If you're fortunate enough to have Social Security, pensions, rental income, or any other fixed income source that covers all of your expenses in retirement, first and foremost, congratulations! You're in a great place, and I'm sure it took you a lot of hard work to get there. As a financial planner, I've worked with a few people in this situation who also have other traditional retirement savings that they've built up over their careers. They often wonder how they should invest this money that they don't necessarily depend on.
Should you take no risk because you don't need to?
Should you take a higher level of risk because you can afford to?
It all depends on your unique goals and situation. This is a perfect example of why a personalized financial plan is so important if you want to get the most out of your money.
In this post, I’m going to cover three key things you should consider when making decisions about how to invest your retirement nest egg that you don’t necessarily rely on for income.
Beyond the Social Security or pension income that covers all your month-to-month bills, think about whether there are other things you’d like to spend money on. Since you have extra savings, could spending on activities or experiences bring you more joy in retirement? For instance, consider traveling more during your early, active years of retirement. Whether it's exploring new places or visiting loved ones more often, travel can greatly enhance your retirement experience.
According to the traditional 4% rule, you could spend about 4% of your portfolio balance at the beginning of retirement, adjusted for inflation, without a significant chance of running out of money. For example, if you have a million dollars saved that you don’t need for essential expenses, investing that in a 50/50 portfolio could allow you to spend an additional $40,000 per year.
If you’re willing to be flexible with your withdrawal rates based on market performance, you might even be able to spend more than 4%. One withdrawal strategy, known as income guardrails, allows you to adjust spending according to market conditions, potentially enhancing your financial flexibility.
Alternatively, think about how you could use this money to bring happiness to your family. Perhaps you’d prefer to help out children or grandchildren now, rather than leaving an inheritance later. By providing financial support to your loved ones while you're still alive, you can witness the positive impact and enjoy the gratitude of your family members.
If you don’t want to spend more money just for the sake of it, consider how you could help future generations. Investing more aggressively can be a good option if your goal is to leave a significant legacy. Higher stock allocations, such as an 80/20 or even 100% equity portfolio, generally offer higher returns over the long term, helping your investments keep up with inflation.
Additionally, consider tax-efficient strategies like Roth conversions. If you have money in pre-tax accounts, converting to a Roth IRA means paying taxes now at potentially lower rates. Your heirs will then inherit tax-free assets, which can be a significant benefit if they are in higher tax brackets.
For those charitably inclined, think about making Qualified Charitable Distributions (QCDs) from your IRAs. Starting at age 70½, you can donate up to $105,000 (in 2024) per year directly from your IRA to a charity without incurring taxes. As an added benefit, this can also help manage required minimum distributions (RMDs) that start at age 73 or 75, depending on your birth year.
Another option is using a Donor-Advised Fund (DAF) for charitable giving. If you have highly appreciated securities, you can donate them to a DAF without paying capital gains taxes. The charity receives the full value of the securities, maximizing the impact of your donation.
Unexpected expenses are a part of life, and retirement is no exception. Home repairs, new vehicles, and health care costs can add up. Keeping a portion of your savings in cash ensures you have easy access to funds when these expenses arise. For instance, setting aside money for a new roof or an unexpected medical expense means you won’t have to sell investments at an inopportune time.
Long-term care expenses are another significant consideration. Most of us will need some form of long-term care, which can be expensive and is expected to rise with inflation. If you’re in your 60s and planning for care in your 80s or 90s, investing some of your funds can help ensure you have enough to cover these costs when the time comes.
Additionally, think about inflation’s impact on your expenses over time. While Social Security benefits include cost-of-living adjustments, many pensions and annuities do not. If your pensioner annuity does not increase with inflation, it’s important to project future expenses and ensure your investments can cover the gap. A balanced or aggressive investment strategy can help your savings grow and keep up with inflation.
Make sure to account for non-monthly expenses in your retirement plan. Annual vacations, family events, or large one-off purchases should be factored into your financial planning. Having a separate travel budget or setting aside funds for special occasions can help you enjoy these experiences without financial stress.
Deciding how to invest extra retirement savings is a highly personal decision. It depends on your goals, risk tolerance, and unique financial situation. Whether you choose to spend more, leave a legacy, or prepare for unexpected expenses, a personalized financial plan can help you make the most of your retirement.
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