How to invest savings after maxing out retirement accounts?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
eiggub
Posts: 2
Joined: Mon Jul 14, 2014 5:01 pm

How to invest savings after maxing out retirement accounts?

Post by eiggub »

I’m currently maxing out my retirement plans (403b, Backdoor Roth, HSA, SEP IRA & taxable account) in Vanguard index funds with 20% of income. I also recently bought a home with previous savings to build equity and to get the mortgage interest deduction.

The dilemma is what to do with a purely non-retirement savings account for possibly another (or upgrade) home purchase or other unknown big expense in 5-7 yrs. What should I invest in? More index funds, CDs, high grade bonds, low interest rate savings account, high risk managed fund, hookers, vice funds....
mich_bogle
Posts: 85
Joined: Mon Jun 02, 2014 3:54 pm

Re: How to invest savings after maxing out retirement accoun

Post by mich_bogle »

I asked a similar question recently.
I ended up selecting VASIX for my fund.

It sounds like to need to evaluate how much risk exactly you are able to tolerate. Then you need to select an asset allocation that matches that risk tolerance.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: How to invest savings after maxing out retirement accoun

Post by livesoft »

We always just invested in our retirement asset allocation. When we spent the money on things we would just withdraw by selling what made the most sense and rebalance. It tweren't hard nor complicated nor needed any thinking. But just think about for a second: When it comes time to spend such money, you would sell stocks if they've been doing great; you would sell bonds if stocks were not doing great. If they were both doing poorly, you would probably just wait to spend the money. It is that simple.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: How to invest savings after maxing out retirement accoun

Post by retiredjg »

eiggub wrote:I’m currently maxing out my retirement plans (403b, Backdoor Roth, HSA, SEP IRA & taxable account) in Vanguard index funds with 20% of income. I also recently bought a home with previous savings to build equity and to get the mortgage interest deduction.
A person with a SEP IRA should not be doing back door contributions to Roth IRA because the SEP IRA is involved in the tax calculation. Are there two of you?
spectec
Posts: 1828
Joined: Mon Jul 14, 2014 8:00 am

Re: How to invest savings after maxing out retirement accoun

Post by spectec »

I'm with livesoft. Seems to me a comprehensive plan would take into account non-qualified money as well as qualified money. After maxing out your retirement plans, why not use the same asset allocation for your non-retirement savings? Maybe even mirror them. After all, if you think you have a good plan for certain buckets of money, why wouldn't that same plan work for other buckets? It's all just accumulated wealth, no matter where it's held. The major difference is liquidity and the true after-tax value of each type of investment.

As similar question arises when some clients reach age 70-1/2 but they don't need the RMD's to pay living expenses. They will often complain that they don't want to take the money out of whatever it's invested in because "it's doing so well".

I recommend that they do three things:
1) Thank God you have that type of problem;
2) Pay the taxes on the distribution:
3) Put what's left back into the same investment on an after-tax basis.

It's really just a sideways move.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: How to invest savings after maxing out retirement accoun

Post by retiredjg »

Welcome to the forum!
spectec wrote: After maxing out your retirement plans, why not use the same asset allocation for your non-retirement savings? Maybe even mirror them. After all, if you think you have a good plan for certain buckets of money, why wouldn't that same plan work for other buckets?
Because the non-retirement savings might have a different time frame so it might need to be invested in a more conservative manner.

Now for people like livesoft with a large portfolio and a lot of experience to tell him what asset allocation is appropriate for several different goals all at one time, one big portfolio is a fine solution. But for a smaller portfolio and/or a person with little experience, it might not be a good idea.

There are also issues with a mirrored portfolio because some investments are tax-efficient and some are not. I realize that a lot of the world, including most advisors, don't pay attention to this or might even believe it is a bad idea. But it is sort of a given around here to pay attention to tax-efficiency. I'm not saying everybody does it, but I'd bet that most do.
spectec
Posts: 1828
Joined: Mon Jul 14, 2014 8:00 am

Re: How to invest savings after maxing out retirement accoun

Post by spectec »

I'm not sure I follow your reasoning, but I'm new to this forum and am willing to know more about the rationale.

I see lots of situations in which people try to assign different distinctions to different buckets of money, but most of those distinctions are illusory. They tend to take a simple concept - total personal wealth - and make it overly complex. The facts is that Total Assets minus Total Liabilities equals Total Net Worth. Adjust for taxes and liquidity, and you have the answer. Regardless of age, and no matter how sophisticated one's plan might be, at the end of the day no one will ever change that formula.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: How to invest savings after maxing out retirement accoun

Post by retiredjg »

Imagine a person has about $200,000 and some of this is for a house downpayment in 6 months and some is for retirement. If all of this is invested at 80% stocks and a stock market crash happens, the person is not going to get his house at the intended time. That might not be an acceptable event.

For a person in this situation it would be better to hold the money for the house in CDs, cash, and short term bonds and invest the retirement money separately according to his ability to tolerate risk long term.

The situation would be much different for a person with $900,000 who has the experience to figure out an appropriate stock to bond ratio for the whole portfolio to accommodate the fact that a certain amount needs to be available in 6 months for a house.

I certainly agree there's a lot of nonsense from people having this bucket of money for this and that money for that. A lot of it is just dumb because money is fungible. But when resources and experience are both limited, different buckets of money can be a way for people to achieve separate goals without doing stupid stuff that negatively affects their other goals.

There is also the concept of tax-efficiency which would cause you to hold all your bonds and cash in tax-advantaged accounts, at least to the extent that you can. There is a way to hold your house money in your tax-advantaged accounts, but it would involve selling stocks in your taxable accounts even in the throes of a market crash to get the money out for your house. A lot of people just can't do that even though it simply would not matter because money is fungible and the portfolio could be rebalanced so that you actually "sold" bonds. This technique is described in this wiki page but I believe only a very experienced investor would actually be able to make it work during a crash. http://www.bogleheads.org/wiki/Placing_ ... ed_account

I agree that Assets minus liabilities = net worth. And I agree that formula won't change. I just don't see how that is helpful in helping decide how to invest in a portfolio. I realize that not everyone has that opinion. You may be one of them. :D
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: How to invest savings after maxing out retirement accoun

Post by retiredjg »

eiggub wrote:The dilemma is what to do with a purely non-retirement savings account for possibly another (or upgrade) home purchase or other unknown big expense in 5-7 yrs. What should I invest in? More index funds, CDs, high grade bonds, low interest rate savings account, high risk managed fund, hookers, vice funds....
You should invest this money, if you choose to keep it separate from your retirement money, in a less aggressive way than your retirement money. For 5 to 7 years, I'd say mostly cash, short term bonds and CDs. If you are in a higher tax bracket, the bonds should probably be tax-exempt. If the goal can be delayed several years if a crash happens, maybe hold a small to moderate percentage of stocks (like total stock market).

I'd probably skip hookers because there can be unintended sequelae from that type of activity.

The truth is there are a lot of right answers to this question and we don't really know enough about your situation to do more than guess.
conlius
Posts: 95
Joined: Fri May 02, 2014 11:09 am

Re: How to invest savings after maxing out retirement accoun

Post by conlius »

If you want a single AA, you might be able to just throw 50% munis and 50% VTI/VXUS in your taxable (keeping your total 80/20 or 70/30 AA across all accounts) and draw from whichever one is doing the best that year if you need to buy something.

If you want to keep two separate AAs...I would personally keep ~6 months in cash & CDs, then the rest in short+intermediate munis, i-bonds and VTI/VXUS. As the amount of low-risk liquid assets grew in my taxable, i would probably start to tilt more toward the risky side. This would give you a nice liquid buffer but would also provide decent returns.

However you do it, pulling money out of your taxable to buy something WILL modify what you have available to you when you retire regardless if it is cash, CDs, bonds, equities, etc.
supernova
Posts: 304
Joined: Fri Feb 21, 2014 7:45 am

Re: How to invest savings after maxing out retirement accoun

Post by supernova »

I have the same "problem", so what I do is:

1. Invest part of it as if it was a taxable retirement fund (enough that I feel comfortable in doing so)
2. Put the rest into a limited term bond fund for my "fun money".

This is after an emergency fund (which is in savings).
pingo
Posts: 2638
Joined: Sat Sep 19, 2009 8:24 pm

Re: How to invest savings after maxing out retirement accoun

Post by pingo »

eiggub wrote:I’m currently maxing out my retirement plans (403b, Backdoor Roth, HSA, SEP IRA & taxable account) in Vanguard index funds with 20% of income. I also recently bought a home with previous savings to build equity and to get the mortgage interest deduction.
retiredjg wrote:A person with a SEP IRA should not be doing back door contributions to Roth IRA because the SEP IRA is involved in the tax calculation. Are there two of you?
I'm still curious about the answer to this one.
Topic Author
eiggub
Posts: 2
Joined: Mon Jul 14, 2014 5:01 pm

Re: How to invest savings after maxing out retirement accoun

Post by eiggub »

retiredjg wrote:
eiggub wrote:I’m currently maxing out my retirement plans (403b, Backdoor Roth, HSA, SEP IRA & taxable account) in Vanguard index funds with 20% of income. I also recently bought a home with previous savings to build equity and to get the mortgage interest deduction.
A person with a SEP IRA should not be doing back door contributions to Roth IRA because the SEP IRA is involved in the tax calculation. Are there two of you?
pingo wrote:
eiggub wrote:I’m currently maxing out my retirement plans (403b, Backdoor Roth, HSA, SEP IRA & taxable account) in Vanguard index funds with 20% of income. I also recently bought a home with previous savings to build equity and to get the mortgage interest deduction.
retiredjg wrote:A person with a SEP IRA should not be doing back door contributions to Roth IRA because the SEP IRA is involved in the tax calculation. Are there two of you?
I'm still curious about the answer to this one.
Thanks so much for the input. I'm a single person so no additional accounts through a spouse. Some more background as I'm new here and funneled in from Jim Dahle's White Coat Investor site: I'm a 32 yo single physician in NYC with a few W2 incomes with benefits (403b, medical, HSA) and a private practice (SEP vs solo 401k). I'm saving 20% for retirement in index funds with the aforementioned plans. I just bought a reasonable condo out here and now I need to determine what to do with additional savings beyond my emergency fund.

Back to the issue raised, I just opened the SEP this year from the private practice's profits but I already backdoored my Roth. I've reached out to my accountant and will be rolling over the SEP into a solo 401k likely with Fidelity to avoid the pro rata rule. Moving fwd, I'll fund the solo 401k so I can continue to backdoor the roth. Again, thanks for pointing that out. It's much appreciated.
pingo
Posts: 2638
Joined: Sat Sep 19, 2009 8:24 pm

Re: How to invest savings after maxing out retirement accoun

Post by pingo »

Good to hear! :beer
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: How to invest savings after maxing out retirement accoun

Post by retiredjg »

eiggub wrote:I've reached out to my accountant and will be rolling over the SEP into a solo 401k likely with Fidelity to avoid the pro rata rule.
This is good! Just finish the transfer by 12/31 or the SEP will mess up your back door contribution to Roth IRA for 2014.

You may already be familiar with the funds to use at Fidelity - the Spartan Funds have excellent costs.
Post Reply