'I expect to have several years before I take distributions from my 401(k) account'

"I expect to have several years before I take distributions from my 401(k)." (Photo subject is a model.)

Dear Quentin,

I am in my 60s and have a pension through my employer that I can take as a lump-sum distribution, which would leave me with approximately $80,000 after taxes. I would like to invest these funds in a financial vehicle that can generate additional income to supplement our monthly Social Security benefits while preserving the original principal for future emergencies.

I'm easing into retirement. We plan to begin taking Social Security in January 2027. I expect to have several years before I take distributions from my 401(k) account. Given this timeline and our goals, what investment options or strategies might be appropriate for us to consider? Thank you for your guidance.

Happily Retired

Related: 'I'm considering marriage in my mid-60s': Am I responsible for my spouse's medical debt?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com.

By emailing your questions to the Moneyist or posting your dilemmas on the Moneyist Facebook group, you agree to have them published anonymously on MarketWatch. The Moneyist regrets he cannot reply to questions individually.

Don't make it a black-and-white decision. You hopefully have a long retirement ahead of you.

Dear Happily,

There's a lot you can do with $80,000 to help you in retirement.

It sounds like you want to take a safe road. That rules out putting all of it in the market, but even investing a portion - $30,000 - in your 60s is not exactly a bad idea. Don't make it a black-and-white decision. You hopefully have a long retirement ahead of you, with Social Security on the way, and you are under no pressure to take withdrawals from your 401(k) before your required minimum distributions kick in. So far, so financially secure.

Typically, the safer the road, the lower the returns and more susceptible they are to being eaten by inflation. You could look at high-yield savings accounts, CDs, diversified bond funds, stock-and-bond funds, Treasury bills, Treasury notes or Treasury money-market funds. You want this money to supplement your retirement income and as a backup emergency fund. They are both worthy goals, but they are very different.

You want three things: income stability, liquidity and tax efficiency. They are not mutually exclusive aspirations. You could keep $15,000 to $25,000 in a high-yield savings account or money market fund as an emergency reserve with easy access to cash. The remaining funds could be divided between a Treasury or CD ladder, which can provide a predictable stream of income over the next several years.

CDs, as you know, are investment vehicles with set interest rates that attract people looking for a safe haven for their cash. CD rates typically track the federal-funds rate, which the Federal Reserve left unchanged at 3.50% to 3.75% during its July meeting. In August, you still can get rates of around 4.3%. CD ladders allow you to buy 1-, 2-, 3-, 4- and 5-year CDs, so that you have one maturing every year.

As for tapping your 401(k), it would not hurt to do so and/or make some Roth conversions while your income is low - that typically happens after you retire and before Social Security and your RMDs kick in. The Internal Revenue Service allows penalty-free withdrawals from retirement accounts after age 591/2. But starting at 73, Fidelity says you must take RMDs from your traditional IRA and 401(k) accounts whether or not you want or need the income.

Related: 'Time will tell whether that was a good bet': My adviser got me a full SpaceX IPO allocation. Was I lucky?

Minimizing your tax burden

Don't let taxes drive your decision-making, but don't ignore them either. Since you are taking the pension as a lump sum, think about where the money will be held - a taxable account versus an IRA, if a rollover is an option - and how your investment income will be taxed. A diversified stock fund of $30,000 or less does more than provide an income; it helps you beat inflation, and when you do make withdrawals.

"Those withdrawals, which are taxed at your ordinary income rate, can have significant consequences for your tax bill," Fidelity adds. "The additional income from your RMDs can push you into a higher tax bracket, causing you to pay a higher effective rate. Having a higher income can also increase the amount of your investment income subject to the 3.8% net investment income tax (NIIT), an additional tax that only applies to high earners."

Falling over an income-related monthly adjustment amount (IRMAA) cliff can result in an unwelcome increase in Medicare Part B and Part D premiums. For 2026, the maximum IRMAA surcharge for a married couple in the highest bracket is roughly $6,936 per person per year, or $13,872 for a couple. That rock (IRMAA surcharge) and hard place (the 401(k) withdrawals) is why people double down on their Roth conversions during that low-tax window.

"Some retirees who have multiple types of accounts in retirement may benefit from withdrawal strategies that pull from more than one account in a given year," Fidelity says. "That's because different account types can have different tax treatment; withdrawals from brokerage accounts may produce realized capital gains, for example, while Roth IRA and Roth 401(k)s as well as health savings accounts may offer tax-free withdrawal opportunities."

Proportional withdrawals from all your accounts can spread taxable income more evenly, Fidelity adds. By drawing from tax-deferred accounts earlier, you may reduce the higher tax burden that can occur later when Social Security benefits and required minimum distributions (RMDs) overlap. But if you expect significant recurring income or large fluctuations in income from year to year, a more personalized and flexible withdrawal strategy may suit you (read more here).

That's more than you wanted, but not more than you need to know.

Don't miss: I'm a senior who barely survives on $1,300 a month. No way could I live on $1,000.

Check out the Moneyist private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.

Previous columns by Quentin Fottrell:

'I am stuck in a low-income trap': I'm a teacher and very good at my job. Will I ever earn six figures?

'He has been emotionally abusive': My father, 75, is on oxygen and destitute. What do I owe him?

'She's a smoker': My mother, 55, has no car and no job. Should I buy her life insurance?

By emailing your questions to the Moneyist or posting your dilemmas on the Moneyist Facebook group, you agree to have them published anonymously on MarketWatch.

-Quentin Fottrell