Which Retirement Plan to Choose for US Citizens?

Today, pension and social security alone is not enough to cover your living expenses after your retirement. This is because your life’s expectancy after age 65 will increase after retirement to give you another 20 or so additional years through to 90+ years, perhaps.  You are relaxed and rested from the daily hustles and bustles that you used to go through while working. Therefore as your body takes in some rest, it adjusts to taking in a little less beating thus, your life expectancy is extended. The implication of it is that you have another 20 or 30 years to cater to healthcare costs and other living expenses. A survey that was done on couples established that for couples who were retiring by 2015, at least one of them imagined that the other would live on to their 90’s. Which is a good thing because it is the desire for most if not all individuals to live a long comfortable life.

However, if comfort is anything to go by, one has got to think beyond pension retirement plans and social security. This is not so for most Americans. Research in 2019 by the U.S Government Accountability Office showed that an alarming 50% of households with a 55-year old and above as the head lacked retirement savings completely. Experts advise that retirement savings should cover your expenses longer than the years you anticipate to be alive.

What retirement plan options do you have and what do you need to know about them? Before we do, let’s look at some tips to help you save more during your work years.

 

Some money-saving tips to increase your savings

To increase your savings or contributions to your retirement plans, here are some money-saving tips you can practice to keep you lean before retirement but comfortable after retirement. These tips are still applicable after retirement.

  • Accumulate small change and deposit it in your account at least monthly. You never know the power of small steps until after you have gone a mile.
  • Go regular. On things like fuel for your automobile, there is no harm in stepping down from premium to regular. You will still be moderately comfortable but give yourself the noble opportunity to save for your future.
  • Pay attention to your bills. Bills can hyke without your knowledge. If you are unable to track your phone, service, electricity, and other recurrent bills, have a friend check it up for you to see where you are overspending. You could have all your phone bills lumped up under one service provider.
  • Tone down from your guzzler to a low fuel-consumption vehicle. Also, if you are planning to buy a car, you can get a good deal out of a gently used second-hand vehicle which is much cheaper than a new one.
  • Have a go at entertainment only when and if absolutely necessary. A little indulgence from home will still be okay but much cheaper for you. Alternatively, consider dining in less expensive restaurants. Along the same lines, think about reducing your alcohol intake for healthier less expensive options like freshly blended homemade juice or a glass of wine a day.
  • Replace or pay off your credit card debts with a home-equity line. Interest rates attached to home-equity cannot compare to high credit card interest.

These are just a few cost savings options. There are many other savings you can make in your daily life. You only need to pay closer attention to your expenses to see where you can make savings. No savings is too little.

The next thing you need to bear in mind is whether you are ready to go it alone or you need an advisor to take you through the available retirement plan options.

 

Retirement options

There are several retirement plan options for U.S citizens. In this article, we have discussed 8 popular options.

 

1. Individual retirement accounts (IRAs)

Individual retirement accounts (IRAs) are a great option if you want to benefit from the tax advantage that they offer. However, there is a limit set by the internal revenue service on the amount of savings you can make annually. There are several  types of IRAs including:

  • Traditional IRA 

Traditional IRAs offer two kinds of savings on tax. Tax deductions on contributions and deferred tax. Deferred tax is payable upon retirement where withdrawals are taxed as normal income. However, the capital gain attached to your savings is not taxed. This makes it an option for seniors who are not far from retirement. Anyone with any source of income can contribute to the traditional IRA. However, there is a cap to the much you can contribute annually.

It also features a simple set-up and management process which makes it a good option for a wide range of individuals. It is a pretty flexible plan since you have the option of rolling over other retirement plans into the traditional IRA plan or investing it in the asset class of your choice if you had put your savings in an investment brokerage account.

If you opt to withdraw your savings before the retirement age set at 59.5 years, you will incur a 10% penalty on your savings.

  • Roth IRA

Roth IRA is somewhat different from the traditional IRA in that it allows you to make your savings only after tax has been deducted from your income and as such, your earnings and withdrawals will not accrue tax. However, like the traditional IRA, it has an annual savings limit. Usually, it is preferred as an additional retirement plan on top of defined contribution plans like the 401k. Roth IRA allows you to continue contributing even after your retirement. Also, it gives you the flexibility of choosing your preferred investment.

  • SEP IRA

Referred to in full as a simplified employee pension individual retirement account, SEP IRA is designed for small business owners or self-employed individuals who want to make retirement contributions in their (employee’s) name. As the name suggests, it is a simplified affordable retirement plan that offers tax shelter and tax-deferred growth to contributors. It gives a high contribution limit so that you determine how much and the period during which you contribute.

  • Simple IRA 

Simple in this case stands for Savings Incentive Match Plan for Employees. The Simple IRA plan is designed for small businesses without a retirement savings plan in place. It is similar to the 401k in that it allows the employer and employee to make contributions.

  • Spousal IRA

The spousal IRA is designed for couples; one earning and one non-earning couple. The requirement for this plan is that the non-earning couple will set up an IRA account in which the earning couple will make contributions after first doing so in their own IRA account. Secondly, they must agree to file joint tax returns. The spousal IRA works the same way as the traditional IRA with a limit to the amount of contribution that can be made annually.

  • Rollover IRA 

This is a plan that allows you to move your retirement savings, investments, and assets from the retirement plan of your former employer into an IRA account or another plan. Your savings will still maintain the tax-deferred in the new account without accruing early withdrawal penalties. Rollover IRA offers the flexibility of unlimited investment options including stocks, bonds, mutual funds, CDs, ETFs, and others.

Plans that are eligible for a rollover include:

  • 401k plans
  • 403(b) plans
  • Money purchase plans, profit-sharing plans
  • Qualified retirement plans

 

2. Pension plans

Most working Americans rely on pension as their or part of their retirement earnings. This is a type of arrangement where the employer sets aside a fixed percentage of each employee’s salary and contributes it to a retirement savings account. This retirement saving is then invested on behalf of the employee usually in stocks, funds, bonds, or other investment options. After retirement, the employee can opt to receive their pension as a lump sum or as small regular payments throughout the retirement period. However, these payments are standard with no inflation adjustment.

Pension plans are particularly popular among government employees. Pension will be calculated based on:

  • The employee’s age at the time when they joined the employer
  • Employee’s annual earnings
  • Years of service

 

3. Defined contribution plans

In a defined contribution plan, an employee decides to contribute a certain percentage of their pre-tax salary, usually, 3-6% towards the account, and the employer makes a matching contribution to the same account. You also decide how your money should be invested. Usually, you are given several investment options to choose from. Some defined contribution plans also offer tax benefits. Your investment matures when you turn 59½ years. Early withdrawals attract a 10% penalty. There are several types of defined contribution plans. These include:

  • 401k. This plan is popular among employees in the private sector. It features tax-deductible contributions with tax-deferred investment income accrued up to maturity. For the year 2021, the maximum salary that an employee is allowed to defer to a 401k account is $19,500 (this is usually revised, and so keeps changing). However, employees aged 50 years and above are allowed to make additional contributions of up to $6,500. The maximum joint contribution for both the employer and employee should be $58,000 or $63,500 for those aged 50 and above.
  • 403(b). This defined contribution plan works like the 401k plan but only applies to tax-exempt organizations like churches, hospitals, and public schools. Most 403(b) plans however usually limit their investment options to mutual funds and annuities.
  • 457. The 457 plan also works the same way as the 401k but is designed for state and local public employees along with some non-profit organizations like charities.

 

4. Non qualified deferred contribution plans

Non-qualified deferred contribution (NQDC) plans operate much the same as ROTH IRA. However, it is designed for much higher contributions. This plan is mostly offered by employers as a benefit to executive employees with high income. It is popular among executives who have other retirement plans that have attained their allocated limits and are looking for additional options.

This plan does not fall within ERISA guidelines hence does not qualify for tax-deferred benefits as in the qualified retirement plans. In other words, contributions are taxed before being channeled to the respective account. Its greatest advantage is that individuals get to save their money on a tax-deferred basis. Again, it has a wide range of investment options.

 

5. Annuities

Annuities are offered by insurance companies. Annuities allow you to make a lump sum or series payment to the account which is then invested for a period of time and then pays out at a future date, as a lump sum or as a series of payments. You can opt for a fixed annuity that gives you a guaranteed payout or a variable annuity whose payout is determined by the performance of its investments. The variable annuity hence gives you the option of choosing from a range of investment options offered by the insurance company.

Annuities have long been used as a retirement strategy although they are known to have relatively high fees. Again, if you opt-out of the plan before the agreed-upon date, you will be required to surrender some amount as penalty payment.

 

6. Cash value insurance plans

Some life insurance plans like whole life and a universal offer cash value accumulation in addition to death benefits. These plans allow you to take a loan facility against your death benefit which you can use as a source of income during retirement. The remaining part after acquiring a loan becomes your death benefit. This loan does not attract tax. This plan, however, makes sense for people who have reached their maximum limits for other retirement plans and are looking for additional options.

 

7. Retirement real estate investing

Real estate investment is good for individuals who wish to have a stable retirement source of income from rental facilities.

While it will be a little hectic handling the work involved with real estate investments, carefully planned investment will allow you to pay up mortgage debt, property tax, and maintenance with the rental income and still remain with a balance to cater to your needs. This needs you to purchase a well-built property with potential.

However, real estate is a highly risky investment given that your property could fetch less income than you anticipated owing to its location plus it may not be fully occupied if it is a flat or remain unoccupied for a while if it is a single unit. Still, real estate investment has the advantage of appreciating in value over time.

 

Conclusion

The right time to start investing for retirement is now. As you do, consider a retirement investment plan that is right for your needs. A good plan will allow you to comfortably cater for all your bills at least 25-30 years after you have retired assuming that you retire at the official retirement age of 67.

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