Retirement Savings Strategies: Navigating Your Golden Years With Confidence

How would you choose to invest your retirement savings? With people living longer than ever, retirement savings may need to last for decades. So, it's important to make the right choices when it comes to your investments.

There are many options to choose from, including tax-advantaged accounts such as 401(k)s and IRAs, brokerage accounts, annuities, bonds, stocks, real estate, and more. The right choice for you will depend on your financial goals, risk tolerance, and time horizon.

It's also important to start saving and investing early, so your money has more time to grow. You should also calculate your net worth regularly to ensure you're on track for retirement and keep your emotions in check when investing.

Fees can eat into your returns, so it's important to pay attention to investment fees and choose low-cost options where possible. If you need help, consider seeking advice from a financial professional.

Tax-Advantaged Accounts

401(k) Plans

The 401(k) is a popular tax-advantaged retirement savings account offered by many employers. It allows employees to contribute pre-tax wages, which lowers their taxable income. The contributions grow tax-free until they are withdrawn at retirement, providing tax-deferred benefits. Additionally, some employers may offer matching contributions, further boosting your savings. It's important to note that early withdrawals before the age of 59 1/2 may be subject to taxes and penalties.

Individual Retirement Accounts (IRAs)

IRAs are another common type of tax-advantaged account. Anyone with taxable income can contribute to an IRA to save for retirement. There are two main types: Traditional IRAs and Roth IRAs. Traditional IRAs offer tax-deductible contributions and tax-deferred growth, while Roth IRAs offer tax-free withdrawals in retirement but do not provide an immediate tax deduction for contributions.

Health Savings Accounts (HSAs)

HSAs are typically paired with high-deductible health plans and are meant to cover medical expenses tax-free. However, they can also be used as a retirement savings vehicle. Contributions are tax-deductible, the funds grow tax-free, and withdrawals are tax-free if used for qualified medical expenses. With proper record-keeping, you can use the HSA as a long-term retirement savings account.

529 Educational Plans

529 plans are tax-advantaged accounts designed for saving for college or other qualifying educational expenses. They offer tax-exempt earnings at the state and federal levels. While the primary purpose is education funding, in some cases, you may also be able to use 529 funds for other purposes, such as apprenticeships or K-12 tuition.

Solo 401(k)

The solo 401(k) is ideal for self-employed individuals who want to maximize their tax-advantaged savings. It allows for pre-tax contributions, similar to a traditional 401(k), and also permits pretax profit-sharing contributions from their business entity. This account provides a larger annual contribution limit compared to some other options.

These are just a few examples of tax-advantaged accounts that can help you maximize your retirement savings. Each type of account has its own contribution limits, tax benefits, and features, so it's important to understand the specifics of each before making a decision.

Asset Allocation

• Adjust your asset allocation according to your age. For example, if you're younger than 50, you can consider investing heavily in stocks. As you reach your 50s, you might allocate 60% of your portfolio to stocks and 40% to bonds. Once retired, you may prefer a more conservative allocation of 50% in stocks and 50% in bonds.
• Consider your innate risk tolerance, not just your age. If you're 65 or older and can stay cool through market cycles, you can buy more stocks. If you're 25 and every market correction strikes fear into your heart, aim for a 50/50 split between stocks and bonds.
• Don't let stock market conditions dictate your allocation strategy. It's impossible to time the market, so follow a planned asset allocation strategy.
• Diversify your holdings within each asset class. For example, hold 20 or more individual stocks or invest in mutual funds or exchange-traded funds (ETFs). Diversify your bond holdings by investing in bond funds or varying your holdings across bond maturities, sectors, and types.
• Invest in a target-date fund that manages asset allocation for you. This is a mutual fund that holds multiple asset classes and gradually moves toward a more conservative allocation as the target date (your planned retirement year) approaches.
• Shift toward more conservative investments once you retire since you no longer have an active income to replace losses. However, don't completely abandon growth-oriented positions as you will need this money for decades.
• The younger you are, the more aggressive you can be with your asset allocation. As you age, shift money into more conservative assets to protect against risk.
• The two most common lower-risk assets for a retirement account are certificates of deposit and bonds.
• Many retirement advisors recommend planning to replace about 75% of your income in retirement.
• Generally, the two most recommended asset classes for growth-oriented portfolios are stocks and funds.

Robo-Advisors or Target Date Funds

Robo-advisors are a low-cost alternative to traditional financial advisors. They use computer algorithms to automate investment management and build and manage an investment portfolio for you, based on your goals and risk tolerance. Robo-advisors are ideal for those who prefer a hands-off approach to investing and don't have complex financial needs. They charge lower fees than human advisors, which can translate to higher long-term returns for investors.

Robo-advisors like Betterment, Wealthfront, and SoFi offer a range of features such as low or no management fees, tax-loss harvesting, access to human advisors, and diversified investment portfolios. Some robo-advisors also provide additional services like cash management and lending.

When choosing a robo-advisor, consider factors such as management fees, expense ratios, account types, investment options, rebalancing capabilities, and access to human advisors. It's important to evaluate your financial goals, risk tolerance, and investment amount before selecting a robo-advisor that aligns with your needs.

Target-date funds, also known as lifecycle funds, are another investment option for retirement savings. These funds provide a "set it and forget it" approach by automatically rebalancing your portfolio from growth investments to more conservative ones as you get closer to retirement. The target date in the fund's name corresponds to your planned retirement year, and the fund adjusts its asset allocation over time accordingly.

Target-date funds offer a diversified mix of stocks and bonds, gradually shifting from riskier stocks to less risky bonds as retirement approaches. This helps younger investors benefit from the higher growth potential of stocks while providing more security and predictable income for retirees.

Some popular target-date funds include Vanguard Target Retirement, JPMorgan SmartRetirement Blend, TIAA-CREF Lifecycle Index, and T. Rowe Price Retirement. These funds vary in their investment strategies, glide paths, and fees, so it's important to compare different options before selecting one that aligns with your retirement goals and risk tolerance.

Dividend-Paying Stocks

Pros

Dividend stocks can be a great source of passive income, which is ideal for retirement.

The income from dividends is flexible – you can reinvest it, save it, or spend it.

Dividend stocks are usually also value stocks, which means they are shares in companies that make a steady profit and are therefore relatively stable and safe.

Dividend stocks can provide income as well as asset growth, as the value of the stock is likely to rise over time.

Dividend stocks can help hedge against inflation, as dividends often increase over time.

You can get some diversification by investing in dividend-focused mutual funds and ETFs, which typically have average dividend yields of around 3% but can be as high as 9%.

Dividends may have tax advantages – they can be classified as income or capital gains, and the latter is taxed at a lower rate.

Cons

Dividend stocks are usually more expensive than investments in other companies, as their popularity can inflate the stock price.

Individual stocks can be risky, even if they are value stocks.

You need to choose your dividend investments carefully to ensure you don't overpay.

Many dividend stocks are in sectors such as utilities, banks, and old-line industries, which can lack diversification.

Stocks are generally riskier than bonds and other fixed-income assets.

It can be tough to figure out the right asset allocation for dividend-producing investments.

Dividend payments are taxed twice – once at the corporate level and again at the personal income level.

Dividend policies can change over time and are not guaranteed by the company.

Annuities

There are several types of annuities available, including:

• Deferred fixed annuities: These offer a guaranteed rate of return over a set time period, typically between 3 and 10 years. Any earnings are not taxed until funds are withdrawn.
• Variable annuities: These provide the potential for growth and guaranteed income for life, starting when you choose. They are often chosen by those who want to grow their future income and outpace inflation.
• Deferred income annuities: These provide a guaranteed income for life or for a set period, starting at a future date chosen by the annuitant. They offer flexibility, allowing the annuitant to change the start date or increase the future income stream.
• Immediate fixed income annuities: These provide guaranteed income for life or for a set period, beginning within a year. They can include beneficiary protection or a cost-of-living adjustment to keep pace with inflation.
• Fixed indexed annuities: These provide the opportunity for growth based on the positive performance of a market index, as well as protection when the index performance is negative.
• Steady, predictable income in retirement, regardless of market fluctuations.
• Tax-deferred growth and tax-advantaged income.
• Flexibility in how you save for and receive money in retirement.
• The potential for payments to continue for beneficiaries after your death.

However, there are also some challenges and risks associated with annuities. These include:

• Liquidity may be limited, with withdrawals before a certain age subject to a tax penalty.
• Guarantees are subject to the claims-paying abilities of the underlying insurance company.
• Risks can be higher if the annuity is not underwritten by a highly-rated insurance company.
• Fees and charges can be high, with insurance charges, surrender charges, investment fees, and fees for optional benefits.
• Withdrawals will reduce the value of the annuity and the death benefit.
• Early withdrawals may be subject to surrender charges and market value adjustments.
• The performance of the underlying investments is subject to market fluctuation and is not guaranteed.

Overall, annuities can be a good option for those seeking guaranteed income in retirement, but it is important to carefully consider the pros and cons before purchasing an annuity contract.

Frequently asked questions