Retirement Planning: Exploring Post-Retirement Investment Strategies

If you've already maxed out your retirement contributions for the year, there are still plenty of other good places to put your money.

The first place to look is an individual retirement account (IRA). IRAs are a great way to invest for retirement outside of your workplace, and you can put money into both a traditional or Roth IRA and your 401(k) at work. For 2024, you can invest up to $7,000 in IRAs ($8,000 if you’re 50 or older).

If you've already maxed out your IRA options, or you'd rather invest your extra savings in a different way, there are several other options to consider. These include:

- Health Savings Accounts (HSAs)

- Life insurance policies

- Series I Savings Bonds (I bonds)

- High-yield savings accounts (HYSAs)

- Index funds

- Exchange-traded funds (ETFs) and mutual funds

- Blue-chip stocks

Invest in a traditional or Roth IRA

An individual retirement account (IRA) is a great way to invest for retirement outside of your workplace. You can put money into a traditional or Roth IRA in addition to your 401(k) at work. For 2024, you can invest up to $7,000 in IRAs ($8,000 if you’re 50 or older).

Traditional IRA

With a traditional IRA, you’ll likely be able to deduct the full amount of your contributions from your taxable income. This means you’ll pay less in income taxes this year. However, you will have to pay taxes later when you take money out of the account in retirement, and it's hard to predict what your tax rate will be by then.

Roth IRA

If you’d rather not have to worry about taxes in your golden years, you can opt for a Roth IRA. Your contributions are made with after-tax dollars, which means the money inside your account grows tax-free and you won't have to pay taxes when you start taking money out during retirement. However, there are some income limits that might prevent you from opening and contributing to a Roth IRA. For 2024, you can contribute up to the maximum amount if your gross income is less than $146,000 for single and head of household filers, and less than $230,000 for married couples filing jointly.

Benefits of a Roth IRA

• Tax-free growth
• Tax-free withdrawals in retirement
• No required minimum distributions (RMDs)
• No age restrictions on contributions
• You can choose beneficiaries to inherit your Roth IRA, and they’ll be able to use the money in the account tax-free too

Open a brokerage account

Opening a brokerage account is a great way to continue investing after you've maxed out your retirement plan. Brokerage accounts are taxable investment accounts that allow you to purchase stocks, bonds, mutual funds, and other assets. While they don't offer the same tax benefits as retirement accounts, they provide more flexibility in terms of access to your money.

• No Tax Benefits: Unlike retirement accounts, brokerage accounts don't offer tax breaks on contributions. Any gains you make in a brokerage account will be taxed for the year you earn them.
• Unrestricted Access: Brokerage accounts offer unrestricted access to your money. You can withdraw funds at any time without early withdrawal penalties, giving you more freedom and flexibility.
• Investment Options: Brokerage accounts typically provide a broader range of investment options compared to retirement accounts. You can invest in individual stocks, bonds, mutual funds, ETFs, and other assets.
• No Contribution Limits: There are no income or contribution limits on brokerage accounts. You can invest as much as you want, making it a great option if you have maxed out your retirement plan.
• Taxes and Fees: Keep in mind that you'll need to pay capital gains taxes on the growth of your investments in a brokerage account. Additionally, there may be various fees associated with the account, such as account maintenance fees and commissions.

When deciding whether to open a brokerage account, it's important to weigh the benefits against the lack of tax advantages. Brokerage accounts are ideal for savings goals that are further than five years away but closer than retirement. They can also complement your emergency savings. It's recommended to first max out your retirement accounts, such as a 401(k) or IRA, before opening a brokerage account.

Invest in real estate

Investing in real estate is a great way to make money after maxing out your retirement accounts. However, it's important to note that building a real estate portfolio takes time, money, patience, and hard work. Here are some guidelines to help you navigate the process:

• Pay off your own mortgage first: Before investing in rental properties, it's advisable to pay off your personal residence. This reduces risk and frees up more money and focus for investing in an investment property.
• Pay in cash: Avoid going into debt to buy a rental property. Debt equals risk, and buying properties with cash allows you to sleep better at night, knowing your investments are truly yours.
• Stay local: Investing in properties close to where you live makes it easier to keep an eye on your investments and navigate any challenges that may arise.
• Prepare for problems: Set up an emergency fund dedicated to your real estate investments to cover any unexpected costs, such as taxes, repairs, or maintenance issues.
• Work with a real estate agent: A good real estate agent is essential for finding properties in the right areas and guiding you through the challenges of real estate investing.

There are a few ways to generate income as a real estate investor:

• Long-term value appreciation: Buying a house at a low price and holding it through market downturns can result in significant profits when the value increases over time.
• Rental income: Most investors buy properties to generate monthly income from renters. However, this also comes with the responsibility of handling repairs, maintenance, and potential vacancies.
• 1031 exchange: Reinvesting profits into a similar property within a certain timeframe allows you to avoid paying capital gains tax, resulting in substantial savings.

Take advantage of your HSA

A health savings account (HSA) is a great way to save for retirement, with the same tax benefits as a 401(k) but with more control. It can be used to boost your retirement savings and is a highly effective savings and investment account.

The Triple Tax Advantage

HSAs offer a triple tax advantage. Contributions, interest, and investment gains are all federal tax-free. Withdrawals for qualified medical expenses are also tax-free. This means that if you pay for qualified medical costs with your HSA, you will not pay any taxes on the money you take out. This is a powerful incentive to save in an HSA.

Max Out Contributions

It is a good idea to contribute the maximum amount allowed each year to your HSA. The contribution limit is adjusted annually for inflation. In 2024, the limits are $4,150 for individuals and $8,300 for families. If you are 55 or older, you can make a catch-up contribution of up to $1,000 per year.

Don't Spend Your Contributions

Due to the triple tax advantages, it is best to treat your HSA as an investment tool for retirement. Avoid spending your contributions before retirement if you can. If you do need to spend from your HSA, be sure to spend on qualified medical expenses to avoid tax consequences.

Invest Your Contributions Wisely

You can choose how to invest your HSA contributions. Your investment strategy should be similar to the one you are using for other retirement assets, such as a 401(k). Shop around for a plan with high-quality, low-cost investment options.

Use HSA Funds for Medical Expenses First

The best use of your HSA funds in retirement is to cover health care expenses, as these withdrawals are tax-free. Qualified payments include office-visit copayments, health insurance deductibles, vision and dental care, prescription drugs, and more.

Reimbursement for Medical Expenses

You can also use your HSA to reimburse yourself for medical expenses. Keep your receipts for all healthcare expenses you pay out of pocket, and you can submit them for reimbursement at any point in the future.

Use HSA for Non-Medical Expenses After 65

After you turn 65, you can withdraw money from your HSA for any reason without incurring a tax penalty, although you will pay ordinary income tax on non-medical withdrawals.

Invest in a life insurance policy

If you've already maxed out your retirement contributions, investing in a life insurance policy can be a great option. Life insurance policies with a cash-value component, such as whole life or universal life insurance, can serve as a source of income during your retirement years. Here are some key things to know about investing in a life insurance policy:

Buy Term Insurance

For retirement planning, permanent life insurance that accumulates cash value is typically recommended only for high-net-worth individuals. For most people, a simple term life policy with an adequate death benefit is a more cost-effective option, freeing up more money for investing in other retirement accounts.

Create an Emergency Fund

It is advisable to build an emergency fund of three to six months' worth of living expenses using the savings from opting for a term life insurance policy. This emergency fund can help you stay on track with your retirement contributions by covering any unexpected expenses.

Consider Disability Insurance

Disability insurance can provide financial protection if you become unable to work. While you may have some disability coverage through your employer, purchasing additional private disability insurance can offer enhanced financial security.

Invest the Rest

After allocating funds for term life insurance, an emergency fund, and disability insurance, you can invest the remaining money in a tax-advantaged retirement account, such as a traditional or Roth IRA, or a 401(k) plan, if you haven't maxed out your contributions yet. If you've already maxed out these options, you can explore other investment opportunities outside of dedicated retirement accounts, although they may not offer the same tax benefits.

Benefits of Life Insurance for Retirement

Life insurance policies with a cash-value component allow this account to grow over time, providing a source of income during retirement. You can withdraw the cash value or borrow against it, although any outstanding loans and interest will typically be deducted from the death benefit paid to your beneficiaries. Additionally, withdrawals above the cost basis may result in taxable ordinary income, and early withdrawals before the age of 59 1/2 may incur a federal tax penalty.

In summary, investing in a life insurance policy can be a strategic decision after maxing out your retirement contributions. It offers financial protection for your loved ones and provides the potential for tax-advantaged income during your retirement years.

Frequently asked questions