Are You Using the Right Retirement Plan?
by Steve Lewit
There are many types of retirement plans available to residents of Buffalo Grove, IL, so how do you know if you’re using the right retirement plan?
Retirement planning has always been difficult, but these days it has only become more challenging. In addition to growing uncertainty related to receipt of Social Security payments, the ever-expanding array of retirement options available can make it difficult to decide which plan is right for you.
So how do you know which retirement plan is right for you? Let’s take a quick look at some of the most common retirement plans.
Types of Retirement Plans
This article will examine two of the most common retirement plans and some commonly used retirement vehicles, all of which might play different roles in your overall financial plan.
When available, one of the best ways to begin building your retirement savings is through a 401(k). Traditional 401(k) accounts grow tax-deferred, while a Roth 401(k) is a way to make contributions after taxes have been taken out.
Plus, many employers will match a portion or all of what you contribute to your account. If you haven’t already, be sure to ask your employer about how much they are willing to contribute to your 401(k) each year.
Another advantage of both types of 401(k)s is their high contribution limit. In 2020, the limit for employee contributions is $19,500 per year for individuals who are under 50 and $26,000 per year for individuals who are over 50. Because of high contribution limits and the possibility of matching contributions, a 401(k) can often grow quite quickly.
The other most common type of retirement plan is an Individual Retirement Account (IRA). For many people, especially those with “non-traditional” employment status (contractors, gig workers, entrepreneurs, etc.), IRAs offer an attractive option for building wealth and limiting their tax obligations.
There are two primary types of IRAs: traditional IRAs and Roth IRAs. Both of these accounts have an annual contribution limit of $6,000 ($7,000 if you’re over 50). However, the most notable difference between these plans is not if, but when you are taxed on your contributions. With a traditional IRA, you will be taxed when you withdraw from your account in the future. Additionally, as of 2020 and passage of the SECURE Act, you must begin making minimal withdrawals at age 72. On the other hand, a Roth IRA assesses taxes at the time of contribution but will have no additional taxes or minimum withdrawal requirements down the road.
401(k), Roth 401(k), IRA, and Roth IRA retirement plans are common, basic retirement plans. However, many people save for retirement using additional vehicles that complement their basic retirement plans.
On the conservative end of the savings spectrum, vehicles such as annuities, whole life insurance, bonds, and certificates of deposit (CDs) can help you steadily build your wealth over time. These options offer greater principal protection, but less opportunity for growth.
On the riskier end of the spectrum, many individuals also invest in stocks, real estate, mutual funds, commodities (such as gold), and even cryptocurrencies. These vehicles can offer greater growth possibility but do so at the expense of principal protection.
A healthy portfolio typically includes a diverse assortment of investments. The mix of investment vehicles that makes sense for you will depend on various personal details, such as your savings goals and your willingness to tolerate risk.
So, Which Retirement Plan Makes the Most Sense for Me?
There is not one universally “best” retirement plan that will be right for everybody, but there are a few basic things you should probably keep in mind. If your employer offers a 401(k) match, this is where you should begin your savings. That’s because matching contributions can dramatically improve your ROI without adding any risk to your portfolio, and essentially amount to free money.
However, if your employer doesn’t offer matching contributions, a 401(k), even if offered, might not be best for you. That’s because you may encounter limitations in terms of available investment options, hidden fees, and inaccessibility of funds. Consequently, you’ll need to do some research in order to determine whether a 401(k) is indeed a better fit for you than an IRA.
You should also consider opening an IRA if you are maxing out your 401(k) and have additional savings you’d like to invest or if you don’t have access to a 401(k).
Individuals who are younger and/or individuals who anticipate they will be earning notably more in the future should probably select a Roth IRA, when possible. On the other hand, individuals who are worried about paying taxes upfront or are nearing retirement may be better off choosing a traditional IRA.
As you will quickly discover, there are seemingly countless variables that impact your ability to retire. If you have weak or limited healthcare coverage, for example, you may also want to consider designing a plan that minimizes the cost of early withdrawal (enabling you to pay for sudden emergencies). Needing to pay for other large expenses—such as a bigger home, college for your children, a major trip, or anything else—will also impact how you save and what you save with.
The bottom line: nobody can tell you what plan is best until they take a closer look at your unique financial picture. But diversifying your portfolio, being conservative with your spending and aggressive with your saving, maximizing employer contributions, and minimizing tax obligations are all things you can do to put yourself in a better position to retire.
SGL Financial and Your Retirement Plan
Knowing which retirement accounts are right for you can be difficult, let alone determining how those accounts will fit into your larger retirement savings strategy and financial plan.
If you have not yet begun planning for retirement, consider working with a fiduciary financial planner like SGL Financial. SGL Financial takes a holistic approach to financial planning, enabling you to both protect and grow your wealth over time—even if you are unsure what the future has in store.
For those who already have a plan in motion, revisiting your retirement plan at least once a year can help keep your strategy consistent with your reality. Employment changes, new investment opportunities, changing rates of returns, and other new developments are just a few of the reasons changing course might be the right idea.
Working with a team member at SGL Financial can set you on track to retire by your target date, keep you on track, and support you through retirement. The fiduciaries at SGL Financial specialize in developing holistic plans guided by experience, knowledge, and an appreciation of each individual client, that you can trust will guide you to your goals.