My Retirement Accounts Are Fully Funded, Now What? (EP.254)

0:00We all need to make smart decisions with our money. The long-term investor podcast shows you how by distilling complex financial matters into easily digestible lessons. And now, here's your host, Chief Investment Officer at PlanCorp and the author of Making Money Simple, Peter Lazaroff. Welcome back to the long-term investor. I got a rather interesting question emailed to me a few weeks ago that basically can be summed up as, what should you do after your retirement accounts are fully funded? Now at first blush, it seems like a simple question, but it gets more interesting, the more financially organized you become. And if you want to be able to email me questions, all you have to do is sign up for my newsletter, there's a link at the top of the episode description, or you can visit the long-term investor.com. Now for the purposes of this episode, I'm thinking that if we've already done the obvious tax advantage things, we're going to be talking about maxing out your workplace

1:02retirement plan, handling your IRA strategy, maybe funding an HSA if you're eligible, and maybe even taking advantage of a mega-backdoor Roth if your plan allows for it. So this is not really a should I contribute to my 401K episode. This is the main retirement account playbook is basically exhausted now what episode? If people assume the answer is simple, open a taxable brokerage account and just keep going. And honestly, that is usually the default next step, but as your retirement accounts grow the real question shifts, it becomes more about asking what your next dollar actually needs to do for you. So why is the taxable brokerage account usually the default? Well, it gives you something your retirement accounts don't, which is flexibility. A brokerage account lets you buy and sell investments like stocks, bonds, mutual funds, and ETS and unlike retirement accounts. There is no cap inside the brokerage account and you're not dealing with those early distribution rules that apply to retirement plans.

2:03Yes, the account is taxable, but if you hold your appreciated investments long enough, long-term capital gains might be taxed and probably will be taxed at a lower rate than your ordinary income. So it's that combination of flexibility, liquidity, and broad investment choice that makes a taxable brokerage account, often the right home for long-term access savings. But the other thing that starts to matter at this stage a lot more is asset location, because once you begin building meaningful wealth in a taxable account, it's no longer just about what you own, but is also about where you own it. Some investments are more tax-efficient than others, and that can influence what belongs in a taxable versus a tax-deferred account. In some cases, that may mean rethinking how you're existing retirement assets are positioned, and in others, it may mean using newer tools like a separately managed account or another tax-aware approach to help generate capital losses that can offset gains over time. Without going into too much detail, the broader point I think is pretty simple.

3:07As more of your wealth sits outside your retirement accounts, aftertax implementation starts to matter a heck of a lot more. Before you decide where the money is going, I think you do need to think a little bit about when you might need it. So before you just default right to that taxable brokerage account, you have to think, OK, well, do I need this money in the next couple of years? Because generally speaking, I don't think it belongs in stocks at that point. And not because I can predict markets, I know I can't, but if the market drops right before you need the money, you may not have time to recover. Whereas if the money is something maybe three to ten years away, the answer gets more nuanced. Some of it probably belongs in the taxable account, but maybe not with a full equity mindset. And I think the closer and more important the goal, the more clearly you are going to have to picture how volatility is going to impact an investment and how you realize or don't realize that goal. But if the money is something for more than ten years away, or if you don't really have

4:07a narrow purpose for it yet, that's really where the taxable brokerage option starts to shine. And you can think about some long term tax aware options in that account. Now one thing when I start talking about this that always comes up as people ask, well, what about paying off the mortgage? And I really don't love mortgage prepayments. I also do honestly think that people can get too dismissive of them. And part of that's because I've never met someone who's paid off their mortgage and regretted it. So I'm not going to pretend there isn't value there. There absolutely is. Being debt free can feel amazing. I'm sure I'm not debt free, but I'm sure it feels great. And it definitely lowers fixed expenses, which creates peace of mind. So if paying off your mortgage is one of your life's great financial goals, I do think that matters, but let's not ignore the math in the process. So let's say you have a fixed mortgage at say two and a half percent, it's going to be pretty hard for me to get excited about sending extra dollars there. I mean, that is cheap debt.

5:07No question about it by historical standards, by any standards. And pre-paying it usually comes with a real opportunity cost. Now if your rate is say six and a half percent, maybe the conversation changes a bit. It's still not automatically my favorite answer, but at least now the math is easier to stomach if you're going to send extra dollars that way. I think the bigger question though is whether paying down your mortgage is crowding out the liquid taxable savings you may need to support the life you want in retirement. A paid off house is wonderful, but a paid off house does not by itself fund the rest of your life. Another common question is what about saving for the kids? And I've been doing a lot of episodes on this recently. I'll link to some of those episodes in the show notes at the longterminvestor.com. And if you have children, this is another obvious place where you might think about your next dollar going, but only after you are confident your own retirement is on track. So if you have some extra money and you think that the job for that money is education,

6:08then a 529 plan still deserves serious consideration because earnings can grow free of federal tax and qualified withdrawals are tax-free when used for qualified education expenses. There is also a really good PDF that I'll put in the show notes. It's the common savings accounts for children. It goes step by step to the different types of accounts, not all just 529 stuff. You can download that, and I think that will give you a little sense of if I'm going to save for my kids, what is the best vehicle? But I will re-emphasize something I have emphasized in other episodes on this topic. I do not think that funding 100% of anticipated future college costs is the right goal. I think that is too aggressive, and I think it's too dependent on a future you just can't know a certainty. I personally am thinking that you ought to aim for something more like 60 to 70% of expected tuition because that leaves room for scholarships or lower cost schools, cash flow later, or simply the reality that your child may not take the exact path that you imagined. And one other thing I have to repeat on this topic, I always say it, kids can borrow

7:13for school, but you cannot borrow for retirement. So yes, after retirement accounts are maxed, some of your next dollars may belong in a $5.29, but not at the expense of the flexibility you may still need for your own future. Here's maybe an underrated one, and I think you need to ask yourself, what about using more of your money during life? And discipline savers, I think you know that you underrate this option. And it's obvious when the retirement accounts are full, some people should stop asking only how do I save more efficiently, and start asking, should I use more of this money now? And that could mean giving to charity during your lifetime, it could mean helping family while you're actually around to see the impact, or it could mean spending more intentionally on things that make your life better now, like travel or convenience, convenience, oh my goodness, spend on convenience if you are already doing great financially, spend on your health, spend on family experiences, or simply just buy back some of your time.

8:13And in some cases, I think one of the things that that could mean is paying for expertise. Again, I'm biased, you all know this, but a good advisor is a real expense. But so is any other form of help that keeps you from making costly mistakes, or gives you more confidence, or creates a lot of convenience in your life. Now, a lot of people who are disciplined enough to max out retirement accounts are also prone to assuming that every extra dollar must still be optimized, invested, or somehow hidden from taxes. I don't think that's always true. Sometimes, the highest return use of the next dollar is just not a bigger portfolio. It is a better life. I was trying to break this up, so the person who actually asked this question was in their early 50s, but I started thinking through it for people in their 30s or 40s, and certainly 40s or 50s or nearer in retirement. And so here are a couple of things that came to mind. If you're a high earning professional in your 30s or early 40s, the answer to this question

9:13like what do I do next is probably still a taxable brokerage account. You likely have a long runway, and the flexibility may matter more than forcing every dollar into a narrower bucket. But I also think this is the stage when a larger cash reserve can have real value. It definitely does not look efficient on a spreadsheet because cash isn't going to earn the way that investments are, but having the extra liquidity can give you greater career optionality, it can help you weather uncertainty, and it can make it easier to act when life changes fast. Now if you're in your 40s or 50s, this is often when life feels the fullest and most financially demanding at the same time, because you may be in your peak earning years, but not every dollar can or should be saved and not every dollar saved can or should be invested. I think this is often the stage when balancing retirement, college, taxes, cash flow and lifestyle starts to require more judgment than rules of thumb.

10:14And for many people, this is where paying for good advice begins to make more sense, not because it's cheap, but because the cost of getting important decisions wrong can be much higher, especially when those mistakes compound for decades. And finally, if you're nearing or in retirement, the emphasis starts to shift from pure growth, obviously, to flexibility, liquidity and bridge assets. And there's a fairly well-understood playbook for accumulating wealth, but the de-accumulation phase is different. No two retirees are the same, which is why there are so few truly useful rules of thumb once you start thinking seriously about your withdrawals. And at that stage, the question becomes less about maximizing returns and more about making sure your money is in the right places, in the right amounts at the right times. Now, I think there's some behavioral mistakes you can avoid once you're already maxing out all your retirement accounts. And I think the biggest one I see is that people treat every dollar like an optimization problem. I already mentioned that sometimes the biggest portfolio shouldn't be the goal at a certain

11:18point. You should have the biggest fullest life, but I also see a tax obsession show up. I can also show up as a complexity obsession, but again, I think the biggest thing is that for most people who are listening to this episode and asking this question, it's the assumption that every surplus dollar still has to be saved. I will say it also shows up as a reluctance to spend money on help because the fee is visible and immediate, and the mistakes that you might experience in the future, those are harder to measure. But good advice, like anything else worth paying for, is not supposed to be priced like a non-profit service. If you don't value the work, you don't value the work. And if you do value the work, then the question is whether it helps you make better decisions, avoid costly ares, and use your money more effectively. Look, even in my own life, and certainly in the lives of clients, I see moments when the most optimized answer on paper is not always the most useful answer in real life. And there are times when keeping things simple is worth it, and there are times when a plane

12:18taxable brokerage account is better than chasing a more niche strategy, and there's going to be times when using money during life is better than automatically adding to pile. So I think my bottom line is this. If your retirement accounts are fully funded, a taxable brokerage account is usually the best home for long-term access savings because it's flexible, useful, and well-suited to money that does not yet have a narrow pre-determined purpose. Brokage accounts are obviously going to let you invest across a wide range of assets, while retirement accounts come with contribution limits, withdrawal rules, and are just generally less flexible once that tax advantage space is already full. But saving more money to a taxable brokerage account is not always the universal answer. Some dollars need to stay liquid and then cash. Some may belong in a specialized savings vehicle like a 529, and some may be better off used to pay down debt. And some, and truly, I really strongly believe this might be the most underrated, some may be better used for giving or living right now.

13:21The key, in my opinion, is to stop asking how to optimize every dollar and start asking what each dollar is supposed to do. And if you're maxing out your retirement accounts and trying to decide what your next dollar should do, then schedule a call with me and my team. I mean, this is exactly the kind of planning question where the right answer depends on your goals, your timeline, and the life you're trying to build. As always, thanks for listening, and until next time, to long-term investing. Thanks for listening to the long-term investor podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazeroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions, and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this

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