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When it comes to saving for retirement, you may be familiar with terms like 401(k)s, IRAs and Annuities, but how do you know which one(s) to choose and if you’re using them in the best way possible?
Issues to Consider.
To help ensure your retirement savings can provide you with the income to support your lifestyle, you need to take into consideration different factors, such as longer life expectancies, health care costs, cost-of living increases, and the uncertainty of the financial markets. For example, even if you stick with lower volatility of a conservative investment portfolio, you could still outlive your assets as a result of low returns or high inflation.
3 Rules of Thumb to Help Save for Retirement.
It’s important to discuss with your tax advisor and Wealth Advisor what retirement savings and income strategies make the most sense for you, since everyone’s financial situation is different, but here are some general guidelines to discuss with them.
Contribute As Much As Possible In Your Employer’s Retirement Plan.
Depending on the plan’s provisions, your employer may match a portion, or even all of your contributions, which will help you put more money to work for your future. Any earnings in these plans are tax-deferred, which means you generally don’t pay taxes until you take money out in retirement (though withdrawals before age 59 1/2 are generally subject to a 10 percent IRS early withdrawal penalty). Employer-sponsored retirement plans like 403(b)s and 401(k)s also enable you to contribute from your paycheck before the government takes out taxes, unless you are contributing on an after-tax basis to a Roth retirement plan.
If you are self-employed, speak with your tax advisor and Wealth Advisor about additional ways you may be able to save for retirement, such as with a Keogh.
Look into an IRA.
If you contribute the maximum to your employer’s plan – or currently aren’t covered by one, consider contributing to a Traditional or Roth IRA. As with employer plans, IRA earnings grow tax-deferred. In 2023 you can contribute earned income of up to $6,500 in an IRA ($7,500 if age 50 or older).* If you’re not actively participating in an employer-sponsored plan or are below certain income limits, you may be eligible to make a tax deductible contribution to a Traditional IRA. With a Roth IRA, you cannot deduct contributions, but you generally can make qualified withdrawals tax free.
If you are self-employed, speak with your tax advisor and Wealth Advisor about additional ways you may be able to save in an IRA, such as with a SIMPLE or SEP IRA.
Explore After-Tax Annuities.
If you max out on contributing to your employer’s retirement plan and an IRA, consider yet another tax-deferred option for long-term savings with an after-tax annuity. An annuity is a contract between you and an insurance company, where there are two phases – the savings (accumulation) phase and the payout (annuitization or retirement income) phase. During the savings phase, you make purchase payments into the contract and earnings accumulate on a tax-deferred basis. The payout phase occurs when you begin receiving regular payments from the insurance company by electing an annuity income option.
There are many different types of annuities, but two general categories are fixed and variable annuities. During the savings phase a fixed annuity offers a fixed rate of return that is guaranteed by an insurance company for a period of time, while a variable annuity offers a wide range of variable investment options. Variable annuities are subject to market risk including the possible loss of principal.
The Ability to Receive Lifetime Income.
Annuities offer several income options for receiving payments, including the option to receive payments for the rest of your life (or your life and the life of your spouse). This feature, known as annuitization, offers protection against the possibility that you will outlive your assets. Each annuitization payment contains an earnings portion and a return of principal portion. The earnings portion is taxed. The lifetime income is subject to an insurance company’s claims-paying ability, so it’s important to make sure an annuity is backed by a financially strong company.
*It’s important to note that Traditional IRAs do not have income eligibility limits, but if you or your spouse are covered by an employer retirement plan, income limits apply for deducting annual contributions. As for Roth IRAs, various limits apply. Withdrawing funds from an IRA before age 59 1/2 generally triggers a 10 percent tax penalty.
Your Next Step:
Develop a Financial Plan to Strategize Ways to Save for Retirement
There is no one-size-fits-all answer for what’s the best approach for saving for retirement and creating an income strategy. But a good first step is to create or update an existing financial plan. This will help you to establish your goals and prioritize them for the lifestyle you want to achieve to and through retirement. By working with a Wealth Advisor to create a financial road map for your retirement and other goals, you can discuss your expectations and concerns, generate a snapshot of your current situation, run through what-if scenarios, and then implement product solutions for your plan.
You can evaluate and modify your plan continually as your life evolves.