Do you know how much money you’ll need for your retirement? Many factors need to be considered to determine how much you’ll need, and how much you need to save to get there.
You’ll also need a strategy for growing your savings over time. Depending on the type of work you do, retirement plan options offered by your employer, and several other factors, you have many choices for your retirement investments.
This article will take a look at various retirement plans and strategies to help you determine the right plan for you and to help bring clarity to your financial future.
Let’s Talk About You
Choosing the right type of retirement plan (or plans) for your savings depends on several factors. For example, how old are you now and how much have you already saved? When will you retire and how old will you be at that time?
If you’re married, does your spouse work and if yes, at what age will he or she retire? Do you have long-term healthcare expenses for yourself, your spouse or an adult child? Do you have plans to downsize your home, move to another state, travel or make major purchases?
This seems like a lot to consider, and it is. But all of these details — and many more — make up a unique picture of you and your financial future. In order to create a lifestyle in retirement that meets your goals and expectations, we need to plan now.
The younger you are when you begin saving for retirement, the better. If you didn’t save well in your early years, then now is the time to start. The more aggressive you can be in saving and investing now, the more likely you will achieve your retirement savings goals.
A somewhat simple rule of thumb for how to invest presumes that you should subtract your age from 110 to determine the percentage of your portfolio that should be invested in stocks. The balance should then be invested in bonds or fixed income investments.
Let’s say you’re 55 years old. The formula suggests an ideal asset mix of 55 percent stocks and 45 percent fixed income investments. As you age, the mix will shift to include more exposure to lower-risk bonds and fewer higher-risk stocks. Creating a retirement plan strategy that aligns with your financial goals, risk tolerance, and savings realities are imperative.
Your Retirement Plan Options
Several types of retirement plans are available that make saving simple and beneficial. Depending on whether you own your own business or work for someone else will determine which options are right for you. All plans have benefits and restrictions, such as annual limits on pre-tax savings, employer matching provisions, and withdrawal limits.
Let’s look at the different types of retirement plans to see which ones might best meet your financial goals.
1. Employer-sponsored Retirement Plans
Many corporate employers offer a type of retirement plan called a 401k. This makes saving for retirement easy because the employer simply deducts a certain percentage of your income from each pay period and that amount is invested into your retirement plan account.
Federal rules governing 401k plans make early withdrawals difficult and costly, and this helps encourage savings. Additionally, traditional 401k contributions are pre-tax and may be matched with an employer contribution. These factors work together to maximize savings during your working years and grow your savings over time.
If you own your own business, you can set up a Solo 401k with similar benefits of a corporate 401k, investing into your plan as both the employee and the employer.
If you leave one job for another, you can “roll” your 401k savings into your IRA, or your new the new employer’s 401k if the plan permits.
Not for profit employers and many school systems may offer a similar retirement plan called a 403b. Like 401k’s, these types of plans make saving during working years simple, and provide nice tax benefits to encourage saving.
If you are under age 50, you can contribute up to $18,500 into a 401k or 403b plan in 2018. If you’re over 50, a “catch-up” provision allows you to contribute up to $24,500 for 2018.
2. Individual Retirement Accounts
Self-employed individuals can invest in a retirement plan known as a Simplified Employee Pension, or SEP IRA. Just like a 401k or 403b, contributions are pre-tax and under the right conditions, you can contribute up to $54,000 in 2018.
There are certain caveats. Be sure to consult with your investment or tax advisor before starting a SEP. If you have employees, you are required to make the same percentage contribution for eligible employees that you make for yourself.
Individuals also can invest in an IRA, even if they also participate in a 401k plan. There are tax limitations so, once again, consult with your advisors before implementing this strategy. For example, you cannot deduct IRA contributions from your taxable income if you are eligible to participate in a 401k. Finally, you lose deductibility if you earn more than $71,000 per year, or more than $119,000 if you file taxes as a married couple. Bottom line: the rules are complex so be sure to consult your tax advisor.
However, if you are not eligible to participate in an employer-sponsored retirement plan, then you will be eligible for a full deduction of your IRA contributions.
Another type of IRA, the Roth IRA, allows you to invest after-tax income with current year tax benefits. However, the money you earn within your Roth IRA is tax-free, and you pay no tax on withdrawals after the age of 59-1/2.
There are maximum income limitations for Roth IRA’s that begin at $120,000 and if you earn over $199,000 you are ineligible to make a contribution. There is good news, however, just this year the US Congress made it legal to make a non-deductible IRA contribution and immediately convert that same amount to a Roth IRA.
3. Health Savings Account
If you have a health insurance plan with a high deductible, you might be eligible for a Health Savings Account, or HSA. This type of plan allows you to save tax-free income and withdraw money to pay for certain medical expenses such as co-pays or other “allowable” medical expenses.
An HSA also allows you to withdraw funds to reimburse yourself for prior medical expenses so long as you have the documentation to prove you made those prior payments. Any unused money invested in your HSA account rolls over to the next year.
Like other retirement plans, there are limits for how much you can contribute to your HSA. If you’re under age 55, you can contribute up to $3,450 per year as an individual or $6,850 as a family. If you’re 55 or older, then the limits increase by $1,000 per year.
You can withdraw the money for non-medical expenses but there’s a cost. Prior to age 65, non-medical withdrawals carry a 20 percent penalty and are taxed as income. At age 65 or older, there is no 20 percent penalty but you can expect to have lots of medical expenses in retirement so it’s smart to let that money work for you until you really need it.
Many experts refer to the HSA as the last “triple-tax-free” vehicle left in the US. Money goes in pre-tax, grows free from tax and, when used for medical expenses, distributions are tax-free as well. HSA contributions can be invested in the same types of funds as your 401k and IRA.
Whatever your employment status or savings to date, the time to get started on your retirement planning is now. Click here to schedule a free consultation. Together, we’ll look at your total financial picture and smart options for meeting your retirement goals.