If you find yourself in the enviable situation of having saved more for retirement than what you’ll actually need, in addition to patting yourself on the back, you may want to know where to invest those funds so that they continue to earn maximum gains.
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Whether you plan to use those extra funds for emergency backup or to leave a legacy or make a philanthropic contribution, you’ll want to make sure your money continues to gain in interest — but in the least risky way possible.
Here, financial advisors explain the best and safest investments for those who have oversaved for retirement.
Before you decide where to put your extra funds, you need to choose whether you want to be investing in a taxable account or a tax-sheltered account. This will determine which types of safe investments are most attractive, according to Michael Finke, a CFP and professor of wealth management at The American College of Financial Services.
“If you are still working before retirement and you’re in a relatively high tax bracket, you need to remember that what you earn on a CD or a high-yield savings account (HYSA) is going to be taxed at your ordinary income rate on the last dollars that you earn [that year],” he said.
This is important, because you earn extra taxes for each thousand dollars that you add to your income, a relatively high rate of taxation — especially when you add in state taxes.
“It’s not unusual for people to be in a 24% federal bracket and a 6% state bracket. So instead of earning 5%, you’re actually only earning 3.5% because you’re paying 30% in taxes,” Finke said.
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To offset taxes, Finke suggested putting as much into a tax-sheltered account as possible, such as a 401(k). This includes making catch-up contributions before you retire.
“Remember after the age of 50, you can put more money away every year in your tax-sheltered accounts. So consider saving more.”
Few investments are safer than a high-yield savings account, according to Christopher Stroup, CFP and owner of Silicon Beach Financial. “These accounts for excess cash offer competitive yields that tend to outpace inflation, which can be a silent force that erodes your purchasing power in retirement,” he said.
Traditional savings accounts can offer next to nothing for your hard-earned dollars, whereas some high-yield savings accounts offer rates close to 5%. “These accounts are also FDIC insured up to $250,000 per beneficiary, so if you find yourself with a lot of excess funds, this could be a great option to park that cash wisely,” Stroup explained.
Another option, Stroup shared, is to execute a CD ladder, a financial maneuver made up of certificates of deposit that have various term lengths and rates.
“Once a CD reaches maturity, you can renew it to maintain the ladder or liquidate the CD to access your cash penalty-free,” he said. “This approach allows you to enjoy the safety of continuous returns during the life of the CD ladder so that you can tap into funds should life deliver an unexpected expense.”
If you have employer sponsored accounts like a 401(k) or an IRA, Finke suggested you make sure they’ve got enough short-term bond funds or treasury bill (T-bill) funds, because these are very low risk, comparable to a HYSA.
“I think Vanguard is paying as much as maybe 4.7% or 4.8% for a short-term bond fund. So that’s a good opportunity to save in a relatively safe investment within a tax sheltered employer account,” Finke said.
Another thing to consider is an I-bond. Everyone is allowed to put $10,000 per spouse away per year into these bonds. You can buy them directly through the government at TreasuryDirect.gov. And you don’t have to pay taxes on the interest until you sell them.
“So in a sense, it’s like a tax deferred way to save and it’s inflation protected,” he said.
While you’re at TreasuryDirect.gov,, don’t forget to look at rates on treasury bills.
“These are any treasury bill that has a maturity of less than one year and rates are pretty high. So we’re still pretty close to 5% that you can get if you just go to the government and directly invest in the treasury bill,” Finke suggested.
Even better, while you’ll eventually pay federal taxes on any income earned from these, you don’t pay state taxes on them. “So that can be a more efficient way to save than say, a high yield savings or a savings,” he said.
MYGAs are guaranteed annuities pretty much like a CD. “They’re not insured by the FDIC, but you can buy them from very highly rated insurance companies that have been around for almost 200 years and you don’t again have to pay taxes until you pull the money out,” Finke said.
For example, let’s say you’re 62 and you buy a 5-year MYGA. It can earn 5% interest for the next five years, and then you only pay tax on the interest when you pull it out after that. By then, you may be in a lower marginal tax bracket after you retire.
“It gives you flexibility to decide when you want to realize those gains and pay the taxes,” Finke said.
One of the safest places to invest excess money is in money market funds, Stroup said. These are not only low-risk and stable investments that primarily invest in short-term debt instruments and CDs, but they allow liquidity similar to a HYSA or even a checking account.
“While the returns are relatively modest, they tend to offer higher yields than savings accounts,” he said.
A last option, Finke suggested, is to “buy yourself future income” through a deferred income annuity (DIA) that will allow you to take $100,000 today and buy yourself around $10,000 of income in five years that will last the rest of your life.
“The benefit of that is that first of all, you get a lifetime income, which is nice to have on top of Social Security. And second of all, the gains that you get in the annuity are not taxed until the money comes out as income. So it can be a tax efficient substitute for something like a CD that also offers the benefit of lifetime income.”
One or more of these options can set you up to not only have a robust retirement, but a financial legacy to leave behind.
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This article originally appeared on GOBankingRates.com: What To Do If You Oversaved for Retirement: 7 Safe & Savvy Investment Ideas
