Are you planning for your retirement, but aren’t sure what you should be doing to prepare yourself financially?
Don’t worry; it’s easy to become overwhelmed by all of the things that go into planning and preparing for retirement, but that doesn’t mean that you have to be. This article will go over several retirement strategies that you can follow to make the most out of the time you have and prepare yourself financially for your upcoming retirement.
1. Contribute the Maximum to a 401(k)
A 401(k) is a savings plan that is sponsored by an employer and allows employees to save some of their paycheck pre-tax and place it in the account, to be withdrawn later with taxes.
As far as retirement investment strategies go, contributing the maximum to a 401(k) may be the most commonly used strategy among the American workforce today for investing in their retirement, as it allows employees to save directly from their paycheck and can be a simpler process for saving money than moving money between bank accounts. The goal of the 401(k) is to save money to be used as income once you have retired and is often the first account people use to save for their retirement.
Keep in mind that you cannot access your funds before you are age 59½ or you will incur a penalty!
2. Open an IRA or Roth IRA
An individual retirement account (IRA) is an account you can use to save and invest your money for retirement. There are a few different types of IRAs, but for now, we’ll focus on the difference between a traditional IRA and a Roth IRA so that you can get an idea of which would suit you better.
The main difference between a Roth IRA and the traditional IRA is in the way the accounts are taxed. A Roth IRA allows you to make contributions post-tax, while traditional IRA contributions are made pre-tax. So, a deciding factor for you may be whether or not your tax rate during your retirement will be lower than it is now.
If it will not be lower, than a Roth IRA may be the wiser choice since you can pay the taxes now and have tax-free distributions later when you have a higher income tax rate during retirement. With a traditional IRA, it is also important to consider that because contributions are made pre-tax, the distributions from this account will be treated as income and as such is subject to income tax.
One thing that you should know about a traditional IRA is that you cannot make any more contributions after you are age 70½ and there are early distribution penalties if you choose to withdraw while you are under the age of 59½!
3. Open a Health Savings Account (HSA)
A health savings account, or HSA, is one of the best retirement strategies you can employ. An HSA is a type of savings account that allows you to put aside money on a pre-tax basis to pay for certain qualified medical expenses. You may only contribute to an HSA if you are enrolled in a High Deductible Health Plan.
One of the best things about an HSA is that the money you save rolls over every year if it isn’t all spent, so you can continue to save more and more each year.
According to healthcare.gov, for the 2020 plan year, the minimum deductible for a High Deductible Health Plan will be $1,400 for an individual and $2,800 for family coverage. If you have an HSA with HDHP in 2020, you can contribute up to $3,550 for individual coverage or up to $7,100 if you have family coverage. This means that if you put enough money into your HSA in 2020, you can cover the entire deductible with untaxed dollars, saving you much more money than if you were to pay for your deductible with post-tax income.
Something you should remember is that the money in an HSA rollover year to year, so even if you don’t think you’ll have any health expenses now, saving up your income now can prepare you for any health expenses you may incur after retirement.
4. Get an Annuity
An annuity is a contract that is made between yourself and an insurance company in which you agree to make either a lump-sum payment or a series of payments to the insurance company in exchange for regular disbursements in the future, often after retirement.
The point of an annuity is, much like a 401(k), to provide some income during your retirement. Also, much like a 401(k) and traditional IRA, you cannot access the funds of your annuity until after age 59½. The good news about an annuity is that you can tailor it to suit your specific needs, and there are many different options that you can use to provide the amount of income that best suits your needs throughout your retirement.
Keep in mind that with an annuity your disbursements are subject to income tax and your contributions do not reduce your taxable income!
5. Don’t Exit Stocks Too Soon
Another of our strategies for retirement, keeping your investments in stocks during retirement is a good thing. People are living longer, and over time the opportunity for high returns can be beneficial during retirement when most of your money is coming out of your savings.
Taking a risk assessment can help you to determine how comfortable you are with risk and allow you to get a good idea of what a market downturn can look like in your portfolio. This way you can determine your comfort and how much you should keep in stocks.
6. Delay Social Security Benefits
Delaying your Social Security benefits is a good idea for those who don’t need cash upon immediately retiring and would prefer a larger benefit later. For every year you delay benefits after full retirement age, there is a permanent increase in benefits every year between retirement age and age 70. This delay can help you to fund your retirement longer if you can afford the initial delay in benefits.
7. Develop a Retirement Plan Withdrawal Strategy
The last of our retirement savings strategies, developing a strategy for when to make withdrawals can help you to make the most of your investments while minimizing the impact of the taxes that you will have to pay upon withdrawal of your funds. Knowing where to withdraw from and when is important and can often seem complicated and difficult to understand if you don’t have a knowledgeable guide who can help you. A tax advisor can best assist you in coming up with a sound withdrawal strategy for your retirement!
Conclusion
These seven retirement strategies are the best options for you to make the most of your money and save up before you retire. Don’t forget to review these strategies with a financial advisor so that you can come up with a good strategy to invest and save that will work best for your needs.
Everyone is different, so be sure that you understand exactly what you expect your needs will be during your retirement and review them with your advisor!