One of the most important decisions that you make is how to invest for retirement. Your ability to plan for your retirement now will determine your comfort level down the road. My husband and I do not want to change our lifestyle much in retirement, so we use multiple methods. Here are a few of the ways that you can invest for retirement too.
Invest for Retirement – 401k Plan
A 401k plan is a company sponsored plan that lets employees make contributions with their pretax income. Employees do not have to pay taxes on the money contributed until they start taking withdrawals upon retirement. Employers are also allowed to match the contributions of employees however they wish. These plans allow you to save for your future and lower your current taxable income. You will however have to invest in assets offered under the company’s plan provider.
I contributed 6% to my day job’s plan for 6 years. They matched 100% of contributions up to 6% and I wanted to get the maximum company match. Now that I am no longer employed with them (WOOT), I will probably simply leave my account alone and let it accumulate interest until we retire. I am fully vested and have more than $5000 in the account, so I will not be forced to move it into a traditional IRA or withdraw it.
Invest for Retirement – Traditional IRA
Traditional IRA accounts can be set up at just about any banking institution or brokerage firm. Traditional IRA’s are very similar to 401(k)’s in that contributions are with pretax income and you only pay taxes on withdrawals. You will not get the matching contributions from an employer though. This retirement plan gives you the freedom to invest in many different assets as well. You can invest in stocks, bonds, or mutual funds offered by the brokerage firm you pick.
I personally do not have a traditional IRA since my husband and I each have a Roth IRA instead. We could technically have both but would be limited to saving $5000 a year in the combo of plans, so we just invest the full $5000 each into our Roth IRA’s.
Invest for Retirement – Roth IRA
You can invest for retirement by establishing your own Roth IRA. A Roth IRA differs from the plans above in that contributions are made with after tax income, but you do not have to pay taxes on your withdrawals in retirement. I personally like having both kinds of plans since we will be able to plan withdrawals in retirement in such a way to live as we want in the lowest tax bracket possible by taking minimal withdraws from my 401(k) and the rest from our Roth IRA’s.
Invest for Retirement – Brokerage Account
Another option to invest for retirement is to set up an account at a financial broker. You will not receive any tax advantages like with the other plans, but you can make unlimited contributions and withdraw your money whenever you like. This is an advantage over IRA’s and 401(k)’s, which have strict restrictions on withdrawals before the age of 59 ½. My husband and I invest at least $5000 a year in individual high dividend stocks using Scottrade.
How do you save for retirement? Do you use any of the ways above?
Crystal Stemberger uses Budgeting in the Fun Stuff to write about finding the balance between paying your bills, saving for your future, and budgeting in the fun stuff along the way.