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Regardless of how old you are now, you should be preparing for retirement. Lifespans are increasing, and overall, people are living longer than ever before. That means you need to plan and consider all available retirement plan options so you have the money needed to support you even if you live to be 100.
It might seem obvious, but a surprising number of people don’t do enough to plan for retirement. In fact, 36% of all Americans over the age of 65 are completely dependent on Social Security to support themselves.
That’s a worrying statistic, but the good news is that there are plenty of retirement plan options you can start using right now to ensure that you have the money you need to retire when the time comes. Your best bet is to think of Social Security as a supplement to your primary source of income.
Check out the following retirement plan options, their requirements, and make a plan to secure your financial future today.
Employer-based Retirement Plan Options: 401K or 403B
The first kind of retirement plan to consider is the 401K or 403B plan. Many employers offer a 401K plan to their employees and provide matching funds. The funds are contributed on a pre-tax basis, which means you will have to pay taxes on the money when you withdraw it.
If you are self-employed, then you may want to open an individual 401K plan. You can contribute up to $53,000 per year (the limit is $18,000 for employer-provided 401K accounts) and up to $59,000 if you are over the age of 50.
403B plans work the same way as 401K plans but are typically provided to employees of non-profit organizations. 401K and 403B retirement plans allow employees to make catch-up contributions of up to $6,000 per year if they are over the age of 50.
Non Employer-Based Retirement Plan options: Individual Retirement Account
The Individual Retirement Account, or IRA, is another popular option. There are several kinds of IRA, some of which may be more suitable to your needs than others.
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- Those who are self-employed typically use the SEP IRA. You can contribute up to $53,000 per year. If you have employees, then you will need to provide a similar plan for those who qualify.
- The Simple IRA is a retirement plan available to employers with fewer than 100 employees. The employer may make unmatched contributions or matching contributions, and employees may contribute up to $12,500 per year as of 2017.
- A traditional IRA allows any person to contribute up to $5,500 per year to the plan, a number that increases to $6,500 over the age of 50. However, people who also have an employer-provided 401K may not be able to claim a tax credit if their income exceeds $71,000 ($118,000 for couples.)
- A Roth IRA allows you to contribute after-tax dollars and pay no taxes on withdrawals taken after you reach the age of 59 ½. The other primary difference between a traditional IRA and a Roth IRA is that there are no mandatory withdrawals at age 70.
If your employer does not provide a 401K plan, opening an IRA can be a good way to prepare for retirement.Check out your IRA options with WealthSimple.
Many government employees and some non-government employees have pension plans that provide them with guaranteed income after they retire. If you work for an employer who provides a pension plan, you can factor that into your retirement plans.
One important caveat here is that in some cases, government pension payments may impact the amount of Social Security you receive. If you are a government employee, make sure that you understand how your pension will factor into your retirement plans.
Annuity plans offer guaranteed income to retirees based on their contributions. There are several types of annuities to examine when considering your retirement plan options:
- Fixed income annuities are insurance plans for retirement, traditionally sold by insurance companies. You make a lump-sum donation to open the annuity and the company provides a guaranteed interest rate. The donations are pre-tax and you will pay taxes when you withdraw money.
- Fixed index annuities are tied to a stock index such as the S&P 500. They offer investors the chance to earn a higher interest rate when the index is up. There is traditionally a cap on the interest to protect the annuity holder when the market is down.
- A variable annuity’s interest rates are tied to underlying investments in the stock market. As such, they offer the potential for much higher earnings than fixed income or fixed index annuities, but they also are riskier because if the stock market has a major downturn, your income will be affected.
All annuity options typically include a surrender charge that will apply if you withdraw money early, and some may limit your ability to pass the funds left in the annuity to your heirs if you die. It’s important to read the fine print and make sure you know what you are buying with each of these retirement plan options.
Health Savings Account
Finally, you may want to consider a Health Savings Account (HSA) to help offset medical expenses. If you’re under the age of 50, you can contribute $3,350 annually, with a cap of $6,650 per family. You can contribute $1,000 more once you are over the age of 50.
There are typically penalties for early withdrawal. Once you reach 65, you can withdraw money for any reason if you pay taxes on it. If you use the money for retiree medical expenses, you will not have to pay taxes. You can even save receipts from when you were younger and reimburse yourself for those expenses out of the account.
The best part of having an HSA is that the money rolls over from year to year if you don’t spend it. In that way, it is like a traditional retirement account.
The Bottom Line
Planning for retirement requires more than simply reviewing your Social Security statements on a regular basis. For most people, Social Security alone will not provide sufficient income to allow you to cover your expenses in retirement.
If you’re unsure what you need for retirement or which retirement plan options are best for you and your family, then you might want to consider meeting with a financial planner or accountant to determine how to prepare for retirement. The more preparation you do today, the less likely it is that tomorrow will find you short of money when you need it most.
About the author – Troy Martin
Troy has been married for 27 years to his wife Shauna. They have six active children and they love to participate in many extracurricular activities including : boating, flying, mountain biking, hunting, fishing, horseback riding, and adventure motorcycling (pretty much whatever will get them outside).
Troy has a vast amount of experience in the following business sectors: medical, dental, manufacturing, retail, restaurants, construction, farming and ranching.
He is a shareholder in Cook Martin Poulson a Utah Accounting Firm.