$ ?s: Investment Advice for Those Who Don’t Need the Money

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Q: I am a 65-year-old retired widow and I have a large IRA. My pension and Social Security cover all my expenses. All the retirement asset allocation advice assumes that you need the money. How should I invest if I don’t need this money?

Sincerely, Gott E. Nuff (Submitted from NAPFA Kiplinger call-in)

$ ?s answered by Matthew Illian, CFP®


Congratulations, Mrs. Nuff!

You have achieved financial freedom. Your struggle to find applicable investment advice is likely a good gauge for how few people find themselves in your enviable position.

Personal financial freedom affords you many options for investing these assets. The first thing you should do is assign beneficiaries to these investments. If you do not need this money, who will—your children, grandchildren, charities? Whatever you decide should be updated in your estate planning documents.

If the answer is your children or grandchildren, you will want to invest this money as if they owned it. A retiree might have up to 50% in stable fixed-income investments, but a 30-year-old is best served by having a much higher percentage in growth-oriented equity stocks.

Consider which types of accounts will be the most tax efficient for passing along your assets. Breaking your nest egg into several pieces could save you thousands. A college 529 plan is tax deferred, and all growth can be taken out tax free. In addition, some states offer deductions for contributions. Another big benefit is that when grandparents own these accounts, they do not count against the student’s financial aid eligibility.

A Roth IRA is another tax preferenced account. Many retirees are converting IRA money into Roth accounts so their beneficiaries can inherit this money tax free. Roth IRAs also eliminate the need for retirees to take required minimum distributions (RMDs). You may choose to start gifting this money to allow your children or grandchildren to make personal Roth IRA contributions.

If you hold these investments in a taxable account, one advantage to a growth-oriented portfolio for retirees is that it is less likely to kick off unwanted dividend payments. It can be hard to swallow a big tax bill generated by assets that you do not plan to touch.

Since you do not need the money, you have the freedom to choose a very conservative portfolio. Seasoned investors have all experienced high volatility in their portfolios. This most recent 2008–2009 crash ranks as the second largest since the Great Depression. You may decide that a more conservative path is emotionally desirable for assets that are not required.

It is probably wise to expect you will need some of these resources yourself. Do not expect that your pensions and government checks will keep pace with the true costs of a retiree’s annual living expense increases. We estimate that the consumer price index (CPI) underestimates a retiree’s basic living cost increases by at least 1% a year. Over time, you will need to supplement these paychecks simply to keep pace with inflation.

After accounting for reserve account assets that you may need one day, I encourage you to start slowly gifting these assets to your beneficiaries. We find that beneficiaries who suddenly realize a large lump sum of money often are ill equipped to handle this money.

Those who built their own reserve accounts took years to learn important emotional and practical skills to manage this money wisely. Should you expect any less of a learning curve from your future beneficiaries?

Here’s a helpful estate planning maxim: “Do your givin’ while you’re livin’ so you’re knowin’ where it’s goin'”

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Matthew Illian was a Wealth Manager at Marotta Wealth Management from 2007 to 2016. He specialized in small business consulting, college planning, and retirement plans.