A question that I often receive is whether it’s a good idea to use one’s lump sum on retirement to pay off short-term debts, such as car debt or one’s credit card.

For example, Ntombise recently wrote to me: “I have just retired from work and expect a lump sum amounting to about R1 million. I still owe about R100 000 on my car and have other debts. I would like to know if I should invest the whole amount short-term or pay off the debts and invest the remainder.”

It is a good idea to contact an independent financial planner, especially near retirement as it is important to understand how your income and lump sum can be used to meet your retirement needs.

When it comes to deciding what to do with your lump sum, you first need to establish whether your pension income is sufficient to live on, or whether you need to generate an income from the R1 million lump sum.

These are some points to consider

• Generally, it is a good idea to settle debts before you retire as your retirement income is fixed and you don’t want to be using it to pay off debt. Any interest you would receive on the lump-sum investment would be lower than the interest you pay on the debt, and the income could be taxable if your interest income exceeds R23 500 a year. So, paying off the debt would make more sense.
• You should allocate some funds for emergencies such as medical bills. A money market account would be a good option.
• If you need to supplement your income, you would need to consider some income-generating investments. Given that what is left of your lump sum would not be a large amount of money, products like the RSA Retail Bond could be an option.
• If you did not require any additional income, you could invest the remainder in a longer-term investment such as a market-related unit trust or exchange-traded fund (ETF). This would allow the money to grow and could be used to supplement your retirement income in later years.

This article first appeared in City Press.