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5 Places to Invest After You Max Out a Retirement Account

In this post, I’ll give you tips to make the most of additional money when you’re a good saver, get a raise, or receive an unexpected cash windfall. 

By
Laura Adams, MBA,
October 18, 2017
Episode #517

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5 Places to Invest After You Max Out a Retirement Account

Simone says, “I’ve maxed out my retirement accounts, but still have $14,000 that I want to invest this year. My husband and I have a six-month emergency fund and are not inclined to prepay our mortgage because the interest rate is 3.25%. Would it be better to use a non-deductible IRA or a brokerage account to invest this money in low-cost index funds?”

Congrats to Simone for blowing the lid off her retirement savings! Not knowing what to do with all your extra cash is a fantastic problem to have.

In this post, I’ll answer Simone’s question and give you tips to make the most of additional money when you’re a good saver, get a raise, or receive an unexpected cash windfall. No matter how much or how little extra savings you have, we’ll cover the right way to prioritize it.

How to Prioritize Extra Cash

Before I answer Simone’s specific question about which investing account to choose, I’ll back up and discuss how to prioritize your extra cash. I created a simple framework, called the PIP plan, that allows you to quickly take note of what you’re doing right and where you may be vulnerable.

PIP stands for:

  1. Prepare for the unexpected
  2. Invest for the future
  3. Pay off high-interest debt

Let’s review each one so you can apply it to your situation.

Free Resource: Retirement Account Comparison Chart.

1. Prepare for the Unexpected

Your first fundamental goal should be to prepare for the unexpected. As you know, life is full of surprises. Some of them bring happiness, but there are an infinite number of devastating events that could hurt you financially.

In an instant, you could get fired from your job, need to travel to see a loved-one, be the victim of theft, get an oversized tax bill, experience a natural disaster, get a serious illness, or lose a spouse.

Being prepared for what may be around the corner is a work in progress. It should change over time because it depends on factors like whether you have a family, your total amount of debt, and your income.

While no amount of money can reverse a tragedy, having safety nets—like an emergency fund and insurance—can protect your finances.

While no amount of money can reverse a tragedy, having safety nets—like an emergency fund and insurance—can protect your finances. They make coping with a tragedy much easier.

Be determined to accumulate an emergency fund equal to at least three to six months’ worth of your living expenses. For instance, if you spend $5,000 a month on essentials—like housing, utilities, food, and debt payments—make a goal to keep at least $15,000 in an FDIC-insured bank savings account.

While keeping that much in savings may sound boring, the goal for your emergency fund is safety, not growth. The idea is to have immediate access to your cash when you need it. That’s why I don’t recommend investing your emergency money, unless you have more than a six-month reserve.

If you don’t have enough saved, make a goal to bridge the gap over a reasonable amount of time. For instance, you could save one half of your target over two years, or one third over three years. Put it on autopilot by creating an automatic monthly transfer from your checking into your savings account.

If you’re like Simone and already have enough saved, consider moving it into a high-yield savings or money market account that pays slightly more interest for large balances. You can download the free Online Bank Comparison Chart (PDF) for a review of the best online banks.

As I mentioned, another important aspect of preparing for the unexpected is having enough of the right kinds of insurance.

To beat inflation and earn enough to accumulate one or more million dollars for long-term goals, such as retirement, you’ll need to take some amount of risk by investing.

If Simone and her husband are lacking any major insurance, such as disability, umbrella liability, or a life policy, I’d recommend that they use some of their extra cash to purchase them before investing.

2. Invest for the Future

Once you start building an emergency fund and have the right kinds of insurance, begin the second goal that I mentioned: invest for retirement. That’s the “I” in PIP, right behind prepare for the unexpected.

If you’re like most people you’ll need to work on both goals at the same time. But unlike your emergency fund, money in your retirement account should never be tapped until you retire.

Another huge distinction between saving and investing is safety. Remember to keep savings safe. However, safety comes at a cost because it gives you no or little return. To beat inflation and earn enough to accumulate one or more million dollars for long-term goals, such as retirement, you’ll need to take some amount of risk by investing.

Use qualified retirement accounts, like a workplace plan or an IRA, to get extra tax savings that work in your favor. Some employers match a certain percent of your contributions to a 401k or 403b, which turbo charges your account. So always invest enough to max out any free retirement plan matching at work.

Contributions to a retirement plan at work can only come from your paycheck. In other words, you can’t move money from your savings into a 401k or 403b. You must adjust your payroll deduction to increase or decrease the amount you invest.

Remember that when you pay off a credit card that charges 18%, that’s just like earning 18% on an investment after taxes—pretty impressive!

Simone says she and her husband have maxed out their retirement plans at work, which is fantastic.

3. Pay Off High-Interest Debt

Once you achieve the first two parts of my PIP plan by preparing for the unexpected and investing for the future, you’re in a perfect position to pay off high-interest debt, the final “P.”

Always tackle your high interest debts first because they’re costing you the most. They usually include credit cards, car loans, personal loans, and payday loans with double-digit interest rates.

Remember that when you pay off a credit card that charges 18%, that’s just like earning 18% on an investment after taxes—pretty impressive!

Common low-interest loans include student loans, mortgages, and home equity lines of credit. These three types of debt also come with tax breaks for some or all the interest you pay, which makes them cost even less on an after-tax basis.

Simone is thinking about her mortgage the right way because she mentions that the interest rate is too low to prepay. Yes, paying it down would give her a guaranteed return, but likely a much lower return than she could make by investing. So, I recommend that she turn to other investing options.

Also see: Should You Pay Down Debt Before Investing?

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