7 Smart Ways to Use Extra Retirement Savings

Understanding the Best and Safest Investments for Oversaved Retirees

If you find yourself in the fortunate position of having saved more than what you'll need for retirement, it's time to think about how to invest those extra funds. The goal is to ensure that your money continues to grow while minimizing risk. Whether you plan to use the funds for emergencies, to leave a legacy, or to make a philanthropic contribution, choosing the right investments can help you achieve your financial goals.

Deciding on Your Taxable Account Preference

Before deciding where to place your extra funds, consider whether you want to invest in a taxable account or a tax-sheltered account. This choice will influence which types of safe investments are most suitable. According to Michael Finke, a CFP and professor of wealth management at The American College of Financial Services, if you're still working and in a high tax bracket, the income from CDs or high-yield savings accounts (HYSA) will be taxed at your ordinary income rate.

This means that each additional thousand dollars you earn could result in higher taxes, especially when considering state taxes. For example, someone in a 24% federal bracket and a 6% state bracket might only end up with 3.5% after taxes, instead of the 5% they might have earned.

Making Extra Contributions to Tax-Sheltered Accounts

To offset these taxes, Finke recommends contributing as much as possible to tax-sheltered accounts such as a 401(k). This includes making catch-up contributions before retirement. After the age of 50, you can save more each year in these accounts, so it’s wise to take advantage of this opportunity.

Opening a High-Yield Savings Account

High-yield savings accounts are among the safest investments available. Christopher Stroup, a CFP and owner of Silicon Beach Financial, notes that these accounts offer competitive yields that often outpace inflation. Traditional savings accounts typically offer very low returns, but some HYSA accounts can provide rates close to 5%. Additionally, these accounts are FDIC-insured up to $250,000 per beneficiary, making them a secure option for parking excess cash.

Executing a CD Ladder

Another strategy is to execute a CD ladder, which involves purchasing certificates of deposit with various term lengths and rates. Once a CD matures, you can renew it to maintain the ladder or liquidate it to access your funds without penalty. This approach allows for continuous returns and provides flexibility in case of unexpected expenses.

Considering Bonds and Treasury Bills

If you have employer-sponsored accounts like a 401(k) or an IRA, Finke suggests including short-term bond funds or treasury bill (T-bill) funds. These are low-risk investments comparable to HYSA. Vanguard, for instance, offers short-term bond funds with yields around 4.7% or 4.8%, providing a relatively safe investment within a tax-sheltered account.

I-bonds are another option, allowing individuals to invest up to $10,000 per spouse annually through TreasuryDirect.gov. These bonds are inflation-protected and offer tax-deferred growth until sold. Treasury bills with maturities under one year also offer high rates, typically around 5%, and are not subject to state taxes, making them a more efficient savings option.

Investing in Multi-Year Guaranteed Annuities (MYGAs)

MYGAs are similar to CDs but are not FDIC-insured. However, they can be purchased from highly rated insurance companies with long-standing reputations. These annuities allow for tax-deferred growth, meaning you only pay taxes on the interest when you withdraw the funds. For example, a 5-year MYGA could earn 5% interest over five years, with taxes paid upon withdrawal.

Exploring Money Market Funds

Money market funds are another safe investment option. They primarily invest in short-term debt instruments and CDs, offering stability and liquidity similar to HYSA or checking accounts. While returns may be modest, they tend to be higher than traditional savings accounts.

Considering a Deferred Income Annuity (DIA)

A deferred income annuity (DIA) allows you to purchase future income. For instance, you could use $100,000 today to secure around $10,000 in annual income for the rest of your life in five years. This provides a lifetime income stream, which can complement Social Security, and the gains are taxed only when withdrawn, making it a tax-efficient alternative to CDs.

By exploring these options, you can ensure that your excess savings continue to grow safely and efficiently, helping you build a robust retirement and potentially leave a financial legacy.