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I’m seeking advice and suggestions from the people I trust and value, each of you.
My wife and I recently retired. Our two S.S. accounts and three pensions cover not only all of us current expenses. We are transferring some excess money from our miscellaneous savings account into our car account and vacation account (buckets of sorts) biweekly. But we still have a couple of thousand dollars left over.
Would you recommend we continue to fund our Roth accounts or our taxable investment account or simply build our savings in our high yield savings account? It maybe something I haven’t mentioned. All thoughts, ideas, and suggestions would be appreciated.
Sounds like you’ve saved and planned well – Congrats! You’ve got a great source of fixed income, car account, vacation account, Roth/Traditional accounts (2/3, 1/3), taxable investment account, high yield savings account/emergency fund. I’m guessing you have funds to handle pretty much anything life brings your way. Here’s a few things I considered in our retirement planning…
-Aging in place (wider hallways, grab bars, walk-in shower, higher vanity, etc.)
-Home services as we age (mechanical maintenance, gutter/window cleaning, repairs, house cleaning, lawn/landscape maintenance, in-home care, etc.)
-Home contingencies (appliance replacement, HVAC replacement, roof, exterior/interior painting, driveway, etc.)
-Car fund (number of cars over retirement)
-Income tax on Roth conversions (filling up 12% bracket). If the tax laws are changed such that SS isn’t taxable, then filling up the 12% bracket is even more doable.
-Inflation, especially health care premiums/costs and LTC costs.
-loss of spouse (not something we want to think about). Will the surviving spouse be okay with one SS check and pension? Some choose to purchase a plain deferred annuity for a future date that can also help with inflation.
-Fun projects, vacations, charitable donations, legacy, estate plan.
“-loss of spouse (not something we want to think about). Will the surviving spouse be okay with one SS check and pension? Some choose to purchase a plain deferred annuity for a future date that can also help with inflation.”
There is even a specific Annuity built for this purpose, The Qualified Longevity Annuity Contract, or QLAC. It is funded with IRAs dollars and allows continued Tax Free growth, and also shields the amount in the QLAC from RMDs. You can stretch it out to begin paying as late as age 85.
Alternatively, You could also purchase a ladder of MYGAs..starting at 2 years or 3 years out. Example. $100,000 in 5 $20,000 MYGAs, each maturing 2 years apart. 3…5…7…9…11. This provided protection from market volatility, market risk, longevity risk, inflation risk, etc. As each MYGA matures, you can take the principle and interest, or roll it over, avoiding taxes and providing extended tax free growth.
One great alternative is to buy MYGAs, and as they mature, convert them to SPIA, guaranteeing lifetime income for single person or a couple.
Isn’t it great to have options?
I’m in a similar situation (retiring in July)and have been asking myself this question. Our emergency cash savings are in two high-yield savings accounts, but the bulk of our savings are in tax-deferred accounts (rollover IRAs and 401K/403B from our current jobs). If you can use the excess for Roth conversions without pushing yourself into a higher tax bracket, that’s what I’d do. Or put it into a taxable investment account.
Thank you for commenting. I’m thinking that if what we’ll do with some of it
By all means max out your Roth accounts and fill up your low tax brackets with Roth conversions. Also make sure you’re getting a good rate on cash. I stopped using my high yield savings account when it couldn’t keep up with the Vanguard Federal Money Market fund (VMFXX, currently paying 4.26%).
LH, Not knowing your ages, location, and working status, giving quality advice is difficult, but my initial thought, after reading your post, relates to your Roth account. I am not sure that you can continue to fund Roth accounts, unless you have earned income?
As far as continuing to invest in a taxable brokerage account, absolutely you can do that. However, you might want to consider the amount of risk you want to assume, as you invest that money.
Certain annuities, MYGAs and some CDs are paying decent rates currently. Vanguard’s VFMXX Money Market is at 3.65% currently. There are 3 and 5 year MYGAs paying 5.00% plus.
I like the idea of your savings buckets too. Assuming you have an emergency fund (home repairs, large unknown future expenses, etc.) and you have adult children, have you considered gifting, while you are still alive so you can see them enjoy the money.
Congratulations on your retirement and your prior planning!
Where did you get that rate for VMFXX?
https://investor.vanguard.com/investment-products/mutual-funds/profile/vmfxx
Right, 4.26% as in my comment above, not 3.65% in Kevin’s.
I’d opt to fund the Roth if you can do so. I’m assuming that you do have an “emergency” fund.
We do have an emergency funded with a couple years of expenses, thanks
if you are funding those accounts I wouldn’t call them excess. Someday you will deplete them and still keep funding I suspect. We do the same thing.
I would make sure you have a cash emergency fund as well. In high yield savings.
We use money we don’t need to spend to fund 11 529 plans for grandchildren and we give cash to our children when I take a RMD along with charities.
In my 15 years retired I have discovered no matter what, there is no real excess money – water heater went, AC went, major car repairs, HOA increase.
You are in a good place but with a long way to go. Plan accordingly.
Thank you Richard. I know when I comment or ask a question that I don’t give enough information.
What I consider “excess” is above what we have automatically have transferred bi-weekly into our Roth accounts and our “buckets” which include a vacation bucket (already having what we expect to spend for the next year) , a car bucket ( which has more than enough to pay cash for our next car purchase) , a emergency bucket ( which has two years with of expenses in it). We are not yet to RMD’s yet. Should I keep putting the two thousand dollars more than we need now monthly into a savings account or a taxable investment account? All buckets and savings are in high yield savings accounts
If you still have earned income and you believe the you are not going to be utilizing the other couple of thousand I would put it a Roth account. Unlike a brokerage account you will not be paying any income taxes on possible dividends and interest, and under current IRS rules your heirs will be able to accrue an additional 10 years of tax free growth before they have to close the account out tax free as well.
As an example I posted this two weeks ago:
I think one of the most underrated benefits of Roth conversions earnings is their being untaxed for decades, and inheritance of the asset.
My wife is 66 her mother is 103. If my wife lives to the same age, that is 37 years of tax free earnings. If the rules are the same from now until 10 years after she dies and my children don’t touch the funds until then that is 47 years of tax free earnings.
If the fund was even only 100k today, 100% in Vanguard Total World ETF, (which it is currently) since inception the historic return of the mutual fund iteration’s (used this as it is equivalent as it has been in existence longer) of 8.62% the balance at withdrawl would be $4,872,595 TAX FREE.
David thanks for your input. Our retirement accounts are about 2/3 Roth and 1/3 Traditional. I’ve always hesitated at doing conversions, but with the 2,000 a month I can use some of it to pay the tax hit. It would have a great long term benefit
Agree with what has been posted already. I really like that you are saving ahead for large purchases like your next car. We are doing that too. We are right there with you about being newly retired. We retired last year. If you have earned income, you can add to your Roth, but if just SS and pensions, you can’t. I like the idea of being generous with some of the extra, either through charitable donations or maybe family things? Like, maybe your kids want to buy a house and you could help with giving towards that and it would be a one time thing. Like we gave our kids enough to pay closing costs on their first homes. It was just a few thousand dollars, but it still helped them.
Would also suggest taking trips, if you wish. We are saving to take a big trip next year. We have a money market fund and a taxable brokerage account. Our car and other longer things we are saving for within about 5 years are in the taxable brokerage. The money market has our emergency fund, our sinking fund and some shorter term things like the trip we are saving for. I will be interested to see what others say. Good luck, and welcome to retirement. The folks here at HD I think are caring and give me things to think about on our journey. Chris
Hey Chris,
Where are you going on your trip? Many of us HD have travelled extensively and might be able to provide some great tips learned from visiting your destination(s).
Hmm, that might be a good idea for a forum post, David. We haven’t narrowed it down yet, but know you need to plan a year out if you can. So I will talk to Spouse about possibilities and make a post. Thanks for the idea. Chris.
BTW research has shown that people get more pleasure from planning and then anticipating the trip, than the trip itself.
LH, it’s hard to give advice without knowing more specifics about your situation. Generally speaking you need a healthy slush fund (AKA Emergency Money); High Yield Savings is a good way to go. After that maybe a brokerage account, allocated in a way that is comfortable for you.
Have a great retirement.
You can only fund a Roth if you have earned income. But if you’ve met your needs beyond all of what you’ve stated, the question you need to ask is what are our goals?
One possible goal could be build wealth and be outrageously generous. To do that, funding stock mutual funds in your taxable investment account might be a good way to meet those goals. Or, with your existing wealth, set up a Donor Advised Fund to fund charitable endeavors you like.
Ben, thank you for the reminder of not being able to fund our Roth accounts with SS and pension money. I do have a summer job with our City parks department that will help me fund them