Where Should I Invest My Extra Retirement Savings as a High Earner with a Pension?

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Workers are usually advised to set aside 10% to 15% of their income for retirement. Some experts even recommend saving 20%. And if you’re able to save beyond that point, even better.

If you earn an average wage, it may be possible to house all of your retirement savings in an IRA or 401(k) while following this guidance. If you’re a very high earner, however, it can make saving for retirement a bit more complicated. That’s because saving 10% or 15% of your wages might exceed the maximum allowable IRA or 401(k) contribution each year.

In this Reddit post, we have someone who’s wondering how to save for retirement with a large salary. They and their partner are already maxing out their 401(k)s and still have room for savings, but they’re not sure what to do.

It’s a great “problem” to have. And it’s one that has many solutions.

Don’t limit yourself to tax-advantaged accounts

There’s a reason retirement savers are strongly advised to put money into an IRA or 401(k). These accounts are loaded with tax benefits.

With a traditional IRA or 401(k), your money goes in on a pre-tax basis, lowering your IRS bill in the near term. Money in these accounts can also grow on a tax-deferred basis.

With a Roth IRA or 401(k), your money goes in on an after-tax basis, but gains and withdrawals are tax-free. Roth IRAs bar very high earners from making contributions directly, but there are no income limits associated with Roth 401(k)s.

This year, 401(k)s max out at $23,500 for savers under 50 and $31,000 for savers 50 and over. The poster and their spouse are in their 40s, so they’re subject to the lower limit.

Let’s say they each earn $400,000 each and contribute $23,500 to a 401(k). That’s only about 5.9% of their income. If they want to save 10% of their income for retirement, that’s $40,000, so they need a home for the $16,500 they can’t put into a 401(k).

In that case, a taxable brokerage account could fit the bill. There are no IRS benefits associated with these accounts, but there are also no contribution limits or restrictions. Other investment options include building a bond ladder, CD ladders, and even certain life insurance products that can act as a form of savings.

A pension changes things, too

While the general convention is to save 10% to 15% of your income for retirement or more, having a pension could change things for the better. A generous pension could take some of the pressure off of you to save (though it’s never a bad thing to end up with extra money).

Let’s say your goal is to have a $150,000 annual income during retirement with inflation adjustments, and you’re looking at a $75,000 annual pension with inflation adjustments built in. That means your savings have to cover less than half of your income needs because there’s also Social Security to factor in.

In a situation like this, it’s a good idea to sit down with a financial advisor, review your various retirement income streams, and map out a savings plan. An advisor can help you figure out how much to save based on the guaranteed income you’re entitled to. They can also help you figure out where to put your extra retirement savings if you’re maxing out an IRA or 401(k) but want to continue saving beyond that level.

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