When planning for retirement, there’s more to consider than relying on traditional retirement savings accounts. Each person has a unique vision of retirement, and no single approach can fulfill all goals. Early retirement serves as a good example. Among millennial workers, 52% express a desire to bid farewell to work early. However, it’s important to note that conventional retirement plans such as 401(k)s and individual retirement accounts (IRAs) impose penalties on withdrawals made before age 59 ½. At the same time, recent estimates suggest that annual retirement costs can range between $120,000 and $150,000.
This doesn’t mean that early retirement is unattainable or that you should drastically change your retirement investments. It simply means that it might be beneficial to expand your horizons and go beyond your 401(k) or IRA to build a more robust retirement strategy.
Building on the Foundations and Tax Benefits
Before looking beyond your 401(k) or IRA, it’s crucial to understand the advantages of these foundational tax-advantaged tools, so you can effectively use and supplement them.
401(k):
Offered through your employer, a 401(k) allows you to deposit a predetermined amount of your pretax income directly into an investment account. The annual contribution cap for individuals aged 50 and under is $22,500 ($30,00 if you are 50 or older) in 2024. Most companies match their employees’ contributions up to a certain percentage, and employees can invest these funds in a limited range of investment options. Contributing at least enough to receive the maximum employer match is generally advisable.
IRA:
Typically used by the self-employed but accessible to anyone, an IRA is a long-term savings account that maximizes tax savings. While offering a wider range of investment options compared to a 401(k), IRAs have lower contribution limits. In 2024, the maximum annual contribution is set at $6,500 ($7,500 for those aged 50 or older).
Roth 401(k) or IRA:
A variation of the traditional 401(k) or IRA, Roth accounts are funded with post-tax dollars. While they don’t provide upfront tax savings like traditional contributions, withdrawals from Roth accounts during retirement are tax-free. This feature can be valuable if tax rates rise during retirement.
Additionally, depending on your career situation, other retirement plans may be available to you, such as 403(b) plans commonly offered to public school employees.
Diversifying Your Investments:
For retirement investing, 401(k)s, and IRAs are essential tools because of their tax benefits. However, depending on your retirement goals, it may be beneficial to diversify your investments using other tools. So, where else can you seek retirement investment strategies that complement your 401(k) or IRA?
Related article: Forget Stocks and Bonds! Discover the Hidden Treasure of Silver IRAs
HSA:
A health savings account (HSA) allows you to set aside pretax income for healthcare expenses. In 2024, eligible individuals can save or invest up to $3,850 annually. Unused contributions roll over yearly, and interest or gains earned on the account accumulate tax-free. Funds can be used for any medical expenses at any time without penalties. A lesser-known advantage of HSAs is that once you reach age 64, you can use the funds for any reason without penalties or taxes on withdrawals. The combination of pretax savings, tax-free gains, and potentially tax-free withdrawals makes HSAs a powerful tool for more than just healthcare expenses.
Related article: Surviving Retirement: The Epic Battle Against Crushing Healthcare Expenses!
Real Estate:
Often overlooked as a retirement investment, owning and paying off a home can be an effective strategy. Over 76% of households aged 50 and above own their homes, which can be leveraged through home equity loans or reverse mortgages to supplement your finances in retirement. Rental properties, which currently account for 6.7% of individual tax filers, offer a means of generating a steady, passive income to enhance your future financial situation.
Investment Accounts:
Brokerage and advisory accounts tax your investments and gains upfront, but they provide flexibility to structure your investment approach according to your risk tolerance, goals, and timeframe. If early retirement is one of your ambitions, these accounts can be set up to mimic the strategy of an IRA, 401(k), or HSA without contribution caps or early withdrawal penalties. Keeping some of your early retirement savings in an investment account can bridge the income gap until you reach age 59.5 when penalty-free withdrawals are permitted from 401(k)s and IRAs.
Mapping Your Strategy and Seeking Guidance:
Regardless of your retirement goals, building your financial plans on a solid foundation of a 401(k), an IRA, or both remains essential. You can consider adding regular brokerage accounts, HSAs, real estate, or other investment avenues to enhance your retirement savings.
Whether you feel confident or uncertain about achieving your retirement goals, seeking advice from a financial advisor can be beneficial. They can help you explore how these supplementary investment options can fit into your plan and make adjustments based on your evolving vision of the future.