Dear Senior Living Adviser,
I am a recent widow and I’m receiving my husband’s 401(k) pension, which has been growing in value. This will be my only source of income when I retire in 3 years.
I am 62 and would like to invest at least $20,000 in a low-risk investment that I can access in case of an emergency and not have to pay taxes on. What would you suggest?
— Louise Lament
I’m sorry for your loss. The beneficiary of a 401(k) plan isn’t receiving a pension. A 401(k) plan is a form of defined contribution retirement plan, while a pension plan is known as a defined benefit plan.
Because you say the 401(k) is growing in value, I expect that’s what you have — not a pension, but rather a portfolio of investments. That’s not to say you couldn’t use that money to buy a pension-like benefit in the form of an annuity, but that’s a separate issue for you to consider down the road, ideally by hiring and consulting with a fee-based financial planner.
Depending on how long you were married (at least 9 months in most cases), and whether or not your husband contributed to Social Security, you should be able to get a Social Security survivors benefit, based on his work record. However, taking a survivors benefit before your full retirement age of 66 will reduce that benefit.
You could receive a survivors benefit now and switch to a benefit based on your work record at your full retirement age of 66, or wait until age 70 to get a benefit based on your work record, and by doing so, earn delayed retirement credits, increasing the size of the benefit based on your work record. I recommend working with a firm like Social Security Solutions to get help deciding on an optimal claiming strategy for your expected lifetime Social Security benefits.
I think it’s important to have a measure of financial flexibility in your investments, and an emergency fund certainly fits that need. Money saved in an emergency fund should be readily available and safe from market price fluctuations. The savings vehicle should be liquid and safe. In today’s relatively low-yield environment, that probably means a high-yield savings account or a money market account.
It’s the “no tax” part that makes things difficult. You could invest in a tax-exempt money market mutual fund and not owe federal income taxes on the investment earnings, and depending on the fund and where you live, the interest earnings also may be exempt from state and local income taxes. But, you really shouldn’t let taxes be the tail wagging the dog in how you invest your emergency fund. If you don’t have a working relationship with a tax professional, this is your year to start having one.
You’ll owe taxes on the money you take out of the 401(k), so managing the tax exposure there is important. You could choose to keep some of that portfolio liquid and use it as your emergency fund.
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