$200k for retirement - but already 65
August 12, 2022 11:19 PM   Subscribe

I’m helping a relative figure out how to best invest around $200,000 which is going to be their retirement fund. The thing is, they are already 65 - not retired yet but not far off. Is it as simple as putting as much cash as possible into the 401k?

There is a small 401k right now but not much, so this will make up the majority of their retirement savings. We want to make sure this money is there to help pay for care as they get older as well as giving a small income upon retirement.

This is in Tennessee. Thank you Metafilter!
posted by ukdanae to Work & Money (11 answers total) 5 users marked this as a favorite
There are two considerations, what is the best asset allocation for an income on retirement, and what is the best tax wrapper. These are separate things. A 401k is a tax wrapper, within which you can invest in a range of things.

I think the 401k is likely to be the best tax wrapper open to them, but they should use all available allowances. Other people will have better ideas, but maybe they can also add a Roth IRA or 401k.

In terms of asset allocation, for an income, they could do worse than matching something like the Vanguard Target Retirement Investment Income fund, which is designed for people currently in retirement. It is fairly conservative and has over the past few years given an income return of around 1.72%-2.83% and some capital growth (over a 3+ year timeframe).
posted by plonkee at 1:20 AM on August 13 [2 favorites]

The community in the bogleheads.org forum can be a helpful source of advice for questions around financial planning and making investment decisions for retirement. Some places to start could be Investment planning and Asking portfolio questions.

People may be able to offer more appropriate and useful advice if they have enough information to get a rough understanding of the full financial situation: income, expenses, assets, liabilities. e.g. how much income is anticipated from each different source in retirement (social security, pension if any), what is the anticipated annual budget for all expenses in retirement, are there other assets (e.g. a paid off home, approximate size of investment accounts, existing asset allocation and fund choices in investment accounts) etc.
posted by are-coral-made at 1:30 AM on August 13 [1 favorite]

I think knowledge is as important as dollars. Try to link them up with an adviser who can help with questions such as this ask. Someone who can give guidance on spending as well as saving. Your relative will need to understand what a realistic budget for his situation is.

There are financial institutions that provide good advice about investing, but the don't help with budget, insurance, housing, etc.
posted by SemiSalt at 4:38 AM on August 13 [1 favorite]

They've paid taxes on it already. They should max out 2021 and 2022 401k amounts, but otherwise , I think a Roth IRA makes more sense. Financial advisors vary in skill. In the US, there's an Area Agency on Aging, and they should have referrals for fee-paid advisors. If you aren't paying a fee, the advisor will be making commissions, and these are usually not the best investments. Relative needs advice to make good decisions regarding taxes on withdrawals.

The account should be invested, many people use investment tool their employer chose, or choose a mutual fund at Vanguard or similar. Basic financial literacy helps, but be cautious; lots of sites have ads for stocks that may or may not be crap.

Thanks for helping your relative, it's a jungle out there.
posted by theora55 at 8:48 AM on August 13 [2 favorites]

As far as I know, there is a limit to how much money you can contribute to an 401k or Roth IRA account unless this is a rollover from a existing retirement account (in which case I assume you would have said so)

But you can have money for retirement sitting in a regular investment account - it just doesn't get any special tax treatment. Plus you can spend it or not as you need since you are the only one who knows that you have designated it as money for your retirement.

In terms of where to put it, I would strong second the recommendation for Vanguard Retirement Account - it is designed to have an appropriate balance of investments for people who need the money to be safe, need current income and also need the money to grow a little over time since retirement can last 30 years or more. Plus it can be a set it and forget it option for your friend. I like Vanguard because they the some of the very lowest expenses in the business and they are owned by the people who are invested in their funds.
posted by metahawk at 9:54 AM on August 13

Is it as simple as putting as much cash as possible into the 401k?

In a way, yes. You can easily figure out how much the maximum contribution is for the 401k, there will be a catch-up amount based on age, I think the maximum for 2022 is $27,000. You could then put all of that money into the 401k, that will lower your taxable income. You could then live off the cash assets to make up for the loss on the paycheck, if need be. You could also open a tax advantaged Roth or IRA, the maximum annual amount is $7000 and use some of the cash for that. Whatever is left over I would consider putting into a target fund appropriate for age. And ditto above that you should find a fee-based financial advisor.
posted by nanook at 10:08 AM on August 13 [1 favorite]

At his age, he should have some money saved in a virtually no risk vehicle that simply seeks to avoid loss to inflation. I would put at least $10,000 in I-bonds (that's the max you can buy in electronic ones). The rate will be 9.62% until October. He can keep the bonds up to 30 years. There is a 3 month penalty if kept less than 5 years.

posted by Flock of Cynthiabirds at 6:05 AM on August 14

After making a plan, it would be good to talk it through with someone and make sure they haven't missed anything - like, you don't want to put after-tax money in a 401(k) unless it's a Roth contribution (and yes, you can do Roth 401ks, or IRAs can be either pre-tax or Roth as well, and keeping that straight is important). If they expect to be paying lower taxes in the future, which is likely, maybe they want to use some of this money for their expenses and put more salary pre-tax into their 401(k) until they max it out.

For both their 401k and whatever investment account they put the rest into, they will have to choose investments; there are guidelines out there for balancing stocks (high risk in the short term, higher returns in the long term) vs. bonds (more stable and guaranteed but lower average returns) based on how soon you expect to need the money. I recommend going for the lowest fees you can get, Vanguard is top notch for this.
posted by Lady Li at 11:43 AM on August 14

We want to make sure this money is there to help pay for care as they get older as well as giving a small income upon retirement.

As always, the devil is in the details. I would urge you and your relative to unpack the above statement further, because as I understand the question, that's asking their $200K nest egg to do some heavy lifting that just isn't feasible. For instance, let's say they want to earmark $25,000 for future care needs. That leaves $175,000 to be disbursed for retirement income. How long does your relative think they might live? For this illustration, let's say 15 years, meaning $175K/15 = $11,667 or $972/mo. With no other income sources, that is well into poverty level in Tennessee.

Related, I don't think the risk of investing this nest egg in equities is wise given your relative's age, even at the risk of inflation. Their time horizon is too limited to make the loss-of-principal risk worth it. And while that's a great rate for I-bonds in this environment, it only amounts to $480 per $10K per year. That's not nothing, but I would argue that it's not meaningful for your relative, given their age and assets, unless perhaps for their care set-aside. Better, to my mind, would be a simple sweep money market fund at your brokerage. It'll go up as interest rates do, just not as high.

I think it's admirable that you are helping your relative. Realistically, how many of these answers are they going to understand and be able to execute? In my experience, most folks wouldn't know the first step to take even if they liked every answer. So, above all else, my answer is to keep it simple if you have any expectation of your relative understanding what's going on with their finances. You might find, as I and my siblings did when our dad hit his 90s, that life was better all around if he believed a few little fictions about his circumstances, alleviating upset about possibly not living within his means.

I hope this hasn't come across as negative. I don't mean it to be! And kudos to you for being there for your family to the extent you are able.
posted by Short Attention Sp at 4:32 PM on August 14

While that's a great rate for I-bonds in this environment, it only amounts to $480 per $10K per year.

The rate is currently 9.62%. That amounts to $962 per $10k per year.
posted by Flock of Cynthiabirds at 2:54 AM on August 15

To be clear, $200k alone isn't going to provide a healthy retirement income. A rule of thumb for working out how much capital you need to accumulate to pay for retirement is that the maximum sensible retirement income you could sustain for 30 years is 4% of your capital. For $200k, that would be $8000 per year. To achieve that, the money would need to be invested in a sensible and suitable mix of bonds, stocks and cash.

(I assume that with the 401(k) plus social security they will have more than is stated in the question. Otherwise they'll need to think about how they can continue to work for many more years.)
posted by plonkee at 3:31 AM on August 15

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