Choosing The Right Retirement Plan So You Can Start Saving For The Future
Your retirement may be decades away, or it might be right around the corner, but one thing is for sure: It’s important to start saving today for retirement to make sure you have enough money to live on tomorrow.
Knowing how to plan for retirement -- and choosing the right retirement plan -- can depend on many factors, like your savings habits, your financial needs, and your income. But here’s something many people don’t consider: the type of job you have can play a big role in finding the most compatible retirement plan.
Different professions often mesh more seamlessly with specific retirement accounts, so it’s important to understand that as you progress in your career, your savings can build over time in the right account.
What Types of Retirement Accounts Are There?
For retirement planning, the abundance of savings and investment options means there’s no shortage of choices. But it can also become a bit overwhelming to someone new to retirement saving without knowing the similarities and differences between many retirement plans.
Here are some common retirement savings options:
401(k)s and 403(b)s
One of the most popular and commonplace retirement plans is the 401(k), since it’s often offered from your employer. With an employer-sponsored 401(k), you can elect to have a certain portion of your paycheck withheld towards your account, and in many cases, your workplace will match the funds you deposit. So, if you set aside 5% of each paycheck, and your employer offers 100% fund matching, your retirement contributions are effectively doubled.
A 401(k) allows for generous deposits into your account. In 2020 and 2021, you can have up to $19,500 of your pretax income set aside into your account, with an added $6,000 if you’re 50 years of age or older. The 401(k) contributions earn interest tax free, and are only taxable upon withdrawal.
A 403(b) is very similar to a 401(k) but is set up as a retirement option for nonprofits, schools, or religious or governmental groups with certain tax exemptions in place.
An IRA, or individual retirement account, is another popular way to set up tax-advantaged savings for retirement, with emphasis on the word individual, since it allows you to manage your own contributions in a myriad of ways.
An IRA is not one account in itself, per se, but rather one savings umbrella under which you divide your assets into stocks, bonds, laddered savings packages, mutual funds, and more. There are a few types of IRAs that can grow your savings tax-free, but each one differs slightly. Here’s what to know:
- Traditional IRA: With a standard IRA, you can make a tax deduction for the contribution you make, which can also grow tax-free until you withdraw them. (Just remember that if you withdraw your IRA funds before retirement, you could be subject to penalty fees.) In 2020 and 2021, traditional IRA contributions are limited to $6,000 for the entire year, or $7,000 if you’re 50 or over.
- Roth IRA: Contributions made to a Roth IRA are after you’ve paid taxes from them (your net income from your paycheck), can grow tax deferred, and be withdrawn tax-free after retirement (age 59 ½ and above) in most cases. Roth IRA contributions limits are also $6,000 standard, $7,000 for 50+.
- SEP IRA: SEP, or Simplified Employee Pension, is another version of the IRA designed for small business owners and self-employed contractors. Generally, when a business is minimally staffed, an SEP IRA is easier to set up and manage than a regular 401(k) would be for a larger company.
Annuities take retirement saving into investment territory, where the contributions you make today will grow into a payout stream when you withdraw at retirement. Deferred annuities, like 401(k)s and IRAs, offer tax-deferred growth until withdrawal, and give account holders control of their assets -- so if you’re not in need of your funds, you’re not obligated to withdraw them.
Since annuities are an investment vehicle, it becomes important to know who you’re investing your money with; an annuity is still a risk-taking venture that could lose money instead of earning it.
Health Savings Accounts
A specialized Health Savings Account (HSA) can help pay for qualified out-of-pocket medical expenses (like co-pay expenses, medications, dental work and alternative medicine) if you have a high-deductible health insurance plan but have trouble meeting your deductible costs before your provider picks up your expenses.
An HSA can also serve as an ideal retirement savings plan, too. Regular contributions to your account build over time, giving you ample funds to pay for medical expenses after retirement or to supplement Medicare coverage.
If you work in the government or public sector, you may have the luxury of a fully-funded pension plan to look forward to. Unlike other retirement plans that require funding from you, the employee, with a pension plan you simply need to put in your time, retire, and receive regular payments from your employer post-retirement.
There are two significant cons to pensions, however: they’re increasingly rare in the private and corporate industry, and they’re generally not adjusted for inflation, so the payout you begin received at, say, 65 years old, will be the same in 10, 20 or 30 years’ time. Like Social Security, a pension plan may not be enough to survive on in retirement, so diversifying your savings income streams with a tax-deferred account is strongly recommended.
Let Your Career Determine Your Retirement Plan
If you work your entire life at a career with the goal of retiring, shouldn’t your career, then, determine the type of retirement plan that’s best for you? Reiterating, the profession you work in may lend itself better to a certain retirement savings account that can maximize your investment better because it works to your strengths, the amount you earn, and the way you strategize your savings according to the work you do.
Here are some career-specific retirement account suggestions you may want to consider:
- Key retirement option(s): Permanent life insurance policy
While most who serve in the Armed Forces or public safety will retire with pensions, it may not be enough to live on, since a pension cancels out contributions to Social Security. Roth IRAs and Thrift Savings Plans are also great choices, according to financial advisor Scott Tucker.
But Tucker says that a permanent life insurance policy is the best retirement plan for military, safety and law enforcement personnel that sets up the transition to retirement and your retirement itself, since it can act similarly to a tax-savings plan like an IRA.
“Using this tool as a portion of a financial plan works well for military because they need the life insurance coverage anyways due to the myriad of benefits, income, and risks that come with being a soldier,” Tucker says. “And they get similar long-term and tax-free growth options without limiting their ability to use it based on a certain age or reason.”
- Key retirement option(s): Solo 401(k)
U.S. residents living and working abroad still need to save for retirement, and still need to pay the IRS income taxes, so a retirement account with tax deferments that give you a financial advantage will suit you best.
A solo 401(k) fits this bill nicely because it allows you the choice of making tax deferred or exempt contributions, similar to a traditional plan or Roth IRA, essentially the best of both of worlds. Of course, you’re still a U.S. citizen, so don’t overlook other conventional retirement plans, especially ones offered by your employer.
- Key retirement option(s): 403(b) and Roth IRA
Retirement plans for teachers can vary, and sometimes, there’s not one magic account that can do it all. You’ll need to diversify and mix up the way you save. You’ll have a minimum of a pension to retire on, though many educators can opt for an additional retirement account, like a self-funded 403(b) or Roth IRA. That way, you can get a tax deduction on contributions to the former, and tax deferment on withdrawals from the latter. Experts recommend contributing 80% of your retirement savings to a 403(b) and 20% to an IRA.
- Key retirement option(s): 401(k)
Nurses are like teachers in that they’re eligible for pension plans, but they may not stay at the same hospital or healthcare institution long enough to build up enough of a post-retirement income.
So, a tried-and-true account like a 401(k) is a flexible and solid retirement plan for nurses, since you can keep contributing to it and rolling your funds over wherever your job takes you. Focusing on a 401(k) becomes a nice supplement to a pension plan or Social Security benefits that sets up a lucrative post-retirement income.
Self-employed entrepreneurs/sole proprietors/small business owners
- Key retirement option(s): A structured mix of 401(k)s, Roth IRAs, and other accounts
If you’re a small business owner or self-employed professional going solo, you have a few challenges ahead of you. You need to find funding to start up your business, you need to generate income from it, and you need the ability to save for retirement. Thus, there really is no one-size-fits-all account that does the job. Some financial experts suggest creating a structured account with several retirement options -- each one an arm that serves a different financial function.
“Retirement accounts can be structured for far greater investment flexibility and to include many more features than are available through traditional channels,” says retirement plan consultant Bernard Reisz. According to Reisz, qualified plans, like 401(k)s or profit sharing, can include Roth sub-accounts, after-tax contributions, in-plan rollovers, in-service distributions, and a loan feature all in one. “All plans can be structured to invest in alternative assets, such as real estate, private lending, tax liens, private placements, and many others,” he says.
Real estate agents and realtors
- Key retirement option(s): A mix of IRAs, 401(k)s, and other investment options
Real estate professionals often travel the self-employed route, as well, so their retirement planning options need to match a similar approach, preferably one with tax benefits. To that end, it’s no surprise that a traditional or Roth IRA, a 401(k) or Solo 401(k), a Simplified Employee Pension (SEP), or making other investments is the route to take.
Retirement plan for real estate agents should be based on the nature of your employment. If you’re a self-employed agent, a Solo 401(k) puts you in command of your own contributions with the necessary tax deferments.
Go the IRA route, and you’ll need to look at the amount you want to contribute, and if it’s employer sponsored. For instance, a traditional or Roth IRA allows contributions up to $6,000 (pre-tax contributions for traditional, tax-free deductions for Roth), but a Simple IRA more than doubles that limit, capping out contributions to $13,500 for 2020. Simple IRAs may also include employer matching if you work for a brokerage firm or real estate agency.
For brokers with a staff of agents, employees and other real estate professionals, experts recommend the Simple IRA -- plus the tax-deferred Keogh pension plan -- since they allow for employer contributions that can begin immediately after they begin employment.