Should You Reinvest If Your Retirement Nest Egg Is Too Big?

Most people worry about saving enough money for retirement. Between taxes, healthcare costs, and inflation, people frequently underestimate how much money they will need. However, it is also possible to save too much. It’s worth asking if your nest egg is too big.

If your retirement plan projects a big surplus, you may actually be depriving your heirs and beneficiaries of a lot of money, due to an overly conservative investment strategy. If this is the case, you may benefit from two different investment strategies. One strategy ensures you have the money you need to live the life you want while retired. The other strategy allows any surplus to grow more than it would if invested solely for the purpose of funding your own retirement.

Considering the Possibility of Two Retirement Strategies

This “leftover” money is likely invested too conservatively, since you intended for it to provide returns only through your lifetime. You could allow that money to work much harder for you by setting it aside and investing it in a more aggressive manner. For example, you could use your children or heirs as inspiration and invest this money as you would given their younger age and accordingly higher risk tolerance.

In this scheme, you would have two, or possibly even more, investment strategies for your nest egg. The bulk of the money, which will fund your retirement, stays invested conservatively. However, a smaller portion is invested in a more aggressive manner, with the intent of leaving it for your heirs. The money will be exposed to higher risk, but also the chance of higher returns, which ultimately means you’ll pass on more to your heirs. Since you won’t need this money during your own lifetime, it should be somewhat easier to invest it aggressively, as you don’t have to worry about getting locked into losses. This portion of your portfolio can ride out market lows for the lifetime of your beneficiary.

Figuring Out the Best Account to Divide in Two

If you instead use a taxable brokerage account to create the two accounts, your heirs will likely end up paying much more in taxes. Whenever your heirs sell investments in the inherited account, they will need to pay capital gains taxes based on the value of the assets when you died and the value when they are sold. Furthermore, the brokerage account is taxable on an annual basis, which means this capital gains tax also applies to dividends and interest earned throughout the year. In other words, your heirs will pay these annual taxes on top of larger fees whenever the assets are sold.

Treating the Accounts as Separate Investment Entities

However, if you are mentally prepared to accept the risk and understand that the second account will necessarily be more volatile, you can end up amassing significantly more income for your heirs over time. The important thing to keep in mind is that this money is outside of your retirement projections, so its performance has no bearing on how you maintain your retirement lifestyle.

If you choose to go this route, it is important to be diligent in figuring out how much money you can set aside, based on pessimistic assumptions to keep yourself protected. Then, once you have secured your own retirement against inflation and longevity risks, you can then build an aggressive growth portfolio for your heirs that can include stocks, precious metals and even crypto currencies, with professional guidance as needed.

Originally published at https://robertryerson.me on June 23, 2021.

Robert Ryerson authored the 2016 book What’s the Deal With Identity Theft?: A Plain English Look at Our Fastest Growing Crime.

Robert Ryerson authored the 2016 book What’s the Deal With Identity Theft?: A Plain English Look at Our Fastest Growing Crime.