In developing your plan to meet retirement funding, you'll need to draw together your sources. This primer will get you started on many of the main sources of funding when you retire.
The longer the runway you create for retirement savings, the smoother the landing. If you still have runway left before you plan to retire, you’ll have an easier time building powerful retirement funds from several sources of income, such as traditional IRAs and other retirement accounts. But even if you’re closer to departure, savings can still fund the voyage. After all, you may have a pretty long flight in retirement — some of the money can be left to grow and used as cash flow down the road. Some of them might not be practical considering where you are relative to your retirement age — read How to Catch Up With Retirement Planning if you're starting late — but here are 10 ideas to consider.
Have you ever worked for an employer that offered one? Especially if you’ve ever worked for a government entity, school, or park district, you may have left something behind. Alternatively, if you still have time to make career changes, consider jobs that offer a pension. It’s very hard to get that certainty of income from your own savings.
Unquestionably, start saving here for retirement. You’ll have two issues to resolve: how much to contribute, and should it be pretax (reduces your taxable income — the traditional way) or after-tax (a Roth 401[k]).
Contribute enough to 401(k)s to get the full employer match. It’s free money, and no other investment gives you such instant return on your money.
You’re probably better off with the Roth IRA version, if your employer offers it. You can contribute more — $19,000 + $6,000 more over 50 — than to an individual Roth and still have that individual Roth if your income is under the cut-off. When you withdraw the money, there’s no tax. Since for most people the retirement account can grow to be their largest source of retirement income, aim to collect that income tax-free.
If you have few other tax deductions or can’t afford to contribute otherwise, however, go with the traditional 401(k). All employer match will go into the pretax version, and you’ll pay tax on withdrawal.
Should you contribute more than the minimum match? If you’re eligible for an individual Roth (or traditional IRA), fund that first. If you can save more, go back and increase contributions to the workplace account.
These are similar to 401(k)s. If you work for a nonprofit, you may have one. Investment choices may be limited, and an employer may put the match into an annuity account. When you leave an employer, you can rollover the account into an IRA, but you’ll have to liquidate the investments. You can’t transfer them in-kind, unless it’s to another 403(b).
Deferred Compensation Accounts
Your employer may offer these to shelter more of your savings. These act much like a 401(k), usually without an employer match. When you leave employment, however, you may be forced to withdraw the entire account and pay taxes on it in that same year. The account won’t be quite as substantial as you might think because of the serious tax hit in one year. Before you contribute, be certain you understand exactly what the distribution requirements and taxability will be.
These do offer a tax deduction. Unfortunately, the income limits are low; if income is low enough to contribute, you might not benefit much from the tax deduction (and might struggle to find the money). All money will be taxable at retirement, and you can roll over your retirement accounts from former employers to consolidate funds. You have a range of investments—individual stocks, bonds, and mutual funds.
These have a higher income limit for contribution, but no tax deduction. But you pay no tax on it when you withdraw during retirement, and you can withdraw your contribution (but not the earnings) at any time. You’re also permitted to withdraw for education, serious medical issues, or $10,000 for a first home, but the rules are complex, so do your research.
Even small or late-started Roths are worthwhile — they’re a lump sum you can withdraw if necessary. Need $20,000 of dental work? With a Roth, you can withdraw that money with no tax; from an IRA or 401(k), you’d need to withdraw that amount plus the amount to pay taxes on it.
Health Savings Accounts
Consider funding an HSA but not using it — pay out of pocket. Let the money grow tax-free until retirement, when it can be withdrawn tax-free to pay for medical costs (including long-term care insurance premiums). There’s no obligation to reimburse yourself for bills when incurred — save documentation and submit them once you’re retired. Scrutinize investment options and try to house most of your HSA at a brokerage that offers stocks or mutual funds; bank interest doesn’t offer much growth.
Social Security Benefits
Take it as late as possible, up to age 70, as long as your health is reasonably good. There's no completely safe investment that will pay off at the rate that Social Security increases per year of delay.
Brokerage Accounts for Stocks, Bonds and Other Equities
It’s difficult to build significant wealth contributing to retirement accounts alone. These accounts give you the maximum choice of investments and can give you a war chest for funding an annuity, real estate, travel and medical care. You can sample BetterInvesting's resources for free
to help you understand the best types of long-term investments for building these accounts.
If you plan early retirement (before 55 or 59½), you won’t incur any penalties for withdrawal from these accounts. Choose investments with some regard for taxes — capital gains rates are usually less than income rates, but a huge gain will be taxable. Nice problem to have.
Annuities for Steady Cash Flow
These are fraught with pitfalls, but in the simplest form (a single premium income annuity) you give an insurance company a lump sum to buy yourself a pension — usually higher income than you can safely withdraw from a portfolio.
Maximize your savings opportunities and fly through retirement.
Danielle Schultz, CFP, is a fee-only financial planner and principal of Haven Financial Solutions in Evanston, Illinois.
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