Dear Market Watch,
I am 72 years old and married to my wife, 71 years. We have one son, 45, who lives in California. We give him and his family $20,000 a year. Between us, with pension income and Social Security, we now receive just over $100,000 a year (gross) when we live in Florida. We own a $400,000 paid-off house, plus two cars.
My wife and I are not sure what to do with our money. We don't need the money, so our IRAs and Roth accounts keep growing. Our combined IRA accounts are about $1.3 million, including $690,000 in Roth accounts, and our regular savings with Vanguard are about $1.08 million. We have an outside inspection 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 convert it to a Roth? I'm open to suggestions.
Confusion and loss
See: “I hope to stay at home”: I am 76 years old and have no relatives. What should I do with my belongings?
Dear confused and lost,
Having millions of dollars you don't need and being able to sit in multiple accounts is a very good 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 that money work for you.
One of the best tools retirement savers have is diversification, and that can come in many forms. Perhaps the two most influential things are asset diversification and tax diversification. With the former, you use multiple types of asset classes in building your portfolio, so you have a mix of conservative and aggressive investments that work together when one part of the market is down (or the other part is doing particularly well). The latter refers to the compounds you use, and the methods for withdrawing from them.
It's a good idea to have a mix of accounts — taxable assets, deferred taxes, and after-tax assets — because they give you more power in determining how much you pay in taxes. For example, if in the future you want to withdraw some of your savings but don't want to pay a hefty tax bill, you can tap into a Roth account (assuming you follow the rules and take qualified distributions) so that the withdrawals are tax-free. If you want to keep your Roth accounts but need extra cash, you can withdraw from a tax-deferred account, such as a traditional IRA, but only take as much as you can up to the top of your tax bracket, so that you don't pay back. To the next slide. You can always make a bunch of distributions too.
Roth accounts are great to have, and may result in a tax-free inheritance for your loved ones. However, it comes with rules. For example, in order to reap the benefits of a Roth account, you must have that account with your converted assets open for five years (which is a separate five-year clock from the time you open your Roth IRAs).
The amount you convert to a Roth account is completely 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 the tax bill on this Roth conversion so that the account balance is not diminished as a result of the conversion.
Having liquid assets is essential at any age, but especially in retirement. However, you have enough to cover living expenses for a few years. Before taking any drastic steps, be very considerate and thoughtful about the type of investments you choose for your savings – and create a plan that you can revisit regularly (for example, once every six or 12 months, and certainly after major life events).
I know you said your financial advisor didn't help you much, 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 plenty of other professionals who can be helpful, including certified financial planners. They can create one or more portfolios to meet all your needs, explain in detail the types of investments you should have in your accounts, as well as coordinate any tax or estate obligations. I recommend at least shopping around for a planner, and doing some interviews. You don't have to work with anyone, of course, but this exercise can be useful and you can connect with someone who can facilitate the process of saving and enjoying the money you have accumulated.
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Do you have a question about your retirement savings? Email us at HelpMeRetire@marketwatch.com
