Best way to invest a surplus
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Having money invested in an IRA that you don’t need to spend anytime soon, or maybe that you’ll never want to spend, is a great situation to be in during retirement.

Financial advisers have suggestions for well-heeled retirees who find themselves in this fortunate circumstance.

If you are in that lucky group, consider these strategies on the best ways to invest with your retirement accounts when you don’t really need the money.

1. Get more aggressive

If your primary goal is maximizing what you leave to your heirs or to charity, you have more leeway than most.

If you don’t need the money right away, you can be more aggressive with your investing, says Jamie Hopkins, a professor at The American College of Financial Services and director of the New York Life Center for Retirement Income.

The conventional wisdom for retired investors is to stick to a mix of about 60 percent bonds and 40 percent equities. But if you don’t need to spend the money, Hopkins advises putting 80 percent in stocks and 20 percent in bonds.

If your money is in a target-date fund with a target set at the year you retired or were scheduled to retire, it is probably invested mostly in bonds at this point. If you like the set-it-and-forget-it aspect of a target-date fund, Hopkins advises that you simply move your money to a target date 2050 fund, which will have a bigger allocation to stocks.

2. Do a gradual Roth rollover

Beginning at age 70 1/2, the IRS mandates you to take required minimum distributions, or RMDs, from your traditional IRA and pay taxes on the money. Instead, consider converting your traditional IRA to a Roth IRA, on which RMDs aren’t required.

Do it over a five- to eight-year period, says certified financial planner Leon LaBrecque, CEO of LJPR Financial Advisors in the Detroit area. “You’ll still owe the IRS taxes when you convert, but you’ll have more strategies to manage — and lower — the bill.”

If a Roth conversion doesn’t seem right for you, LaBrecque suggests that you ask your accountant to estimate how much you’ll owe in RMDs over the next five to 10 years and then invest that amount conservatively so that you’ll have it when you need it. Then, you can safely be more aggressive with the remainder.

“After you have dedicated money to the RMD, I’d invest the rest in equities,” LaBrecque says.

3. Choose a QLAC

Qualified longevity annuity contracts, or QLACs, can be bought within an IRA or other tax-advantaged retirement fund. These are a type of deferred annuity that will provide you with a regular income later in retirement. You don’t have to start taking the money until you are 85, and in the meantime, the amount used to buy the QLAC is sheltered from RMDs.

The IRS allows you to save up to $130,000 in a QLAC, “and you are protected from RMDs for the next 15 or 20 years,” until you turn 85, Hopkins says.

What if you don’t live to age 85? “Buy it with a return of premium so if you die earlier than expected, your heirs get the money back. It’s a good longevity hedge,” Hopkins says.

The return on investment isn’t great, he adds, but wealthy people tend to live longer, making it a better investment for them.

4. Think really long term

When determining the best way to invest money you don’t think you’ll need, consider the risks that every retiree needs to think about: inflation and longevity.

“You might be retired for longer than 30 years,” says Maura Cassidy, vice president of retirement at Fidelity Investments. “You have to keep ahead of it; you need inflation coverage.”

In other words, someday you might need that money. Although you might invest less cautiously than people whose margins are thinner, don’t go crazy, Cassidy says.

If you have more than you need, consider delaying the day when you invest more conservatively, she says.

“Our research indicates that retirees should be at 60 percent bonds, 40 percent stock allocation at age 65. That’s a good allocation for 15 or 20 years,” Cassidy says. “Then, you should sell off even more equities so that by the time you are 80, you’re at 80 percent bonds and 20 percent equities.”

If you still don’t need the money at age 80, she says, “Slow it down. You might wait until age 90 to go to 20 percent equities.”