As a retiree, you probably know that you're going to need some investment income to supplement your Social Security benefits. That's because Social Security is only designed to replace about 40% of pre-retirement income. Taking a 60% cut in pay compared to your income when you were working isn't going to make for a very fun retirement.
Most likely a good portion of your retirement money is going to be in a retirement plan such as a 401(k) or an IRA, and you'll make withdrawals from it over time. But beyond these retirement investment plans, there are a few other financial accounts you might need as well. Here's what they are.
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1. Checking account
You'll need a bank account for depositing your Social Security check along with withdrawals from your 401(k) and IRA. This will most likely be a checking account. Checking accounts don't pay you any interest, but they come with ATM access and unlimited monthly withdrawals. You can pay your bills from your checking account and take money out as needed to cover your living expenses.
Most likely, you'll have most or all of your income deposited into your checking account and then route it from there into other accounts that you'll be using.
2. Savings accounts
Retirees need to have money saved. You should ideally have enough in savings to cover around two years of living expenses so you don't have to take money out of an investment account during a downturn. You may also want a separate dedicated emergency fund beyond this to cover more routine emergencies.
The need for an emergency fund doesn't disappear as a retiree -- in fact, it increases. That's because you're going to need money to cover surprise expenses that you'll inevitably face. You won't want to take it from your 401(k) or IRA, as randomly withdrawing from these accounts whenever you have unexpected costs could push you over a safe withdrawal rate.
It's also a good idea to save for big purchases like vacations in a savings account so you can move money over to it as needed from your Social Security check or when you make your investment account withdrawals. If you keep this money separate from checking, you can more easily make sure you have enough to accomplish your goal. And you're less likely to spend it on other things besides that big trip you've been planning.
There are plenty of high-yield savings accounts out there. You can also keep some savings in a money market account depending on your needs. Money market accounts are kind of a hybrid between a savings and checking account, providing higher returns than checking accounts but better access to your funds than a savings account offers.
3. Certificates of Deposit
Finally, many seniors would benefit from adding Certificates of Deposit to their portfolio. CDs often provide a higher rate of return than even high-yield savings accounts do, and the rate of return is guaranteed for the duration of the CD term. So unlike savings accounts, which have a variable rate, you can be confident in the return on investment you'll get.
You do need to be aware that there will be penalties if you withdraw funds from your CD early before the term ends. So this isn't a good place for, say, your emergency money. But if you're saving for a medium-term goal, like a big vacation for your 70th birthday three years from now, then a CD could be a good place for the funds. Plus, unlike investing in the market, you won't risk losing money in an FDIC-insured CD as long as you simply leave it alone.
By adding these three types of accounts to their mix of assets, retirees can better use the funds they withdraw from retirement accounts while helping to preserve their investment account balance to create a more secure future.
