Dear MarketWatch,
I am 72 years old and married to my wife, 71. We have a son, 45, who lives in California. We give him and his family $20,000 a year. Between us, with retirement income and Social Security, we now receive just over $100,000 a year (gross) living in Florida. We own a house that paid for $400,000, along with two cars.
My wife and I are not sure what we should do with our money. We don’t need the money, so our IRA and Roth accounts remain and continue to grow. Our combined IRAs are about $1.3 million, with $690,000 in Roth accounts, and our regular savings with Vanguard are about $1.08 million. We have external audits and savings totaling $70,000.
We had a financial advisor for 10 years, but we let him go because we didn’t think he helped us much. Should I leave the money as is or put it in a Roth? I’m open to suggestions.
Confused and lost
See: ‘I hope to stay in my home’: I am 76 years old and have no relatives. What should I do with my assets?
Dear confused and lost,
Having millions of dollars that you don’t need and being able to just sit in different accounts is a great problem to have and a testament to the way you and your spouse have saved over the years.
But you’re right, it’s better to be proactive and make money work for you.
One of the best tools available to retirement savers is diversification, which can come in many forms. The two most influential, perhaps, are asset diversification and tax diversification. With the former, you’re using multiple types of asset classes in building your portfolio, so you have a mix of conservative and aggressive investments that work together when one side of the market is down (or the other is doing particularly well) . The latter refers to the vehicles you use and how you can collect them.
It’s helpful to have a mix of accounts – taxable, tax-deferred and after-tax assets – because it gives you more power to decide how much to pay in taxes. For example, if you want to withdraw some of your savings in the future but don’t want to pay a hefty tax bill, you can tap into a Roth account (assuming you’re following the rules and taking qualified distributions) so that your withdrawals are exempt from taxes. If you want to preserve your Roth accounts but need extra money, you can withdraw from a tax-deferred account, like a traditional IRA, but take only as much as you can up to the top of your tax bracket, so you’re not pushing into the bracket next one. You can always do a combination of distributions too.
Roth accounts are great to have and could even lead to a tax-free inheritance for your loved ones. However, they come with rules. For example, to truly reap the benefits of a Roth account, you should have that account with your converted assets open for five years (that’s a separate five-year clock from when you opened your Roth IRAs).
How much to convert to a Roth account is entirely up to you, but you will pay taxes when you make that conversion (so you probably don’t want to overdo it). You can also use some of your cash savings to pay taxes on that Roth conversion so that your account balance doesn’t decrease as a result of the transfer.
Having liquidity is essential at any age, but especially in retirement. That said, you have more than enough to cover a few years’ living expenses. Before making any drastic moves, be very thoughtful and careful about the type of investments you choose for your savings and make a plan that you can review regularly (for example, once every six or 12 months and certainly after major life events).
I know you said your financial advisor wasn’t very helpful, but that shouldn’t dissuade you from consulting another qualified, trustworthy professional who is also a fiduciary. Advisors at investment firms that house your assets can be helpful, but there are many other professionals who may be helpful, including certified financial planners. They can build you one or more portfolios to meet all your needs, explain in detail the types of investments you should have in your accounts and even coordinate any tax and estate liabilities. I recommend at the very least looking for an agenda and conducting a few interviews. You don’t have to work with anyone, of course, but this exercise can be helpful and you may connect with someone who can help you save and enjoy the money you have accumulated more easily.
Readers: Do you have any suggestions for this reader? Add them in the comments below.
Have a question about your retirement savings? Send us an email at HelpMeRetire@marketwatch.com