Dear MarketWatch,
I’m 51, with about $140,000 in a few different retirement accounts. I own a home with my husband with about $150,000 and 23 years left on our mortgage. I currently make $80,000 a year. I expect to get about $2,500 a month in Social Security when I retire.
I have recently inherited $170,000. After paying off my credit-card debt, renovating my house, and putting $20,000 into an emergency fund, I estimate I will have about $90,000 left. What would be the best way to invest this to beef up my retirement funding?
Most Read from MarketWatch
Not Yet Retired
Dear Not Yet,
I am happy to hear that you started with paying off your credit-card debt and adding to an emergency fund. Those are both great ways to get a solid financial footing, and much better than immediately spending it. That said, it’s good that you were able to do a little renovating — not every cent needs to go into savings, especially if you are being diligent with your money.
Before you find a place for the rest of the inheritance, do a quick check-up of your current finances. The typical rule of thumb for an emergency fund is to have around three to six months’ worth of living expenses, which depends on your sources of income.
If you’ve only got a single income, be it as a single person or married couple, you would put more in your emergency fund, whereas if you have a dual-income household, it would be OK to lean on the lower end of that range. The $20,000 you already set aside is great, but take this opportunity to ensure you’re where you should be with an emergency fund, as it’s better to put it away now than go and withdraw from an investment account later.
Shop around for the best savings account for your emergency fund, such as a high-yield savings account, which will earn you more interest than your typical bank account.
As for your retirement investments, I can’t tell you for sure how to invest it because you have to take into account your retirement goals, needs, current and anticipated future spending, inflation and interest rates, and so on. There’s plenty for you to look into, though.
Consider target-date funds, which are investments with a targeted retirement year (2045 or 2060, etc.). These funds automatically adjust to be more conservative as the years go on so that they remain age-appropriate (traditional advice dictates that the older you get, the more conservative your portfolio should be to protect against big market downturns).
Target-date funds are basic tools to get invested for retirement, but they aren’t for everyone. Some investors might need more customization. And keep in mind, your retirement could easily stretch 30 years or more, so ultra-conservative investments won’t necessarily keep your money working for you in the long-run.
Target-date funds can make sense for the novice investor. You might decide to invest in one outright, or you could use a few of them to act as a blueprint as you build your own retirement portfolio. I shared some tips for using them as a guide with this reader here.
You didn’t mention if your inheritance came in the form of cash or an investment account. If it was an inherited IRA, you have options to keep it in that type of investment account (although there are rules).
If your inheritance is in cash, you’ll have to be more strategic. IRAs are great retirement-focused investment accounts, but they must be contributed with earned dollars. If you already have an IRA that you contribute to, whether it’s traditional or Roth, you’ll be subject to a maximum contribution limit of $8,000 in 2024 (the standard $7,000 plus an additional $1,000 catch-up contribution for people 50 and older).
There are, as you might have suspected, plenty of rules with these accounts, too, which are based on income limits and if you file your taxes jointly with your spouse or separately. Here’s some more information on IRA rules and spousal IRAs, which may be helpful for you if your husband is not currently working. My colleague, MarketWatch financial-planning columnist Beth Pinsker, wrote this helpful column on funding an IRA.
An alternative to the IRA, which has no restrictions and is not retirement-centric, is a taxable brokerage account. These accounts are not as tax-advantageous as an IRA or 401(k), but they also aren’t as limiting, given that investors don’t have to wait until they are 59 ½ years old to withdraw without penalty. Many advisers will argue it’s good to have a variety of accounts geared for your retirement for ultimate diversification.
Whatever you choose to do, pay close attention to fees. Even something that seems minute, such as 1%, can add up over time and eat away at your profits. Look into index funds with low expense ratios, and don’t get too caught up in stock picking. If you want to get into stock picking, only use a small portion of your money.
Once you figure out if you still need to boost your emergency savings, get started on beefing up that retirement account, instead of keeping the money sitting stagnant in a savings account (especially one that isn’t a high-yield savings account that’s earning so little in interest).
You may feel the urge to check up on your account a lot once you invest that money, since it is a pretty large sum and it’s hard not to get a little anxious about it — but try to refrain. Once you have an appropriate asset allocation, be it from a target-date fund or your own construction, do check-ups at quarterly or bi-annual intervals.
The earlier you start investing, the more time your money has to work for you.
Most Read from MarketWatch
Source Agencies
