Your retirement savings strategy is a really important part of retirement preparation. Although it may seem like “just saving” using a workplace retirement account, or a target date fund based on your retirement timeline, makes sense – your unique goals are likely better served by a carefully constructed plan.
Not all savings vehicles are created equal, which means it can pay to diversify your investments, and leverage different tools to help you reach your goals. Your first step is to gain a deeper understanding of what options are available to you – and how they can be used. Below, I have outlined four different savings methods that you can incorporate into your comprehensive strategy.
Workplace Retirement Account
In lieu of traditional pension plans where the employer contributes funds to their employees’ shared retirement plan, many modern-day employers offer their employees the option of a contribution plan. Most often you’ll have the option to enroll in a company 401(k), but depending on where you work, you might also see a 457 Plan, or a 403(b).
These accounts allow employees to take charge of their retirement savings by allotting a certain percentage of their income to be funneled into their retirement account each month. This plan relies on the proactive nature of the employee and redirects the responsibility for retirement planning. The funds you contribute to the account are pre-tax, which can help to lower your taxable income right now. You will, however, have to pay income tax when you withdraw the money in retirement.
However, many times 401(k) plans aren’t just funded by employees. Many companies offer an employer match, which will match the funds you contribute to your account up to a certain percentage. That percentage usually ranges from 4%-6% depending on the company. In order to qualify for the match, employees must also reach a contribution threshold. It’s important to know your company policy, so that you can take advantage of any matching contributions available to you.
Open an IRA
An Individual Retirement Account, or IRA, is a popular savings vehicle for many soon-to-be retirees because of the flexibility it offers in investment options. While there are many variations, there are two main types of IRAs that you should be aware of: Traditional and Roth.
What is a Traditional IRA?
A Traditional IRA is most similar to your workplace 401(k). You contribute money on a pre-tax basis which can help lower your taxable income for the year. Keeping an eye on your tax bracket is a great way for being proactive about your tax strategy while also saving you money. When you take your required minimum distributions (RMDs) in retirement, you will have to pay income tax on the money from this account.
Many people choose to open a Traditional IRA because there is no income threshold to contribute like there is with a Roth IRA. This method also allows you to automate your contributions so you are growing money in your account each month. It is important to know that the contribution limit for a Traditional IRA is $6,000 ($7,000 if 50 or over) in 2019, that’s an increase of $500 from the $5,500 limit in 2018, so be sure to take advantage of that if you can.
What is a Roth IRA?
Many people love contributing to Roth IRAs because of the tax benefits it offers in retirement. With most retirement accounts, you avoid paying taxes when you contribute and have to pay taxes when you retire. This method could hurt you and raise your tax bracket in retirement which could make your tax bill much higher.
When you contribute to a Roth IRA, you do so with after-tax dollars. This means you pay taxes on the money you contribute, but you do not have to pay taxes when you take the money out in retirement. Roth IRAs also do not have the RMD stipulations that a 401(k) and Traditional IRA do, allowing you to save for longer and only withdraw money when you need it.
There are income limits for contributing to a Roth IRA. For 2019, if you are filing single the limit is $137,000 and if married and filing jointly the limit is $203,000. These limits have increased since last year which is important to know because you may be eligible to contribute.
It is important to see how an IRA could work into your retirement saving strategy. Talk with your financial advisor about your specific options.
Remember Your Health Savings Account
A retirement savings vehicle that often flies under the radar is health savings accounts or HSA. These accounts are designed to help you cover the cost of medical expenses. Often accompanied by a high-deductible medical plan, HSAs allow you to contribute pre-tax dollars to the account. The money will also grow tax-free and will remain tax-free when withdrawn as long as the funds go to cover medical costs.
Health is one of the most important (and expensive) things to consider in retirement. Even a healthy couple is estimated to spend upwards of $250,000 on medical expenses alone in retirement! With such high expenses, saving up for them would be a great idea and that is where HSAs come in handy.
HSAs roll over each year, so you can continue to save money in the account as long as you have it open, which is really helpful when saving for retirement. You know you will use the funds eventually, so why not set yourself up and start saving for your health today!
Retirement saving is all about sound investments and one key to achieving that is through diversification of your portfolio and assets. It can be tough for many people to try their hand at the stock market, but there are so many paths you can go down. It is important to find and select the path that matches your risk tolerance and helps you achieve your goals. There are many options, but here are a few to help get you started:
- Mutual funds
- Real Estate
Talk with your financial advisor about your goals for retirement and how traditional investing could help you reach them.
Saving for retirement is a journey, one that takes discipline, strength, and creativity. Armed with knowledge, you now know that it isn’t just about saving, it is about how you save for retirement. If you want help thinking through your options for saving for retirement, schedule a call with us today!