Planning and getting ready for retirement is a big step that needs attention. Whether
you want to join a retirement community, buy a vacation home, or catch up on golf, it’s
exciting to imagine how you want your retirement years to look.
Before you map out what you want to spend your retirement savings on, you need to
understand how and where you can best maximize those savings. Once you identify the
right combination of investment vehicles for your goals, you’re one step closer to the
retirement of your dreams.
Here are some types of retirement plans for you to consider.
Traditional Pension Plans: A Dying Breed?
Traditional pension plans, also known as defined benefit plans, provide a specified
monthly benefit at retirement. Contributions are made and managed by employers and
paid out when an employee retires or changes jobs, or if the company dissolves.
However, pension plans have been declining in popularity due to their high cost and
complexity for employers. As of 2022, only 7% of private industry, nonunion employees
had access to a pension plan. Pensions once offered security in retirement. For many,
that security now needs to be found elsewhere.
401(k) Plans: The Modern-Day Staple
401(k) plans have become the go-to retirement plan for many employees. This type of
employer-provided defined benefit plan allows you to contribute a portion of your salary
to a retirement account with certain tax advantages.
There are annual contribution limits, but you may be eligible for catch-up contributions if
you’re over 50. This is a useful option if you were unable to maximize contributions
during your early working years. And if you want to contribute more than the maximum,
watch my video to learn the four things you need to do first.
401(k) plans allow employees increased freedom to choose how retirement savings are
invested. Additionally, employers frequently offer to match a percentage of
contributions, increasing the appeal of this retirement savings vehicle.
IRAs: Traditional vs Roth
There are several types of 401(k) plans, but the most common are Traditional and Roth
IRAs. Choosing which of these retirement savings strategies is right for you depends on
your tax strategy.
Traditional IRAs allow for tax-deductible contributions with taxes paid upon withdrawal.
Roth IRAs, on the other hand, are funded with after-tax dollars. This means that
withdrawals in retirement are tax-free, providing a different approach to retirement
planning.
Getting your taxes paid and out of the way as soon as possible may not be a good
enough reason to choose a Roth IRA. Start here to learn which plan is right for you.
Retirement Planning for Public Sector and Non-Profit Employees
With the diminishing popularity of pension plans, retirement planning looks different for
those without traditional employers.
403(b) and 457 plans are employer-sponsored retirement savings options for specific
groups of employees. Various types of 457 plans are most commonly offered to non-
federal government workers or top executives of nonprofit organizations. 403(b) plans
are typically provided for non-profit and public school employees.
These plans are similar to traditional 401(k)s and feature tax advantages, along with
contribution limits.
SEP and SIMPLE IRAs: For the Self-Employed and Small Businesses
Saving for retirement is often more challenging for those who are self-employed or own
a small business. Thankfully, there are unique retirement saving plans that can help you
plan more effectively.
Simplified Employee Pension (SEP) plans are designed for self-employed individuals
and small business owners. They allow for higher contribution limits than traditional
IRAs. Savings Incentive Match Plan for Employees (SIMPLE) IRAs are also for small
businesses. They offer a simpler alternative to 401(k) plans.
Both SEP and SIMPLE IRAs provide tax advantages. However, they differ in terms of
contribution limits and employer matching rules. Knowing which option is better for you
is a crucial step when planning for the success of your retirement and your business.
Other Considerations in Retirement
Whichever options are available, it’s important for you to consider how to supplement
your retirement income.
If the market slows after you retire or if inflation continues to rise, your retirement
savings will have less purchasing power. It’s also wise to plan for healthcare needs,
which typically increase as you age. Consider how these strategies could provide
additional security to your retirement years.
Annuities can provide a steady income stream in retirement. These contracts with
insurance companies guarantee payouts over a certain period.
Social Security has traditionally been a crucial part of most retirement plans. With it,
retirees have an income base that adjusts with inflation. However, Social Security funds
are projected to run out in 2037. It’s estimated that taxes will still cover a percentage of
traditional benefits, but legislative change is needed if Social Security is to remain a
reliable source of income in retirement.
HSAs and Long-Term Care Insurance can both be effective strategies when planning
for future healthcare needs. Saving specifically for an assisted living facility or
caregiving expenses can help you plan against outliving your retirement savings.
Conclusion: Starting Early and Staying Informed
Getting an early start on retirement planning can make a significant difference. The
more time you have to save, the more your savings can benefit from compounding
interest.
Staying informed about retirement plans is equally important. Some strategies may be a
better fit for your early years but need to be adjusted as you get closer to retirement. As
you plan and save, make sure your retirement strategy fits your goals.
It can be terrifying to try to plan your retirement and navigate the “what ifs,” but
Caviness Wealth Management is well-equipped to help you plan effectively. If you’re
ready to find out what your plan can do for you, we’re ready to help. Connect with us on
LinkedIn, or give us a call at 972.499.8273.
You can also book a complimentary meeting to start your financial journey here:
Schedule a Meeting.
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