So you’ve finally decided to start saving for retirement. The good news: It’s never too late to start. The bad news: Your employer offers a paltry savings plan, or worse, none at all.
Retirement planning can be fulfilling when you’ve got a solid plan in place, but frustrating when the career you’ll look to retire from in 10 to 20 years’ time doesn’t give back much in the way of savings. Many companies offer the standard 401(k), but do a poor job of matching what money you contribute to the fund. Unfortunately, employers of the stingy kind who don’t provide a retirement plan (or health insurance, or good salaries, for that matter) are a dime a dozen.
What is the Best Retirement Plan?
There are many different retirement plans out there. What’s great about them is that they can all serve you well in saving money for years to come.
The Individual Retirement Account
A list of the best retirement savings plans wouldn’t be complete without the inimitable IRA. IRAs are all about the tax benefits and come in two main varieties: Traditional and Roth.
The simple appeal of saving money in a traditional IRA is that it’s tax deferred, meaning that you don’t pay taxes on what you deposit until after you withdraw your funds for retirement. You can contribute to an IRA until age 70, and start withdrawing money at age 59 1/2 — withdraw before and pay a penalty fee. This can be avoided in some cases, like using your IRA savings when buying a house.
To recap — no taxes are paid on money invested in a traditional IRA until after withdrawal. With a Roth IRA, it’s the opposite. Here, you’ll be taxed first when depositing, but not when withdrawing. Another specific difference with the Roth version is that you won’t be penalized for the pre-59 1/2 withdrawal rule, but only for taking out contributions. Withdraw interest early, and there’s no fee.
Some financial advisers tout the rewards of a SEP IRA, or the Simplified Employee Pension Individual Retirement Account. SEP IRAs are great for the self-employed individual, or anyone looking for an auxiliary savings plan outside of work. According to Kerry Hannon of Forbes, you can contribute up to 25% of your net income to a SEP IRA.
The Solo 401(k)
There are variations on standard 401(k) retirement plans. The solo 401(k) is a good plan for people who freelance on the side and have little to no retirement plan options. Only self-employed people and their spouses are eligible for this solo savings option. According to Forbes, the contribution limits under a solo 401(k) are generous — up to $16,500 — and funds from a previous employer’s 401(k) can be rolled over into your new solo plan.
Generally issued through a life insurance provider, an annuity is another retirement savings alternative for you to consider. Here, the insured provides the insurer with financial resources to be invested and then paid back after the money you invest builds interest. You can choose a lump sum payment or a series of fixed payments.
Not every retirement planning option must be retirement-centric. Standard investment workhorses like mutual funds, stocks, bonds and treasury bonds can garner enough interest in the long run to supplement, or even finance completely, your retirement if done wisely. These types of investments are structurally basic: with stocks and bonds, you’ll place “stock” in their future with the money you invest. Becoming a shareholder, or part owner, can yield high returns with the higher the investment. As always, don’t go into investing blind — it’s suggested to consult with a financial professional first.
The High-Yield Savings Account
Money market accounts, certificates of deposit (CDs for short) and other savings accounts offer higher interest rates, usually when the account balance is high. If you’ve spent a few years earning interest off an investment, for example, try depositing some funds into 12- or 24-month CD, then, reinvesting those earnings into a new CD or other savings package. These trusted banking products work well on their own or as a supplement to another retirement savings account.
Retirement Planning of the Future
There’s always Social Security to fall back on, but as we’ve been learning, rising medical costs, unemployment and payout errors may lead to the demise of the program in the U.S. With the added negative trend of people not saving for retirement early enough, it’s important to begin saving now! Plenty of financial alternatives out there exist to make retirement planning an easy process.
With these tips in mind, even if your job offers an above average retirement package, don’t rely on an employer to decide how much you can or can’t save for retirement. By the time it comes to hang up your working hat, a gold watch and a pat on the back aren’t enough currency to get by in life when you’re older than 65 and your bank account is still zero.