Holland Column

Retirement & Financial Planning

Holland Financial

What to Do with Excess Money?

Despite the fact that a lot of people would like to have this problem, many retirees are faced with the dilemma of being forced to take Required Minimum Distributions (RMDs) from IRA accounts and not knowing what to do with the money. I received this question (text slightly modified and name changed) from a PlanStrongerTV™ viewer:

My husband and I are retired and our income is Social Security and a small pension. We can pay all our bills on this income (unless we have some crisis, like buying a new air conditioner). We now have to take annual RMD payments, which, combined between my husband and me, are around $15,000 a year, after taxes. We don't know what to do with this money, so we put it in our money market account at our bank. The interest paid is about $4.00 a month. I go over to the bank every quarter and ask for an upgrade, which brings the interest payment up slightly. My question is, what should we invest the RMD money in that would make the money grow?  – Ramona

Hi, Ramona. Thanks for writing. I’ll break your question into two parts:

1. Undesired Required Minimum Distributions. Many of our clients are in the same “boat” as you and your husband! My firm holds our clients’ money at the same large, well-known, financial custodian that you do (I deleted the institution’s name from your question). For clients who want help with this same problem, we can calculate and move the RMD amount from their IRA account(s) to a regular joint investment account. This, essentially, keeps the money working for the clients as if no RMD was required. Of course, income taxes have to come out and be sent to the IRS as part of the process, but we handle that directly with the custodian.

2. Surplus Cash That Earns Next to Nothing. Although prevailing interest rates are starting to climb, cash in the bank will probably continue to earn very little. Once you have a healthy emergency fund established for the unexpected (like the broken air conditioner), you can then look for alternatives to earn more interest. There are two primary solutions my company uses, and they are both from insurance companies: 1. Fixed Interest Annuities or 2. Fixed Index Annuities. Annuities don’t have required RMDs, and the interest can be left to accumulate and compound tax-deferred. The Fixed Index Annuity is “indexed” to the stock market. The interest earned is not guaranteed or known in advance, but it can, potentially, be higher than the Fixed Interest Annuity. Over the years, we’ve seen these products work well alongside our clients’ investment portfolios and within overall financial plans.

I hope this information is helpful. Please realize that these are general observations and ideas; if I knew more about your individual situation, goals, etc., I might have additional or different recommendations. Thank you for writing!

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