The Best Retirement Investments
Retirement, being free of work obligations, can be an exciting time, if you’re prepared. Doing all the things you’ve always wanted to do requires income. First, you need to work hard to have the money to set aside in investment accounts so that you have a comfortable retirement. The money in these accounts will continue to grow up to your retirement date and beyond. Here is a look at different retirement and investment accounts and how they can help you have the retirement you’ve always wanted.
There are four different types of retirement accounts, 401(k) plans, 403(b) plans, traditional Individual Retirement Accounts (IRAs) and Roth IRAs. Which is the best for your retirement needs? Let’s take a look.
401(k) Plans. Still working? A 401(k) plan, which is an employer-sponsored retirement account, is a great way to save for retirement. Your 401(k) contributions are made with pre-tax dollars and this reduces your taxable income, giving you a smaller tax bill.
Some 401(k) plans include matching contributions from your employer. Always contribute enough to meet the company match. Otherwise, you are missing out on free investment money from your employer.
So if your company matches three percent of your contribution, you’ll have six percent of your salary being invested in the 401(k), three percent from you and three percent from your employer.
Don’t hold back with 401(k) contributions. Don’t stop at the company match. Investing 10 percent of your salary is a good goal, more if you can manage it. And you will want to contribute as much as you can as you get closer to retirement. You are able to contribute as much as $19,500 for 2020.
The catch-up contribution limit for employees aged 50 and over is $6,500 for 2020. People who are 50 and older can make annual catch-up contributions to a 401(k) plan at the end of each calendar year as a means of catching up with their retirement savings.
You can start taking withdrawals from a 401(k) plan at age 59 ½ and you must make minimum withdrawals at the age of 72.
403(b) Plan. A 403(b) plan is similar to a 401(k) plan except it is used by public schools, charities, churches and nonprofits as a retirement plan for their employees. A 401(k) plan is a retirement plan sponsored by for-profit companies for their employees.
With a 403(b) plan, you contribute pre-tax money to the plan and these funds grow tax-free until retirement. It is wisest to keep the money invested in the plan until retirement age. If you cash out a 403(b) plan before the age of 59 ½, you must pay an early withdrawal penalty of 10 percent and pay income taxes on the money you receive.
Like 401(k) plans, there are matching contributions from employers in 403(b) plans. So it is smart to contribute at least as much money to receive the match from your employer.
Traditional IRA. With a traditional retirement account you are able to contribute pre-tax dollars to a retirement account where your investment will grow tax-deferred until you make a withdrawal in retirement. Upon retirement, your IRA withdrawals are taxed at your current tax rate. Contribution limits are $6,000 for those under the age of 50 and $7,000 for those 50 and up. So depending on your age, you are able to contribute as much as $6,000 or $7,000 a year to a traditional IRA.
You can begin withdrawing money from a traditional IRA at age 59 ½ or older. Starting at age 72, you must take required minimum distributions from traditional IRA.
If you withdraw money from a traditional IRA before you are of retirement age, you will pay a 10 percent penalty on the amount withdrawn and you’ll also pay taxes at standard income tax rates. There are exceptions to this penalty rule including if you are using the distribution toward the purchase or building of a first home, you become dsabled, you use the money for unreimbursed medical expenses, for higher education expenses, for adopting a child or to pay for medical insurance after losing a job.
Roth IRA. A Roth IRA is a retirement savings account that allows you to withdraw your money tax-free upon retirement. Roth IRAs are funded with after-tax dollars so contributions to Roth IRAs are not tax deductible. But once you start making withdrawals from a Roth IRA, the money is tax-free.
Roth IRAs are a good choice when you believe your taxes will be higher in retirement than they are now.
With a Roth IRA, there are no required minimum distributions as there are with 401(k) plans and traditional IRAs. And you can withdraw Roth IRA contributions without tax or penalty.
But if you withdraw earnings from a Roth IRA, you may owe income tax and a 10 percent penalty.
There are, however, income limits to contributing to Roth IRAs. In 2020, the income limit for singles is $139,000 and $206,000 for married couples. If you make more money than these income limits you won’t be able to use a Roth IRA for your retirement savings.
The contribution limit for a Roth IRA is $6,000 in 2020, and $7,000 if you are 50 and older.
For both Roth and traditional IRAs, you must have earned income, such as wages or a salary, to contribute to either plan.
Creating a Steady Flow of Income in Retirement
Looking for a steady flow of income during retirement? Consider these retirement investment options.
Bonds. A bond, whether individual or bundled in funds, is a loan you give to governments, cities or corporations that then pay you regular interest. Once a bond matures, its face value is returned to you. Bonds are a low risk option and this usually means lower returns. Buy a bond not to grow your money but for a regular interest income and for the guaranteed principal you will receive when the bonds mature.
Retirement Income Funds. Retirement income funds are a type of mutual fund and they automatically invest your money in a diverse portfolio of stocks and bonds. The aim of the fund is to produce monthly income. With retirement income funds, you are able to access your money at any time.
Real Estate Investment Trusts (REITs). A REIT is a mutual fund that aggregates real estate holdings including apartment buildings and commercial structures. For a fee, professionals manage these properties, collecting rent from the properties and paying expenses. The investor receives the remaining income.
Variable Annuity. With a variable annuity, your money goes into a portfolio of investments that you choose. And for a fee, you can add an optional benefit called a rider. This rider insures the amount of future income you can withdraw from the portfolio. Watch out for fees, some are as high as three to four percent a year.
Dividend Income Funds. A dividend income fund is a collection of stocks overseen by a fund manager. And the dividends you receive are the dividends paid out by the stocks in the fund.
Peer-to-Peer Lending. Peer-to-Peer lending matches borrowers with investors. It is basically lending without the bank as an intermediary. Many of these investments pay out high interest rates. But there is some risk in this kind of investing. So check your risk tolerance before investing in peer-to-peer lending.
Lower Risk Investments
Municipal Bonds. These bonds are debt securities issued by state, county and city governments. The interest you earn will be tax-free when it comes time to file your federal income taxes. These bonds also may be exempt from state and local taxes if you live in the state where the municipal bond is issued.
U.S. Treasury Notes and Bonds. The yields on U.S. Treasury notes and bonds are higher than what you would get from a certificate of deposit or a money market account. U.S. Treasury securities can be purchased through TreasuryDirect.gov.
Treasury Inflation Protected Securities (TIPS). Treasury inflation protected securities are known as TIPS. These securities pay the interest and additional principal to compensate for inflation. You can buy TIPS for as little as $100 and in terms of five, 10 and 30 years.
Catch-up Strategies for Retirement
Max Out Your 401(k) Plan. Now is the time to put every last penny into your 401(k) plan. Getting the matching contribution from your employer will help as well.
Contribute to a Roth IRA. With a Roth IRA, you’ll be able to make a tax-free withdrawal in retirement. So if you meet the income requirements, a Roth IRA is a good place to stash your retirement cash.
Make Use of Catch Up Provisions. If you are 50 and up, you can make a catch up contribution of $6,500 to a 401(k) or 403(b) plan and a catch up contribution of $1,000 to a Roth or traditional IRA plan.
Decrease Monthly Spending. To find more money to invest in retirement you will need to decrease spending in other areas. So take a close look at your budget and look for items you can easily cut so you’ll have more cash to set aside for retirement savings.
Look at Home Equity. Your home’s equity provides liquidity during retirement. It is there if you should need it. Some older retirees might consider borrowing against the equity in their home to help with living expenses. You could use a home equity line of credit to draw from the equity in your home. Just be sure to borrow only what you need and look for other sources of income.
Downsize to a Smaller Home. Selling your home and moving to a smaller, less expensive place is one way to increase your money in retirement and it is an option to consider if you are living in more house than you need. Downsizing can help to lower your living expenses considerably and is a smart strategy to consider for empty nesters with rooms they no longer use or need.
Tap Into Cash Value Policies. Tapping the money in an insurance policy should be considered a last resort. But it is an option if the need for the insurance is no longer there and your need to cash is acute.
Choosing a Life Insurance Policy
With life insurance, you sign a contract with the life insurance company and agree to pay a premium in exchange for the life insurance company paying a sum of money upon your death to your family and beneficiaries.
Taking out life insurance policies is a way to provide income to a remaining spouse and children upon your death.
Types of Life Insurance
There are two major types of life insurance, term life insurance and whole life insurance. Whole life insurance is sometimes called permanent life insurance.
Term life insurance pays only if the death occurs during the term of the policy, which is usually from one to 30 years. Whole life or permanent insurance pays a death benefit whenever the policyholder dies.
So do some shopping around and compare the costs of term life and whole life insurance from different insurance companies. How much money were you planning on leaving your beneficiaries? Which type of policy makes the most sense for you? If you are likely to outlive your policy then a whole life or permanent life insurance policy would be best.
Choosing a life insurance policy is an important part of a retiree’s financial planning. So don’t put off this decision. You want your spouse and children provided for after you die. And life insurance is a smart way to do that. Begin comparing life insurance quotes below.
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Are you a beneficiary of a life insurance policy and wondering if you’ll eventually be taxed on the death benefits? Are you a business owner providing group life insurance for your employees, and wondering if that expense is deductible?
A family should consider insuring the life of their primary breadwinner to make sure that the income stream is not interrupted should something happen to him or her. But when do you know you need multiple policies?
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There may be a handful of people who will be directly affected by your passing so it’s good to know that you don’t have to pick one over all the others. You can choose a few people easily. You don’t have to pick only your spouse.
Never turn down a matching 401K plan unless you will starve to death because of the deduction from your paychecks. How often do you have people paying you to put money away for the future while getting a tax break on that amount? Any match is free money so don’t pass it up!
Once you make the decision to buy life insurance, selecting the right life insurance company and plan is extremely important. Here are some things to remember.