U.S. Markets closed

Ask Farnoosh: What Do You Do After Maxing Out Your 401(k) and IRA?

Tara writes: What do you do with your money if you have savings and you've already maxed out 401(k) & IRA contributions?

Sounds like you’ve taken responsible steps to cover your near- and long-term savings needs. How are you doing in terms of insurance? Depending on circumstances, you may want to consider life, disability and/or long-term care insurance. If you have dependents, I’d recommend a term life insurance policy that can financially support your children or other dependents through a certain time frame – for example, through college, in the case of a tragedy.  Disability insurance can also come to the rescue by providing you with an income should you lose the ability to work at some point, even if it’s just for six months.  Finally, long-term care is proving helpful for seniors who need to fill the gaps not covered by Medicare or health insurance. In fact, according to the Department of Health and Human Services, 70% of those turning 65 can expect to use some sort of long-term-care service, such as assisted living or a nursing home.

If you feel financially secure, a nice splurge seems to be in order! Whether a vacation or shopping spree, Mary Deshong-Kinkelaar a certified financial planner with Kinkelaar & Associates. finds it helpful to have a designated splurge “fund” once you have your financial bases covered.  “It can help establish boundaries for people who feel uncomfortable with the concept of spending,” she says. For this she recommends allocating anywhere from 2% to 5% of your paycheck to the fund.

And something else you don’t often hear: If you do splurge, do so on a rewards credit card so you can get more bang for your buck. “Redeem the points for a gift card and go shopping or redeem them for a nice dinner. It won’t cost you anything extra and will make you feel good,” says Stacy Francis, founder of Francis Financial in New York.  Of course, just make sure to pay off the balance in full when the statement arrives!

Thomas emails: I have a 48-year-old friend who just came into some money, approximately $100,000 through a settlement agreement and needs to get started saving for retirement. She currently works part-time so investing in a 401(k) isn't an option right now. I know she can open a Roth IRA. But that only covers $5,500. How else can she start saving for retirement?
At 48 and with apparently no other retirement savings, a $100,000 windfall is nice but likely inadequate. Your friend would be wise to invest some of this money in a Roth IRA, like you suggest, as well as a taxable brokerage account, which she can open through one of many reputable discount brokers, such as Vanguard, Fidelity, Merrill Edge or Charles Schwab. There she can create a balanced portfolio, factoring in her risk tolerance and expected retirement age.

She should do this all while securing full-time work and saving aggressively for the next 20 years or so.  “Catching up may take earning more so also look at investing in some special training or education to up the earning potential,” says Deshong-Kinkelaar. Additionally, if she has any credit-card debt I’d suggest she use this newfound cash to clear that off and avoid losing any more money to interest.

Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.
Got 10 minutes? Want to earn chance to win cash? Farnoosh is conducting a survey for an upcoming book on money and relationships. At the end of the survey, learn how to qualify for a $100 American Express gift card giveaway. There's one each week for the next several weeks.