Let’s face it. We all dream about it from time to time. If you were in the enviable position of having no debts (or just a mortgage), a big cushion of cash reserves, and have maxed out your retirement savings, what would you do with leftover money each month? Or how would you handle a lump sum like a tax refund, bonus, or inheritance? Where do I invest when I have “enough”? In a prior blog post I offered a formula in “How Much Money Do You Need to Quit and Sail Away”and what to consider after selling a business. Let’s say you’re not quite there yet but do have leftover cash. What should you do when someone throws you a juicy “bone”?
As I say, it’s a nice First World Problem to have. And these are the kinds of “leftovers” we all would like, right?
Occasionally, I get calls from clients who are like this. They have or had had good, stable jobs and sometimes but not always have also had high six-figure incomes. They have cash in the banks equal to more than one year of salary. And the only big debt is a mortgage that they are aggressively prepaying.
Whether someone is in this very enviable spot or not, they each have the same type of question: Where do I invest when I have enough?
Where Do I Invest When I Have Enough?
If someone came to me as outlined above, I would tell them they seem to have a high “risk capacity” (i.e. covered all the basics first) and if they have a long time frame can certainly have a high “risk tolerance”. These two concepts are different but related. I’ve posted about it before on my blog and in response to a question on Investopedia.
Regardless of their position, I have advised clients to reassess their goals and time frame first.
Then I advise them to get their Risk Number (through a tool like Riskalyze that I use in my practice). And then they need to find a matching portfolio aligned with that number. A good no- or low-cost investment platform might be Betterment, Wealthfront, or Schwab. All use ETFs and have no separate trading fees. Another option would be Vanguard direct. (Here we’re assuming that these fictional folks are DIY and don’t want to pay for any advisory services, right?).
If they were to use a professional, I would suggest controlling the things that they can: How much they pay and how they are allocated. In my practice I regularly use and recommend low-cost mutual fund and Exchange Traded Fund options from Vanguard. I’ll even suggest the funds offered through another low-cost index-based provided, Dimensional Fund Advisors.
What About Retirement?
In the opening, we assumed this fictional client has maxed out retirement savings. Is that going to be enough? Perhaps. A better approach is to have a plan that includes spending goals in retirement (i.e. travel, experiences, relocation) as well as potential healthcare costs. All of this should be based on a client’s probable life expectancy. Using the averages from the US Census or Social Security may indicate a life expectancy of about 80 for a man and 83 for a woman. But there is a real actuarial probability that a 65-year old man has a 10% percent chance of reaching age 91. Do you want to run the risk of running out of money beforehand?
You really can never have enough saved for a comfortable retirement. So, if someone has maxed out what they can put away in a company-sponsored plan, I recommend a variable annuity. Yes, an adviser who doesn’t sell insurance is suggesting that. The Nationwide/Jefferson National Monument series low-cost variable annuity ($240 year) offers Vanguard funds. With this in place an investor can put in more money above and beyond the 401(k) limits. As an annuity it shelters gains, dividends, and interest from any taxes in pre-retirement years. And because there are no bells and whistles like riders for minimum guaranteed income or values, it is dirt cheap.
Now if these folks also want or need more flexibility and a way to address long-term care costs, I suggest that they consider an indexed universal life policy. Such policies offer no downside risk to the market’s performance but upside participation and withdrawals for long-term care.
What About Silly Money?
Now if you’re lucky enough to have all the bases covered and all of this leftover stuff is gravy, then what should you do? I say live a little. Sure, we can go into great detail about alternative investments, buying gold, investing in various businesses or directly or indirectly (my preference) in real estate.
But if you have covered everything and are at the top of Maslow’s Hierarchy of Needs, then it’s time to “self-actualize”, find a purpose, and invest in people, experiences, and legacies.
For specific advice on any of these matters, please consider speaking with an independent board-certified planner. So, if you don’t already have a team to help you, focus your time and energy on assembling a team of experts to help you. A good place to start is the National Association of Personal Financial Advisors, a group of fiduciary advisers focused on holistic planning.
