of living adjustment annually. I don't want to work again. As of now, when I retire and we enjoy a lot of hobbies and travels, I would guess that I may work again at some point, but I have no plans to do so as of now, after the sale of my home.

Where do you suggest putting the $600,000 to invest and how do I invest it? We are frugal and can easily live off of just my pension, but I would like to bring home an additional 4,000 to 5,000 per month. To live it up for retirement. I would love to hear your thoughts on my situation and how to invest my lump sum.

Thank you, James. All right, well Tyler, thank you for that question. If you're listening along, you might be saying, my goodness, there's a lot of information there, so I'll wanna summarize it fairly concisely. So here's an overview of Tyler's situation. He has cash in stock of $200,000. He has home equity of 600,000.

Now, truly he has more because he also has a vacation home. But keep in mind, he's gonna move to the vacation home in the 600,000 of equity in his current home is what he's asking about how to invest. So house equity of 600,000, that's not just equity, but that's going to contribute to retirement income.

4 57 plan a $400,000, a 4 0 1  of $200,000, an HSA of $100,000, and a deferred retirement benefit of $75,000. It's called a drop program. This kind of is gonna work just like another 401k  in a sense. So that's where he is. So he has about 1.7 million or so of assets. He has a pension of $70,000 and he's really asking two questions.

Number one. How do I invest this lump sum? So lump sum, that's gonna come from the sale of the home. And then number two, general thoughts on his situation. In other words, is he going to be okay? So let's jump into both those, and let's actually start with number two, some general thoughts on Tyler's situation, and then we can translate that into number one or flown to number one to talk about how should you invest a lump sum within that situation.

So to start, let's go to Tyler's financial situation. See, are you going to be okay? And okay to him? Just to backtrack a bit, means he has a pension of 70,000 per year coming in. There is a cost of living adjustment on that, and Tyler is saying, look, we can probably live just fine on this. We're fairly frugal, but we want an additional four to $5,000 per month.

I don't wanna retire and sit around all day because I feel it's strapped for cash and can't do anything. I want to be able to, in his words, Live it up. So can we have another four to 5,000 per month to do so? So there's a lot of aspects to a well-rounded financial plan, but that's the specific component that I'm going to be looking at.

Is this essentially the cash flow question? Well, here's how I would look at this, because I know there's a lot of details. There's a lot of accounts. There's a pension, there's Tyler, there's his wife, there's our current home, there's their vacation home, there's a sale of a property, there's a lump sum to invest.

Lots going on, but here's what I'm gonna come back to as the basics. Number one, they can live on the pension alone, which is $70,000 per year. My first thought would be, this is Tyler, confirm this is the case, because I know right now, combined salaries are 250,000, and I know you're not actually living on all of that.

You know, there's taxes, there's retirement savings, there's other things coming outta that salary. But going from 250,000 to 70,000 per year, that's an over 70% reduction from where you are right now. So I know you're not actually living on 250,000. Because right now you have taxes, you have retirement contributions, you have two homes.

Now you'll be down to one in retirement. However, make sure that we do have an accurate assessment of what will's retirement expenses actually be, and don't forget the one-off stuff. So it's very simple to look at this and say, okay, I'm going from 250,000, or we're going from 250,000. Combined down to 70,000.

Once we're retired, can that pay our monthly expenses? And you might look at monthly expenses in this case and say, okay, we have a paid off home. We are living fairly simply. You might just add up the basics, like, okay, food each month, or utilities each month, or whatever it might be, entertainment each month.

But don't forget the one-off stuff because so many people say, you know what, James, it costs maybe 5,000 per month to live on. I'm just making up a number. But they're only including their fixed monthly expenses. And when we start working through this, we see there's a lot that they haven't factored in.

And that could be travel, that could be property taxes, that could be birthday gifts, Christmas gifts. That could be new cars every so often. That could be insurance premiums that are paid once per year. What about budgeting in for, say, home repairs or emergencies? So once you factor in those things that aren't showing up in your budget every single month, sometimes you get a much different picture of what retirement will actually cost.

So step number one, I'm not saying that 70,000 is or isn't accurate, but if I'm talking to Tyler, if I'm talking to anyone who's trying to figure out their retirement expenses, I would say make sure that number's truly accurate. So $70,000. Back out taxes, what's left? Is that actually enough and is that actually enough?

Not just on a monthly basis, but also manufacturing those one time things or those annual things that you do have to account for as well? For the sake of this analysis, I'm going to assume that it is because as Tyler said that it is. So that's assumed that that $70,000 covers the basics. The second step I'd look at when, just given some general thoughts on Tyler's situation, is seeing can we create another four to $5,000 per month from their investments to find the answer to that?

Let's do a recap of what they have. Investments. So I know I read this off before, but just in summary, they have 200,000 in cash slash stock, 600,000 in home equity that will be realized and invested once they sell their property. 400 grand and a 4 57 plan, 200 grand and a 401k, a hundred grand in an hsa, and then 75,000 that will grow to 230,000 in a deferred retirement account.

So assuming no market growth, there's about $1.7 million. And the question is, can this $1.7 million be used to create that additional four to $5,000 per month? Well, let's look at this real simply. There's a couple approaches you can take. One is say, well, let's look at the 4% rule. The 4% rule simply says, if you have a portfolio and you want to be assured that that portfolio can last for a number of years, take 4% of it out per year and adjust it for inflation.

So if your portfolio is invested the right way, or at least invested in the way that's consistent with the 4% rule research, that's gonna last for some time and adjust for inflation. So if we just look at that 1.7 million and we look at 4% of that, so assuming that's invested in a way that's consistent with the 4% rule, we can assume or we can know that we have a relatively secure chance or safe chance of being able to have this income last for some time.

4% of 1.7 million is $68,000 per year. On a monthly basis, that's about $5,600 per month pre-tax. Tyler said he wants four to $5,000 per month from his investments. Obviously the 5,600 per month pre-tax is well pre-tax, so we have to back out taxes and depending on what state he'll live in, and depending on the way in which he pulls assets out of his portfolio.

Because he has, uh, pre-tax assets, he has HSA assets. He has non-qualified assets, so depending on the withdrawal strategy used in the state that he lives in, not sure exactly what his tax bracket will be, but he's probably pretty close, if not already there, meaning just applying the 4% rule could get him enough money from his investments to meet that four to five grand extra per month.

Now that's just a 4% rule. There's the gut and klinger approach as well where you can take maybe up to 5.6% or so that initial year of retirement and know that that money's gonna last for some time. If we apply that withdrawal rate, again, there's more dynamic rule set and things that you need to do to make sure that last, it doesn't just say you can take this money and be guaranteed that it's gonna work.

There's certain rules that you need to follow in terms of when can you increase spending, when do you decrease spending, where do you pull funds from each year. But anyways, if he can take 5.6% per year from that 1.7 million, that's $95,000 per year. If you look at that on a monthly basis, it's about $7,900 per month pre-tax, almost certainly enough to cover, well, I shouldn't say almost certainly, that's certainly enough, regardless of what state you live in, to give you four to 5,000 per month after taxes.

So when we look at the super simply, I look at Tyler's situation and I say, Hey, you're probably in a good spot now. It seems simple. But here's two things to note though. Number one, what are some negatives to their situation? I don't mean negative from a bad standpoint, but but negative from the standpoint of this is gonna work against you.

Well, number one, the 4% rule is based upon 30 years of income, and klinger's approach is based upon 40 years of income. So that research is based upon someone retiring. They need to be assured their money's gonna last for some period of time. Well, 30 to 40 years for most people is a lot of time. But keep in mind that Tyler and his wife, they're pretty young.

They're 44 and 43, I believe. I'm just going back to the question here. Yes, they're 44 and 43, so is 30 to 40 years going to be enough for them? Maybe not. I have no idea what family longevity is like or what health is like, but there's a good chance that's not gonna be enough. So as you're looking at that, the implication is don't withdraw as much at first.

So instead of taking out 4% or 5.6%, you need to adjust for longevity, and you do so by tampering down or pulling back how much you're taking out of your account each year. So that's one component of the way I look at it now to the positive. So if that's to the negative of what might detract from how much they could spend, the positive aspect is we're doing all this before taking into account social security.

Tyler mentioned in his note, he said, Hey, I do pay into social security, which as he mentioned, isn't the way it is for all police officers or law enforcement or fire or teachers. A lot of them, if they are covered by a pension, they won't also paint into Social security. However, he is also paying into social security, which means if we're factoring in social security into his plan, that's another income source that's not gonna be available immediately.

It might not be for 20 plus years, but that's something that's going to be in his plan. And so here's a very simple way of looking at this. I don't know what Tyler or his wife's social security benefit is going to be, but let's make an assumption. They get 4,000 per month combined in Social Security at age 70.

Now, why am I making that assumption? Why I'm doing it so I can give myself easy numbers. I know that Tyler and his wife, they want 4,000 extra per month. Really said four to 5,000, but let's just call it 4,000. Well, if we know that 4,000 per month is going to kick in, starting at age 70. Then we don't actually need the portfolio to maybe last for 50 years.

I just spoke about the fact that these rules, the 4% rule guidance rule, they're assuming that you need a portfolio to lasts 30 to 40 years. Well, if you retire at 45, you probably need more life out of your portfolio. However, The reason you need that from your portfolio is you need income to live on. If we know that another layer of income's gonna kick in at age 70, and if Tyler's retiring at age 45, Well, what that's actually telling us is he doesn't need his portfolio to last for 50 years.

He maybe only needs it to last for 25 years, almost to bridge that gap between retirement date and social security. Again, I have no idea what Tyler's social security benefit is. I have no idea when he actually plans to collect Social Security. I'm just making some assumptions here. So as we look at this, if, if he really does only need 25 years, What that means.

The actual implications are maybe he can actually withdraw more at first in the 4% rule or the 5.6% that Gai Klinger's approach indicates can be taken. So this is absolutely not a recommendation. I wanna make that very clear. This is just to illustrate the point that can be made when we're looking at how do we break down what seems like a pretty complex situation between pensions and social security and early retirement and selling a home, several different account types.

You need to break it down to the fundamentals. And so as we're doing this, my thought is it's probably doable. Now, I do recommend that a good amount of planning goes into this. As you have many different accounts to coordinate withdrawals from. You have a unique time horizon. There's gonna be different tax implications, there's gonna be rules around rich accounts.

Can you actually draw from when you first retire without penalty and which can't you? So there's lots of planning that should go into this, but it does appear to me like you have the right pieces in place to be able to make this happen. Hey everyone. It's Mia again for the disclaimer. Please be smart about this.

Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal, or other financial advice. It is for informational purposes only. All right, well, that's just part one of the question. Again, the two part question was, am I gonna be okay?

And then what do I do with that lump sum? Well, let's talk about how to invest a lump sum. And technically this is one question, but when I'm actually asked it, there are two components. There's two meanings that people are ascribing to it. The first part of that question is, what's the makeup of investments that I need to invest in to be able to fund my goals for the rest of my life?

And then the second component to it is, should I invest this all at once or should I dollar cost average into the market? And I think that most people, that's actually what they're more concerned about. Because the first part, it's, you know, and there's some work that goes into it, but can be fairly simple.

So the answer to number one of how do I invest in a manner that will allow my funds to grow and reach all my goals over time? Well, you first need to understand when would that 600,000 in Tyler's case be used? When are you gonna start spending that down? And as you start to model that out, whether that's the first 10 years of retirement, or maybe that's years 20 and beyond, well you can start to get a sense of, okay, should this be invested aggressively?

Should this be invested more conservatively? Typically it's gonna be some combination of the two of how do you make sure you have enough stable assets to be able to continue living and continue taking income even when markets aren't so hot. But also, how do you have enough in growth assets that you can grow your assets in excess of inflation and maintain your purchasing power over time.

So the, the direct answer to part number one of how do I invest in a way to fund my goals is you invest in a way that has the right mix of stable assets and growth assets to ensure that you can generate a rising income stream for the rest of your life. Now, I recognize that's easier said than done, but there are other episodes I've done where I've flush that out in much more detail, and you can always go back to those.

What I want to focus on instead is once you've determined the mix of investments you're going to invest in. How do you deploy that? Do you invest all at once or do you invest little bits at a time, maybe over a number of months, to ultimately invest all the money that you have? And the reason people even ask this is there's a concern.

And the concern is, well, what if you invest it all at once and the market drops 10%, 20%, 30%? Well, we saw this last year, the s and p five hundreds down almost 20%. The Nasdaq was down over 30% when we're looking at calendar year 2022. So what if Tyler sold his home and he invested all $600,000 on January 1st, 2022?

Well, by December 31st, 2022, if he had invested everything in the s and p 500, he would have been down to about $491,000. So over a hundred thousand dollars less than he started with at the beginning of the year. If he had invested everything in the Nasdaq, well, that 600,000 would've dropped to about $400,000 by the end of the year.

So this makes people say, well, geez, isn't it maybe better to put in a little bit over time, maybe over three months or six months, or 12 months? Well, it's a fair question. And so let's explore this. And here's the point that I think is really important for people to understand, and this sounds really, really simple, but it's not until we understand this point that we can start to understand the implications.

Dollar cost averaging. So the act of, instead of investing everything all at once, spreading it over a series of payments over time. But dollar cost averaging is just a series of lump sum investments. So if I have $120,000 as I want to invest, say over the next 12 months, Well, that's the same thing as making a lump sum investment of $10,000 every single month for the next 12 months.

Okay? So, like I said, nothing revolutionary about that. Nothing that mind blowing about that, but just understand that, that every time you dollar cost average, it's just a series of lump sum investments. Now hold onto that thought because now let's explore another pertinent detail, another pertinent fact.

What we wanna understand is the frequency or the probability of positive returns in your investment over any period of time. Now, as we go back to Tyler's situation, when he's looking at that $600,000 and how should he invest it, I don't know exactly what portfolio Tyler's going to invest that in.

What's gonna be the mix of stocks and bonds? And then within those stocks and bonds, what are the mixes of the types of stocks or types of bonds? I don't know. So let's just look at the s and p 500 as a starting point. If you go back to 1936 and you look at the s and p 500, if you look at all daily returns on the index, 53% of them were positive.

So the implication of course is 47% of daily returns were negative. So when you look at it on a daily basis, it's really kind of like a coin flip. Is tomorrow's return gonna be positive or negative? I have no idea. There's a slightly higher probability that'll be positive just looking at the last 90 years of data.

But there's also a very good chance that it's gonna be negative. Now, what if we extend that from one day to one month? Look at all the rolling one month returns since 1936. Well, 63% of those have been positive. Okay, well, what about all rolling quarters? So three months at a time. 70% of all rolling quarters have been positive since 1936 in the s and p 500.

If you take that out to the one year mark, all rolling, one year time periods, 77% of them have been positive. And if you extend that to 10 years, so 10 year rolling period since 19 36, 90 7% of them are positive. So I love these numbers for many reasons. First of which is the longer you stay invested, the less your risk becomes as an investor.

It's almost boringly consistent, how much we can count on, at least historically speaking, the market to grow your money quite a bit when you remain fully invested for numbers of years and even decades. However, let's take these numbers and let's relate them to this concept or this question of, should I invest all at once or should I dollar cost average?

Again, if we break down dollar cost average, it's just a series of lump sum investments. Let's go back to my example of what if I have $120,000, could I invest it over 12 months? And that's just the same as a lump sum investment of $10,000 per month. Well look at just the first two investments in that series.

So I'm gonna invest 10,000 today in $10,000 in one month. Well, let's just start by comparing those two investments. When I do, so if I go back to the numbers, when I just looked at the probability of positive returns going all the way back to 1936, well there's a 63% chance that I'm gonna come out behind by dollar cost averaging versus had I simply invested all at once, where does that number come from?

Well, that 63% chance of me coming out behind is because there's a 63% chance that the market's gonna be positive over the next month if we simply project those numbers going forward. So if I invest part of my money today and part of it next month, that part that I'm investing next month is probably going to be invested in a higher market than the market is at today.

This is not a prediction of what's to come. It's simply looking at history and saying that 63% of the time the market goes up over the course of a month. So if I just look at the first two investments in that sequence, that 12 month sequence, the first one. Is probably going to be invested at more attractive market valuations than the next one.

Now, let's compare the first investment in that 12 month sequence. So the one invested today versus the final one. So in this case, if it's invested over 12 months, the final investment would be in 12 months to call it a year. So if we look at that now, there's a 77% chance that the investment I make a year from now.

Will be made into a higher market than the market's at today. So in other words, that did not benefit me 77% of the time. The reason your dollar cost average is you're hoping that you're investing at lower market valuations than the one we have today. And again, just in case, I'm unclear at all about this, where I'm getting at 77% is not a prediction of what's to come over the next year.

It's simply looking at the s and p 500 historically and saying 77% of the time, if you look at a one year time period, the market's gone up. So the investment I make today, there's a 77% chance that becomes worth more than the investment I make 12 months from today. The principle is the longer you wait, the more likely you are to underperform relative to one single lump sum investment at the beginning.

Just to stretch this out to an extreme, sometimes an extreme example helps to illustrate the principle. What if I'm only making $2 cost average investments? I still have that $120,000 and I want to only invest that in two lump sums, 60,000 now and 60,000 at another interval. What if I stretch out that interval to 10 years?

So 60,000 now and 60,010 years from now. Well, if I do that, there's only a 3% chance historically speaking, that the investment I make 10 years from now will be lower than where the market is today. And by the way, it's not just a lower chance of coming out ahead the longer you extend the dollar cost average interval, but the magnitude of underperformance becomes larger too.

To use that 10 year example, odds are pretty good that that first investment I made has doubled or maybe even tripled in value if it's invested in the s and p 500 or some growth asset. So it's not just that I underperformed by investing some today and some in 10 years, it's that I underperformed by a significant magnitude.

And the longer that dollar cost average interval, the more and more likely it is I'm gonna underperform. By not just a percentage, but the magnitude of underperformance might be more and more significant as well. Okay, so a couple of principles from this. Number one, this is just looking at the odds where you invest everything in the s and p 500.

We go back to Tyler's situation. I don't know his situation fully, but my guess is a hundred percent s and p 500 portfolio probably isn't the best thing to do with that $600,000 of cash that he's gonna have. There might be some mix of stocks and bonds and big company stocks and small company stocks, and international and domestic.

And when you do that, when you diversify, What it actually does is it increases the probability of positive returns over a daily, monthly, quarterly, annual, 10 year stretch. So if you're increasing the probability of positive returns over all those intervals, you're actually less and less likely to be making money by dollar cost averaging versus simply investing all at once.

So that's the first thing that I want to address. The second thing is a lot of you might be listening and saying, well, James, we're not dollar cost averaging because we're trying to maximize returns. We're dollar cost averaging because we're trying to minimize risk. Fair enough. But it all comes down to how you look at risk to me, you always have to start by defining what risk actually means.

Risk is a term that everyone throws out, and very few people can actually give you a good definition of what it means. In the investment world, if you look at a prospectus or an investment risk is typically defined as standard deviation, and the implications of standard deviation is just uncertainty in the short term.

So the risk is, oh my goodness, what if I invest in the market drops 20% right away, or 30% right away? Like we saw in 2022. Well, that's one version of risk. But to me, risk is always the permanent loss of purchasing power. And typically when we're investing, we're not investing this money to use it in one year or two year, or three years.

We're using it or we're investing it to use it in 10 years or 20 years or 40 years even. So when we look at it that way, the greatest risk to our money is not growing it enough to meet our future obligations and our future needs. So the way you address risk isn't through dollar cost averaging. The way you properly address risk is through your asset allocation, the mix of investments that you're designing for your portfolio so that it can specifically fit into your unique plan.

So if you say, James, I'm dollar cost averaging because I wanna minimize risk, you might be minimizing one type of risk, if that's standard deviation or potential outcomes in the next six months or 12 months. Sure. You're probably minimizing that. But are you minimizing that risk? But in doing so, you're actually magnifying the more important risk, which is the potential permanent loss of purchasing power, but your money not growing as much as it needs to over time.

So the principle as we're looking at this is the longer we extend the dollar cost averaging time horizon, the more likely we are to miss how to market returns, which is why I always recommend first and foremost, before you decide how to invest a lump sum, start with your financial plan. What are your needs from this money?

How does this lump sum fit into those needs? Once you've done that, you can identify what's the right asset allocation or investment mix for this lump sum. Then you look to either lump sum dollar cost average over time, and probability says the numbers say you're more likely to make money to do better by investing it all at once than you are to dollar cost average.

Big disclaimer, and this is obvious again, this isn't always the case. If we knew there was gonna be a major market pullback, well then of course we'd wait If we knew that 2022 was gonna happen, or if we knew that 2008 was gonna happen, or if we knew that 2000 to 2002 was gonna happen, well of course you would wait, but you wouldn't actually dollar cost average.

You would wait until the market was at its bottom and then you'd do a lump sum investment. Well, no one knows when the market's gonna be at its bottom in the same way that no one actually knows what the next number of months are going to hold. But one thing I have noticed is that even though no one knows a certainty, most people most of the time tend to overestimate the odds there being a market downturn in the next six or 12 months.

Here's a way to think about this or just, just think about this as I'm asking these questions. Ask yourself, do you think the market will be higher or lower in 10 years? Well, I feel like most people, you'd probably say, well, it's probably gonna be higher. There's 10 years for things to work themselves out.

I'm gonna guess the market's gonna be higher. Then ask yourself this. Do you think it's more likely that the market will be higher or lower in six months? As you think about that, a lot of people, their first thought is probably to say lower. The reason for that is you're more likely to look around and see all the problems, whether this is inflation, whether this is interest rates, whether this is global issues, whether this is political issues, whatever it might be.

It's so easy to get caught up in those issues today and look at that and say, well, of course there's a way that the market could go down. And it's very easy to see that we're, we're wired this way. So it's easy to convince ourselves that our market concerns are based upon superior logic and understanding of the uncertainties we face.

But look at that and ask yourself, is that truly a logical conclusion or is it more of a fear-based conclusion that's wrapped up in logic? The market absolutely can drop in the next six or 12 months. I will never say that it couldn't. Now, there's never not gonna be a time in the markets where it couldn't drop a lot in the next six to 12 months.

That's just always the case with the markets. But just because it feels more likely now doesn't make it actually more likely compared to other times in the past. And Tyler, as I come back to your question, I fully realize I'm starting to go off on some tangents here, and I know that you didn't actually ask this specifically.

I'm just applying your question to the way I often hear it phrased, whether it's clients or other people I speak with who want to know when they do have a lump sum, whether it's from selling a home, selling a business, receiving an inheritance, whatever it might be. How do I invest it? And many times the thing that's actually driving that question is concerns around the market and fears around what might be happening in the next six to 12 months.

So apologies if that doesn't necessarily pertain to your exact question, but just relating it to versions of this question that I've heard quite a bit. So as we start to wrap up, here's kind of the final principles I would leave you with. Number one, when you're asking yourself, should I do a lump sum investment or dollar cost average?

The numbers say it's better to invest the lump sum. When we understand the probabilities and the probability of success getting worse and worse, the longer we wait to invest. What we have to realize is that anything other than lump sum investing is just a form of market timing. The hardest part about this that we haven't really covered yet, it's our emotions.

Whether you receive a hundred thousand or a million dollars or $10 million, and again, whether it comes in the form of a business sale, a pension, rollover, inheritance, lottery, whatever. This is the hardest part is controlling our emotions. It's scary to say we're gonna put all this money to work, knowing that the next 3, 6, 12 months and beyond are going to be filled with uncertainty.

So I will leave you with this. If you are gonna dollar cost average, what's the best time horizon? Well, it's the shortest one possible that still makes you feel comfortable enough to invest the money. This goes back to the point that investing all at once is most likely the best option when we look at probabilities.

But every day, every week, every month, you extend until you actually invest those dollars, the more and more likely you are to come out behind. So that is it for today. Tyler, thank you for your question. I hope that was helpful. For those of you listening that aren't Tyler, I hope that framework was still helpful to understand.

One, how do you get a general sense of if you're gonna be okay in retirement? And then two, if you do have a lump sum, how should you look at investing that? So that is it for today. Thank you to all of you as always for listening. Appreciate you taking the time to do so, and I'll see you all next time.

Thank you for listening to another episode of the Ready for Retirement podcast. If you enjoying the show, please subscribe and let me know by leaving a five star review. And as always, for list of the notes and the resources mentioned in today's episode, you can find those at the Ready for Retirement website, which is ready for retirement.com.

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