Advice from Nashville's Financial Guru Dave Ramsey
Dave Says
By Dave Ramsey
Author of Financial Peace and The Total Money Makeover
8/17/2004
Should I participate in lump sum distribution?
Dear Dave,
I'm being offered an early retirement package and I have the ability to get a lump sum distribution of my pension package. Would I be able to draw from the dividends and interest of that pension before I'm 59 ½ without a penalty? Also, what's the 72(t) rule? What about a lump sum distribution from my 401(k)?
I'll be doing some other kind of work. I'm not looking to stay home and fish. I'm just wondering if there is any way to get any money out of these between 50 and 59 ½ years old.
Richard in Pittsburgh, PA
Dear Richard,
No. A lump sum distribution would have to be rolled into an IRA in order to keep from paying taxes and penalties on it. Once it's rolled into an IRA, you know the rule, you can't pull anything on it until you're 59 ½ without getting hit with taxes and penalties.
The 72(t) rule is distribution of a small percentage of your 401k. It's generally based on a life expectancy table and you can withdraw about 6% per year (for five years or until age 59 ½, whichever period is longer). That's basically not going to be a lot of money. I wouldn't fool with that. I'd let it continue to grow.
If you're leaving your company, the lump sum distribution is almost always the way to go, because most of these pension plans - on the long-term payout - are calculated on about a 7% discount rate. Ninety-nine times out of 100 you're much better to take the lump sum and roll it into a good IRA in a good mutual fund.
All of this would apply to your 401(k) distribution as well. There are taxes and penalties for early withdrawals there as well, so roll that into an IRA too. I think you'd be better off in your long-term planning to just leave all this alone, let the interest compound and go earn your living.
-Dave
I plan to start an Internet business...any tips?
Dear Dave,
I've been looking into starting some kind of Internet business. I value your opinion and, it's kind of a vague question, but what are some of the things I'm going to run into. How much money do I need to have? What kind of expenses am I looking at?
I'm considering offering some kind of free service and then going to local businesses and selling them advertising on the website.
JD in Russellville, KY
Dear JD,
I think the answer depends on what kind of Internet business and how you're going to start it. If you're doing something as a cottage industry, like work-at-home, you can buy access to other people's servers, networks, and methods of payment - like Paypal. You don't have to setup everything yourself at great expense. We started some of our Internet marketing that way and now we have moved virtually everything we do on the Internet in-house.
Now, as far as marketing - marketing is marketing - whether it's online or not. There are some nuances to marketing online, but selling people something basically has to do with convincing them that their life is going to be better if they have the item rather than the money they're giving up to purchase the item. Your plan of selling advertising on your website will work as long as you have enough activity on the site and as long as the advertising space will produce more money than it costs that business for the ad. To get an advertiser's attention, you've got to have a large amount of traffic flowing through your website. And that traffic needs to be made up of the same kinds of prospective customers that the advertiser wants to reach. I think you're going to have to put up content on the website, reach out into cyberspace and drag people by their cyber ear back to your site. Say to them, "Hey, I've got all this great content. Read it. Hang around our site for a while."- I think they call that stickiness. When they hang around your site a while, then you can go to a businessman like me and say you've got this huge number of visitors to the website and if a business puts an ad there, you think they'll get a response. So you're going to need a proven track record to have marketable ad space on your website. It may take you a little while. Don't quit your day job.
-Dave
More About Dave
Dave Says Articles
Dave Ramsey History
Dave Ramsey.com
