The majority of Americans say retirement is their number one financial goal. Still, less than half of Americans feel they will have enough money to retire confidently. Many factors are responsible for this gloomy outlook, chief among them being poor retirement planning. Inadequate retirement planning forces people to lower their standard of living in retirement. Here are some of the most popular retirement strategies that can help a person enjoy their post-work years with fewer concerns about money.
Full Retirement Age (FRA) in the US is 66 years for those born in 1955, and 67 years for those born in 1960 or later. FRA is the official age at which one can start to enjoy the full retirement benefits of Social Security. But one needn’t wait until age 65 to retire. Whatever the age at which one wants to retire, the person must plan for it.
For people employed by the government, for-profit companies, or institutions, the employer’s 401(k) is the most popular retirement plan. In a 401(k) plan, one diverts a certain amount of their paycheck as a contribution to their retirement. The employer may then match the employee’s contribution up to a certain amount.
Most retirement plans limit the amount one can contribute per year. The employer-backed 401(k) has relatively high contribution limits. As of 2023, the most one can contribute annually to their employer’s 401 (k) is $22.500 or $30,000 if age 50 or older. What’s more, since one contributes with their untaxed dollars, a 401(k) reduces one's tax liabilities by reducing their current taxable income.
The employer’s 401(k) has limited investment plans, though. Not to mention it may take several years before the employee fully owns their employer’s contribution.
Then there’s the traditional Individual Retirement Account (IRA). It works just like a 401(k), except it’s available to almost anyone with taxable income. This means it can be the ideal option for people with a high income but without access to an employer’s 401(k).
Unfortunately, the IRA contribution limit is significantly lower, just $7,500 in 2023 for those over 50. However, it does offer several investment choices (e.g., stocks, mutual funds, and bonds).
Then there’s the Roth IRA, which, unlike the traditional IRA, is contributed to using after-tax dollars. This way, withdrawals are tax-free. Another major advantage of Roth IRAs over traditional IRAs is that one can start withdrawing their benefits earlier, before they reach their FRA, without penalties. However, Roth IRA has income limits - below $153,000 for individuals and $228,000 for married couples filing jointly.
Small-business owners and self-employed people who don’t have access to an IRA can set up SEP IRA (Simplified Employee Pension IRA). The employer decides how much they can contribute, but it may not exceed 25 percent of an employee’s annual income. Employees do not contribute.
The contribution limit for SEP IRA is $66,000 in 2023. The employee immediately gets 100 percent access to the employer’s contribution, unlike in the employer-backed 401(k). This can be an advantage for the employee but a disadvantage for the employer trying to maximize employee retention.
Business owners with no employees may set up a Solo 401(k). Also known as one-participant or individual 401(k) plans, a Solo 401(k) plan functions a bit like the standard 401(k), with one unique advantage. One can maximize their retirement savings by contributing as both the employer and employee.
As an employee, one can contribute 100 percent of their income to their Solo 401(k), up to $27,000 in 2023. One can then contribute up to 25 percent of their business’ income. Still, the total Solo 401(k) contribution cannot exceed $66,000.
One key to retiring comfortably is choosing the best retirement plan. However, with a number of retirement plans to choose from, picking the ideal one can be overwhelming. As such, experts recommend seeking professional guidance to ensure retirement goals will be achieved.
