Saving for retirement can be a difficult and stressful endeavor, but it doesn’t have to be. There are many different investment strategies you can take to have a comfortable retirement. Explore these options to see which one is the best for you.
Is a 401k or IRA Right for You?
Named for the section of the tax code governing it, a 401k is a type of retirement plan that lets employees save part of their paycheck prior to taxes. If you invest in a 401k, you choose a percentage of your income that will be deducted each pay period before taxes are taken out. Your employer may match the amount up to the allowed maximum matching percent. The money is invested in the 401k and managed, usually by a third-party company, until you retire and withdraw money from the account.
Pros and Cons
The funds you contribute are vested right away, which means you can withdraw them at any time. But it may take longer for the funds your employer invests to become vested. A 401k reduces the amount of income taxes you pay at the time of investment, but a much higher rate is tacked on when you withdraw the funds. You will also see fees for withdrawing funds early.
IRA stands for Individual Retirement Account and is a retirement savings option for working-age people. Like a 401k, it has certain pre-tax benefits, depending on the type you choose. But unlike a 401k, an IRA can be opened by anyone with an income, so it’s available to self-employed individuals and also non-working spouses when the household income taxes are filed jointly.
Pros and Cons
IRAs give people who work for small businesses and self-employed individuals a retirement savings option. Although the contributions aren’t taxed at the time of contribution, which lowers income tax, the limit for your yearly contribution is $5,500 if you’re under 50 and $6,500 if you’re 50 or older. The funds are taxed as income when you withdraw. If you withdraw the funds before age 59 1/2, you could be charged a penalty of 10 percent or more, in addition to the added income tax.
Pension & Social Security
A pension plan is money contributed by your employer into a pool of funds that will be paid to you upon retirement. Most government jobs include a pension plan that guarantees a retirement income after so many years of service. This payment is a set percentage of your earnings determined by the employer.
Social Security is a form of retirement plan that’s based on your overall earnings from all jobs you’ve held. Unlike a pension, which is solely based on earnings from one employer, Social Security considers your lifetime earnings for all employment, how many years you worked and what age you are when you retire. Social Security retirement payments max out at $2,687 per month if you retire at full retirement age in 2017, but can go as high as $3,538 per month if you wait until age 70 to retire.
An annuity is a financial tool that comes in a variety of options that can help you save for retirement.
Annuities come in many different shapes and sizes. Some examples are immediate and deferred annuities, whose names refer to the payout schedule for each.
Others types of annuities include fixed and variable annuities. Fixed annuities are tied to an index, while variable annuities allow for equity investment gains throughout their term.
Why an Annuity Might Be the Best Fit for You
An annuity can be a great option to supplement or replace other retirement plans. You may have had an emergency and had to cash out your 401k early or your employer’s pension pool may have dwindled, leaving you with little or no pension.
An annuity is a secure method of replacing a pension plan because it offers you a consistent guaranteed retirement income.
Annuities are a safe and secure choice because they provide tax benefits and offer a consistent retirement income, and you won’t outlive your money. You’re guaranteed to receive your payments for the period you designate and if you need to cash out the entire lump sum, you do have that option, albeit with a large penalty for withdrawal.
An annuity might also be the best fit for you if you’re planning on retiring soon, because it isn’t dependent on factors like how long you’ve worked for one company or if employer contributions are fully vested. You can start an annuity as close to your retirement age as you want without these worries.
There are lots of choices to make the closer you get to retirement, but there is no need to be overwhelmed. If you want to learn more about annuities, talk to a trusted advisor today.