The 401(k) plan, while instrumental for many, is just one facet of a holistic retirement savings approach. As we assess our long-term financial goals and the changing dynamics of retirement, it becomes evident that leaning solely on a 401(k) might leave gaps in our retirement planning.
If you’re asking how to invest beyond your workplace retirement plan, you’re not alone. Many are looking for additional avenues to supplement their savings, aiming to create a more comprehensive safety net for the later stages of life.
Exploring alternative investment strategies not only provides diversity but can also position you for a more comfortable and secure retirement. This article sheds light on such strategies and avenues to consider, offering guidance to those striving to fortify their retirement reserves beyond the confines of a 401(k).
What is a 401(k) Plan?
A 401(k) plan is a retirement savings arrangement offered by employers in the U.S. to their employees. Participants can allocate a portion of their pre-tax salary into this plan, which then gets invested in various financial instruments such as stocks, bonds, and mutual funds.
The contributions and the earnings from investments grow tax-deferred until withdrawal. Employers often contribute to the plan as well, matching a percentage of the employee’s contribution.
This feature encourages participation and enhances the growth potential of the savings. It’s essential to note that withdrawals before a certain age typically incur penalties, and taxes apply upon withdrawal. The 401(k) serves as a fundamental tool in retirement planning for many individuals, offering a structured way to accumulate wealth for the future.
Retirement Plan Contribution Limits for 2023
- For 401(k), 403(b), and most 457 plans:
- Contribution limit: $22,500
- Additional catch-up contribution for employees aged 50 and older: $7,500
This format provides a clearer breakdown of the contribution limits for the plans and the additional catch-up contribution.
Is 401(k) Enough to Sustain Your Entire Retirement?
Whether a 401(k) plan is sufficient to sustain retirement largely depends on an individual’s financial goals, lifestyle choices, and external economic factors.
A 401(k) plan, being a popular retirement savings tool, allows individuals to accumulate funds over time, with both employee contributions and often with added employer matches. However, several considerations can determine if these savings will be enough:
- Lifestyle Expectations: The kind of retirement lifestyle one envisions plays a significant role. If one anticipates a modest retirement, living in a location with a low cost of living, a 401(k) might suffice. But those aiming for more active retirements, involving travel or residing in pricier areas, might find a 401(k) lacking.
- Medical Costs: Health care expenses can be unpredictable and can significantly impact retirement funds. While Medicare provides certain coverages, there are out-of-pocket costs to consider.
- Inflation: The purchasing power of savings diminishes over time due to inflation. Therefore, what seems like a substantial amount now might not have the same value in the future.
- Investment Choices: The growth potential of a 401(k) depends on the chosen investments within the plan. More aggressive investment options might offer higher returns but come with greater risks.
- External Economic Factors: Economic downturns, shifts in market conditions, or changes in tax laws can influence the effectiveness of a 401(k) as a sole retirement tool.
Given these variables, while a 401(k) is a vital component of retirement planning, it’s prudent to consider supplemental savings and investment strategies. Diversifying sources of retirement income can provide a broader safety net and adaptability in facing unforeseen expenses or economic changes.
What are the Other Options Beyond 401(k)?
While the 401(k) is a commonly recognized retirement savings option, diversifying with other financial instruments can enhance one’s retirement strategy. Here’s a list of alternative options to consider:
Individual Retirement Accounts (IRAs)
Traditional IRA contributions are typically tax-deductible up to the annual limit. Yet, there are income-based limitations. In 2023, if you participate in a work retirement plan and your modified adjusted gross income (MAGI) reaches $78,000 for singles or $129,000 for joint filers, your Traditional IRA contribution deductibility is restricted.
Tax-Deferred Growth: Gains within a Traditional IRA benefit from tax deferral. You’re taxed upon withdrawal, allowing potential accelerated investment growth.
Withdrawal Considerations: Traditional IRA withdrawals are generally taxable. Your tax rate during withdrawal will reflect your then-current bracket. Withdrawing before age 59½ might incur a 10% penalty, though there are exceptions like qualified medical or education expenses.
Contribution Limits: For 2023, the contribution cap for a Traditional IRA is $6,000 or $7,000 for those 50 or older. If you’re involved in a work retirement plan with a high MAGI, this limit may decrease.
Required Minimum Distributions (RMDs): From age 72, RMDs from your Traditional IRA become mandatory, based on your age and account balance. Not adhering to RMD rules can result in a significant 50% tax penalty on the undrawn amount.
Considering a Traditional IRA requires thorough evaluation. While offering solid retirement savings avenues, it’s not suitable for everyone. A financial consultation is advised to discern if it aligns with your financial goals.
Roth IRA
Contributions are post-tax, but qualified withdrawals are generally tax-free. A Roth Individual Retirement Account (IRA) stands as an alternative to the Traditional IRA, offering its distinct set of benefits tailored for specific financial scenarios.
Roth IRA Contributions and Benefits
Post-Tax Contributions: Roth IRA contributions utilize after-tax dollars, a distinct approach from traditional IRAs that use pre-tax dollars.
Tax-Free Qualified Withdrawals: Roth IRA earnings grow without taxation. Withdrawals, when qualified, remain tax-free. For a withdrawal to qualify, the account should have been operational for a minimum of five years, and the account holder should be at least 59½ years old. Exceptions exist for events like first-time home acquisitions or certain hardships.
Contribution Limits: Roth IRAs share the same annual contribution limits as traditional IRAs. For 2023, these limits are set at $6,000 for those below age 50 and $7,000 for those 50 and older.
No RMDs: Roth IRAs are exempt from required minimum distributions. This absence grants more flexibility in retirement strategies and offers potential advantages in estate planning.
For those with a longer investment horizon, especially younger individuals, Roth IRAs present a favorable retirement savings vehicle, providing opportunities for tax-free growth and withdrawals during retirement.
Additional Roth IRA Insights
Eligibility Criteria: For Roth IRA contributions, there’s a need for earned income. Furthermore, your MAGI should be within set boundaries. In 2023, single filers have a MAGI phase-out at $129,000 and ineligibility at $144,000. For jointly filing couples, the MAGI phase-out stands at $204,000, with ineligibility at $214,000.
Conversions: It’s permissible to convert a traditional IRA to its Roth counterpart, but taxation applies to any taxable amount in the traditional IRA.
Withdrawal Nuances: Roth IRA contributions can be withdrawn without penalties anytime. However, if earnings are withdrawn before age 59½ and the account’s age is under five years, a 10% early withdrawal penalty may apply.
Health Savings Accounts (HSAs)
Compatible with high-deductible health plans, HSAs provide a means to set aside pre-tax dollars for medical costs. After age 65, the funds can serve broader purposes.
Eligibility and HDHPs: Enrollment in a qualifying high-deductible health plan (HDHP) is a prerequisite for HSA eligibility. While HDHPs tend to have lower monthly premiums than traditional health plans, they come with higher deductibles and greater out-of-pocket expenses.
Pre-tax Contributions: HSAs are funded with pre-tax dollars, effectively reducing your annual taxable income. Some employers also contribute to their employees’ HSAs.
Tax-Free Medical Expense Withdrawals: Funds drawn from HSAs for qualified medical expenses aren’t taxed. This covers a spectrum of expenses, encompassing doctor appointments, prescription medication, and medical apparatus.
Investment Opportunities: A number of HSAs provide the option to invest contributions. Notably, any earnings from these investments aren’t subject to tax.
Rollover Feature: HSA balances aren’t forfeited at year-end; they roll over, maintaining their tax-free growth potential.
Post-65 Usage: Upon turning 65, you can draw from your HSA tax-free for medical expenses. For other expenses, withdrawals are taxed.
Annual Contribution Caps: For 2023, HSAs have a contribution ceiling of $3,850 for individuals and $7,750 for families. Those 55 or older can contribute an extra $1,000.
HSAs provide several notable advantages:
Tax Benefits: Contributions are made pre-tax, medical withdrawals are tax-exempt, and investment gains are tax-free.
Flexibility: HSAs cater to a diverse set of medical costs, and unused funds carry over year to year.
Potential for Growth: With the investment option, HSAs offer a growth trajectory for contributions.
Assessing eligibility and benefits is crucial when considering HSAs. While they can be an effective financial instrument, they aren’t universally suitable. A conversation with a financial advisor can provide clarity on the appropriateness of an HSA in light of individual circumstances.
Real Estate
Investing in properties might offer both rental income and appreciation potential, though it requires careful consideration and management.
Types: Real estate investments vary, encompassing sectors like residential, commercial, industrial, retail, and mixed-use properties.
Rental Income: Such investments can yield consistent rental revenue, helping offset property-related costs and offering potential profit.
Appreciation: Over time, the value of real estate can rise, potentially delivering sizable returns upon selling.
Leverage: Real estate offers the advantage of leverage, letting you acquire property via borrowed funds, thus controlling a larger asset with minimal personal capital.
Tax Advantages: Potential tax benefits arise from real estate investments, including mortgage interest, property tax, and depreciation deductions.
Diversification: Real estate presents an avenue to diversify an investment portfolio due to its distinct behavior compared to stocks and bonds, aiding in risk mitigation.
However, these investments come with inherent challenges:
Management: Property ownership necessitates tasks ranging from maintenance to tenant interactions and comprehension of local real estate rules.
Liquidity Concerns: Unlike some assets, real estate doesn’t convert easily to cash, making swift sales challenging.
Value Fluctuations: Just as stock values shift, so can real estate values, potentially resulting in investment losses.
While real estate can offer avenues for wealth accumulation and passive income, it’s vital to be cognizant of associated risks.
Additional Real Estate Investment Tips
Research: Familiarize yourself with various real estate sectors and desired markets.
Seek Professional Guidance: Engaging with a real estate agent and financial consultant can provide clarity in your decisions.
Begin Modestly: For those new to this field, starting with more manageable investments, like single homes or duplexes, is advisable.
Patience is Key: Recognize that real estate is a long-term endeavor and wealth accumulation in this sector is gradual.
Taxable Investment Accounts
Taxable investment accounts are standard brokerage accounts where individuals can purchase a variety of investment vehicles. Unlike certain retirement accounts, they don’t offer specific upfront tax advantages. However, their lack of restrictions and versatility make them a significant component in many investors’ portfolios.
Investment Variety: Taxable accounts present a broad spectrum of investment opportunities, such as stocks, bonds, mutual funds, and ETFs, facilitating a custom approach aligned with individual financial aspirations and risk preferences.
Ease of Access: These accounts are characterized by their liquidity, allowing for the sale of investments and fund access anytime without penalties.
Tax Aspects of Gains and Dividends: Tax considerations arise from capital gains and dividends in these accounts. Being mindful of these implications is essential when curating an investment strategy.
Unrestricted Contributions: There’s no cap on annual contributions to taxable accounts, giving investors the latitude to invest based on their discretion.
Role in Estate Planning: These accounts can be integral to estate planning, as assets within them undergo a step-up in basis after the owner’s demise, potentially benefiting heirs tax-wise.
Managing Losses: If account investments decline in value, investors can employ tax-loss harvesting to balance out taxable gains, potentially decreasing tax obligations.
Taxable accounts offer diverse investment opportunities, ease of access, and unrestricted contributions. However, it’s paramount to comprehend the tax nuances tied to these accounts before diving in.
Further Considerations for Taxable Investment Accounts:
- A Schedule D tax form might be essential to document your capital gains and losses. Capital gains and dividends might necessitate estimated tax payments, especially if they cross certain thresholds.
- Engaging with a financial advisor to shape a tax-smart strategy for your taxable account can be beneficial.
Bonds
Bonds stand as a foundational component in the world of finance, representing a loan between the bond issuer and the bondholder. They are a type of fixed-income instrument that promises to pay periodic interest to the holder and return the initial investment, known as the principal, at a set date in the future.
Classification of Bonds
- Government Bonds: Issued by national entities, these bonds are usually seen as low-risk. U.S. Treasury bonds are a notable example.
- Municipal Bonds: Originating from states or local entities, these might have tax incentives for local investors.
- Corporate Bonds: These stem from companies aiming to garner capital. Their risk and yield spectrum is influenced by the issuing company’s financial health.
- Agency Bonds: These bonds come from entities affiliated with governments, often bearing a yield marginally higher than Treasury bonds.
Bond Features
- Interest: Bonds offer interest, termed the coupon rate, at set periods. This rate can be static or may vary based on certain metrics.
- Maturity: This denotes the date the bond’s principal is repaid. Bond maturities span from short-term periods to over 30 years.
- Credit Ratings: The credit standing of bond issuers is evaluated by rating agencies. These ratings, in turn, impact the bond’s yield. Typically, bonds with perceived higher risk will offer elevated yields.
- Price-Yield Dynamics: Bond prices can alter due to factors like interest rate changes and economic shifts. An inverse relationship exists between bond prices and yields.
Bonds’ Role in Investment
- Income Predictability: Bonds yield regular interest, offering investors a steady income flow.
- Stability: In times of stock market upheavals, bonds can impart stability to a portfolio.
- Diversification: Incorporating bonds into a portfolio can dilute overall risk.
Potential Risks
- Interest Rate Fluctuations: Rising interest rates can depress bond prices.
- Credit Risk: The possibility exists that the issuer might not meet its payment obligations.
- Inflation Concerns: Inflation might diminish the value of bond principal and interest payments.
Bonds can bolster an investment portfolio with their consistent income, stability, and diversification potential. Yet, understanding the inherent risks is essential.
Further Bond Considerations
- Bonds can be traded in secondary markets, though this carries its own complexities.
- Unlike bank deposits, bonds lack FDIC insurance, hence there’s no absolute assurance of principal return.
- For those prioritizing stability and recurring income, bonds can be a fitting investment choice.
Annuities
Annuities are financial products offered by insurance companies designed to provide a steady stream of income for individuals, typically during their retirement years.
Types of Annuities
Fixed Annuities: These provide guaranteed income based on a specified rate. The insurer promises to pay a fixed amount periodically, unaffected by market fluctuations.
Variable Annuities: Income from these depends on the performance of investments chosen within the annuity. The payout can vary based on the success of these investments.
Indexed Annuities: The returns are tied to a particular market index, like the S&P 500. They usually provide a guaranteed minimum return but might offer higher gains if the linked index performs well.
Payment Structures
Annuities can be structured based on how and when payments are made:
Immediate Annuities: Upon purchasing, the individual starts receiving payments almost immediately, typically within a year.
Deferred Annuities: Payments begin at a future date. This type can accrue interest during the deferment period, increasing the eventual payout.
Phases of Annuities:
Accumulation Phase: This is the period during which an individual pays money into the annuity, either as a lump sum or through a series of payments.
Distribution Phase: This phase begins when one starts receiving periodic payments from the annuity.
Benefits of Annuities
Steady Income Stream: They offer a predictable income, especially useful during retirement when regular employment income ceases.
Tax-Deferred Growth: The money within an annuity grows tax-deferred until withdrawals begin.
Protection from Longevity Risk: Since some annuities provide income for life, they can be a safeguard against outliving one’s savings.
Considerations
Fees: Annuities might come with various fees, including management fees, surrender charges, and insurance charges.
Liquidity Constraints: Withdrawing money from an annuity before a certain age or date might incur penalties.
Inflation: The purchasing power of fixed annuity payments can decrease over time due to inflation.
Life Insurance
Life insurance serves as a financial safety net, providing beneficiaries with monetary benefits upon the death of the insured. Beyond this primary function, certain types of life insurance come with features allowing for wealth accumulation, which can be accessed during the insured’s lifetime.
Types of Life Insurance
Term Life: Offers coverage for a specific term, typically 10, 20, or 30 years. It provides a death benefit but doesn’t accumulate cash value.
Whole Life: Provides lifetime coverage and includes a savings component where cash value accumulates. This type can be viewed as an insurance and investment product combined.
Universal Life: Similar to whole life, it offers flexible premiums and accumulates cash value. However, it offers more flexibility in adjusting death benefits and premium amounts.
Cash Value Accumulation
The cash value in a life insurance policy grows over time. Part of the premium payments goes towards the insurance cost, and the rest is invested to grow tax-deferred. This means taxes aren’t due on any earnings as long as the funds remain in the policy.
Accessing Cash Value
Policyholders can access the cash value in several ways:
Loans: Individuals can borrow against the cash value. This can be advantageous since the loan isn’t considered taxable income.
Withdrawals: Some policies allow direct withdrawals up to a certain amount. However, this reduces both the cash value and the death benefit.
Surrender: Terminating the policy will release the accumulated cash value, but doing so before a certain period might incur surrender charges.
Benefits of Cash Value
Flexibility: The accumulated value can act as an emergency fund or be used for planned expenses like college tuition.
Tax Advantages: The growth is tax-deferred, and certain withdrawals can be tax-free if managed correctly.
Guaranteed Growth: Some policies guarantee a minimum rate of return on the cash value.
Considerations:
Cost: Policies with cash value features often come with higher premiums than term life insurance.
Long-Term Commitment: To fully benefit from the cash value, maintaining the policy for an extended period is often necessary.
Life insurance with cash value accumulation provides a dual benefit: protection for beneficiaries and a potential source of funds for the policyholder.
However, it’s vital to understand the specifics of each policy and consider long-term goals and needs.
Brokered CDs
Brokered CDs, or certificates of deposit obtained through brokerages, stand apart from traditional CDs offered directly by banks. They are essentially time deposits with fixed durations, but their accessibility through brokerage platforms comes with a distinct set of features and considerations.
Acquisition: Brokered CDs are acquired through brokerage firms rather than directly from a bank. These firms can access a network of banks, allowing investors to choose from a wider variety of CD offerings.
Potential Returns: While traditional CDs typically offer a fixed interest rate, some brokered CDs may have returns tied to various market benchmarks or indices. This can mean that their returns vary, providing potential for higher gains, yet also introducing a degree of unpredictability.
Liquidity: Brokered CDs can often be sold in secondary markets before their maturity date. This provides more liquidity than traditional CDs, which usually incur penalties for early withdrawal. However, selling a brokered CD early might result in receiving less than the original investment, depending on market demand.
Duration and Diversity: Through brokerages, investors can access CDs from various banks across the country. This allows for easy diversification in terms of CD duration, interest rates, and issuing institutions.
Protection: Like traditional CDs, brokered CDs are FDIC-insured up to the legal limit, ensuring that the principal is protected even if the issuing bank faces financial difficulties.
Costs: Brokerages might charge fees for purchasing brokered CDs, which can affect the overall return on investment. It’s essential to be aware of any associated costs before committing funds.
Conclusion
As retirement approaches, ensuring financial stability becomes paramount. While a 401(k) serves as a foundational retirement savings tool for many, expanding one’s financial strategy to encompass diverse investment vehicles can provide a broader safety net.
From exploring the consistent income streams of annuities to the potential returns of brokered CDs, and from the guarantees of life insurance to the growth avenues in real estate and taxable investment accounts, there are myriad ways to bolster one’s retirement readiness.
Integrating these alternatives can offer both flexibility and diversified growth, helping to build a robust financial future.
Aligning one’s choices with individual goals, risk tolerance, and the ever-changing financial environment is one of life’s essential tasks. Engaging with a trusted financial professional can be instrumental in crafting a holistic retirement plan tailored to one’s custom needs and aspirations.
Author Profile
Michael Landsberg, CIMA®, CFP®, AIF®, serves as the Chief Investment Officer of Landsberg Bennett Private Wealth Management, a Florida-based boutique private wealth management company. With a B.S. from Babson College and an M.B.A. from the University of Florida, he began his career at Morgan Stanley before managing investments in Florida. He believes in disciplined, rules-based investment strategies, and strives to provide exceptional service to clients.
Disclaimer:
Landsberg Bennett Private Wealth Management is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Landsberg Bennett Private Wealth Management and Hightower Advisors, LLC have not independently verified the accuracy of completeness of the information contained in this document. Landsberg Bennett, LLC and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Landsberg Bennett Private Wealth Management and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Landsberg Bennett Private Wealth Management and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related
questions.
Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to
change. Clients are urged to consult their tax or legal advisor for related questions.
