I have had the opportunity to talk to many people about their financial goals. Some are young and just starting their career. Some are older and starting to realize that their working days are almost over. Regardless of age, financial standing, or political views, the one thing that everyone wants to discuss is retirement. Most people would jump at the opportunity to retire tomorrow if they had the ability. However, even people who love their job and leave work fulfilled every day know that at some point they will stop working.
Planning for retirement is important to everyone because they want to be able to retire when they decide and to continue to live the lifestyle they have grown accustomed to. Social Security alone is not enough to make that happen. Unfortunately, you will never be able to save enough money in the bank throughout your life to retire and keep your same standard of living. Savings accounts usually don’t pay enough to keep up with inflation costs. That means that your money in a savings account is less valuable each year. So… what do you do?
Retirement savings are usually going to consist of a mix of stocks and bonds held in retirement accounts. Which account is right for you? That’s what I want to focus on today. I want to help you understand the best way to maximize your retirement savings and minimize your tax bill. Let’s assume you work for a company that has a 401(k) (or other workplace retirement plan) and figure out what strategy works for the majority of individuals. Where to begin?
401(k) up to Company Match – Does your 401(k) offer a company match? Some plans offer a 100% match up to a certain percent of your contributions. Some offer 25 or 50% matching on contributions. Always take advantage of these matching programs. A 100% match means that you double your money just by making the contribution. Even a 25% match is more than double what you can expect to earn from investing.
Roth IRA – Want to save more? Consider opening a Roth IRA. This account won’t save you money on taxes now, but the account will never be taxed in the future. Another advantage includes the ability to choose your own investments in an IRA. If the 401(k) doesn’t offer a diverse set of low cost funds, you can use this account for those investments. Finally, 401(k)’s have annual fees that can be higher than 1%. Most IRA’s have no fees so that will allow you to save more as well. Consider a Backdoor Roth contribution if your income is too high for regular Roth contributions.
401(k) – Did you max out your Roth contribution for the year? Head back over to your 401(k) plan and max out your contributions.
Brokerage Account – Have you maxed out your Roth and 401(k) and still want to save more for retirement? Go ahead and open a traditional brokerage account to save more. Just make sure to consider your asset location and possible tax savings by having investments in this account along with retirement accounts.
For those of you without a workplace retirement plan, a Traditional or Roth IRA is your first step. Everyone’s situation is going to be different so make sure to consult with a professional before following this advice. However, you will almost certainly need to invest in stocks and bonds to have a successful retirement. Make sure to utilize the tax savings and employer matching from retirement accounts to save as much as you can. The important thing to remember is to start as soon as possible. Saving in any account is better than waiting until you are older. It only gets harder as retirement age gets closer.
Mike Zeiter, CPA/PFS