There was a time when you’d have a pension at the end of your working years. Now, pensions are not as common, though you can certainly analyze your retirement strategy.
Not all retirement strategies are the same.
In fact, there is such a wide variety of retirement strategies that it is worth reading up on your choices. Here’s a brief look at the different strategies and what they have to offer.
The traditional 401(k)
Most people have this type of retirement savings strategy, and it works like this. The strategy is funded with pre-tax dollars taken out of your paycheck (through payroll deductions). If you’re lucky, your company will match your level of contribution or even make contributions on your behalf – after all, the employer contributions are tax deductible.
The Safe Harbor 401(k)
A byproduct of the Small Business Job Protection Act of 1996, the Safe Harbor strategy combines the best features of the traditional 401(k) and the SIMPLE IRA, making it very attractive to a business owner. With a Safe Harbor plan, an owner-operator can avoid the significant administrative expenses of a traditional 401(k) and enjoy higher contribution limits.
The SIMPLE 401(k).
Designed for small business owners who don’t want to deal with retirement plan administration or non-discrimination tests, the SIMPLE 401(k) is available for businesses with less than 100 employees. Like a Safe Harbor plan, the business owner must make fully vested contributions (a dollar-for-dollar match of up to 3% of an employee’s income or a nonelective contribution of 2% of pay for each eligible employee).
The Solo 401(k)
Combine a profit-sharing plan with a regular 401(k), and you have the Solo 401(k) plan, a retirement savings vehicle designed for sole proprietors with no employees other than their spouses.
The Roth 401(k)
Imagine a traditional 401(k) fused with a Roth IRA. Here’s a big difference: you contribute after-tax income to a Roth 401(k), and when you reach age 59½, your withdrawals will be tax-free (provided you’ve had your plan for more than five years).
You can roll Roth 401(k) assets into a Roth IRA when you retire – and you don’t have to make mandatory withdrawals from a Roth IRA when you turn 70½.
This employer-funded plan gives businesses a simplified vehicle to make contributions toward workers’ retirements (and optionally, their own). The employer contributions are 100% vested from the start, and the employer can supplement the SEP-IRA with another retirement plan.
The SIMPLE IRA
This is like a SIMPLE 401(k) – a small business retirement plan with a mandatory employer. But in this plan, there is one big difference for the business owner. The owner can temporarily reduce plan contributions if the business is not doing well.
The Keogh Plan
The Keogh is designed for small, unincorporated businesses. There are defined benefit, money purchase, and profit-sharing variations; the defined benefit variation is a qualified pension plan offering a fixed benefit amount.
Did you know you had so many choices?
If you are an employer, you may not have realized you have such an array of choices in retirement plans. But you do, and asking the right questions may represent the first step toward implementing the right plan for your future or company. Be sure to ask a qualified financial advisor or business retirement plan consultant about your options today.
Across the country, people are saving for that “someday” called retirement
Someday, their careers will end. Someday, they may live off their savings or investments, plus Social Security. They know this, but many do not know when or how it will happen. A strategy is missing – and a good strategy might make a great difference.
A retirement strategy directly addresses the “when,” “why,” and “how” of retiring
It can even address the “where.” It breaks the whole process of getting ready for retirement into actionable steps.
This is so important. Too many people retire with doubts, unsure if they have enough retirement money, and uncertain of what their tomorrow will look like. In contrast, you can now save, invest, and act on your vision of retirement to chart a path toward your goals and the future you want to create for yourself.
Some people dismiss having a long-range retirement strategy since no one can predict the future. Indeed, there are things about the future you cannot control: how the stock market will perform, how the economy might do, and so on. That said, you have partial or full control over other things: the way you save and invest, your spending and borrowing, the length and arc of your career, and your health. You also have the chance to be proactive and to prepare for the future.
A good retirement strategy has many elements
It sets financial objectives. It addresses your retirement income: how much you may need, the sequence of account withdrawals, and the age at which you claim Social Security. It establishes (or refines) an investment approach. It examines tax implications and potential tax advantages. It takes possible health care costs into consideration and even the transfer of assets to heirs.
A prudent retirement strategy also entertains different consequences
Financial advisors often use multiple-probability simulations to try to assess the degree of financial risk to a retirement strategy in case of an unexpected outcome. These simulations can help to inform the advisor and the retiree or pre-retiree about the “what ifs” that may affect a strategy. They also consider sequence-of-returns risk, which refers to the uncertainty of the order of returns an investor may receive over an extended period.
Let a retirement strategy guide you
Collaborating with an experienced wealth advisor is essential when creating a retirement strategy personalized for your goals and dreams. When you have a strategy tailored to your unique situation, you will have a clear picture of what steps to take to pursue the future you want.
Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.