Dear MarketWatch,
I’m 51, with about $140,000 in a few different retirement accounts. My husband and I own a house with about $150,000 and 23 years left on the mortgage. I currently make $80,000 a year. I expect to receive about $2,500 a month in Social Security when I retire.
I 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 have about $90,000 left. What would be the best way to invest this to increase my retirement funding?
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Best not yet,
I’m glad to hear that you’ve started paying off your credit card debt and building an emergency fund. Those are both great ways to get on a solid financial footing, and much better than spending it immediately. That said, it’s good that you were able to renovate a bit; not every cent has to go to the savings account, especially if you are frugal with your money.
Before you find a place for the rest of the inheritance, do a quick check of your current finances. The typical rule of thumb for an emergency fund is that you should have about three to six months of living expenses, depending on your income sources.
If you only have one income, whether you’re single or married, you would put more into your emergency fund, while if you have a dual-income household, leaning toward the lower end of the income limit would be fine. that range. The $20,000 you already have set aside is great, but take this opportunity to make sure you’re where you need to be with an emergency fund, because it’s better to put it aside now than money later to withdraw from an investment account.
Look for the best savings account for your emergency fund, such as a high-yield savings account that can earn you more interest than your regular bank account.
When it comes to your retirement investments, I can’t tell you with certainty how to invest them because you need to consider your retirement goals, needs, current and expected future expenses, inflation and interest rates, and so on. However, there is plenty for you to look at.
Consider target date funds, which are investments with a target retirement year (2045 or 2060, etc.). These funds automatically adjust to become more conservative as the years pass, keeping them age-appropriate (traditional advice dictates that the older you get, the more conservative your portfolio should be to protect against major market downturns).
Target date funds are basic tools for investing for retirement, but they are not suitable for everyone. Some investors may require more customization. And keep in mind that your retirement could easily last thirty years or more. So ultra-conservative investments don’t necessarily ensure that your money continues to work for you in the long term.
Target date funds can make sense for the novice investor. You may decide to invest in them directly, or you can use some of them as a blueprint as you build your own retirement portfolio. I’ve shared some tips for using it as a guide with this reader here.
You have not mentioned whether your inheritance was received in the form of cash or an investment account. If it was an inherited IRA, you have the option of keeping it in that type of investment account (although there are rules).
If your inheritance is cash, you need to be more strategic. IRAs are great retirement-oriented investment accounts, but they must be contributed with dollars earned. If you already have an IRA that you contribute to, whether traditional or Roth, you will 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 those age 50 and older).
There are, as you might have guessed, plenty of rules with these accounts too, based on income limits and whether you file your taxes jointly with your spouse or separately. Here is some more information about IRA rules and spousal IRAs that may be helpful to 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-oriented, is a taxable brokerage account. These accounts aren’t as tax-advantaged as an IRA or 401(k), but they aren’t as restrictive either, since investors don’t have to wait until age 59.5 to withdraw without penalty. Many advisors will argue that it’s good to have several accounts tailored to your retirement needs for ultimate diversification.
Whatever you choose, pay close attention to costs. Even something that seems small, like 1%, can add up over time and eat away at your profits. Look for index funds with low expense ratios and don’t get too caught up in stock selection. If you want to get into stock picking, use only a small portion of your money.
Once you figure out whether you still need to increase your emergency savings, you can start strengthening your retirement account, rather than leaving the money sitting in a savings account (especially a high-yield savings account that yields so much ). little interest).
You may feel the urge to check your account regularly once you’ve invested that money, as it’s quite a large amount and it’s hard not to get a little anxious about it, but try to remember. Once you have the right asset allocation, whether it’s a target date fund or your own construction, carry out checks quarterly or semi-annually.
The sooner you start investing, the more time your money has to work for you.
