The Best Way to Save for Retirement

January 30, 2014

Retirement+Blog+Image-l32dmThere are two rules of thumb that are often preached by Financial Professionals when advising clients about retirement savings. The cardinal rule seems to be saving as much as possible in qualified retirement plan accounts, which are generally exempt from tax. Also, the interest earnings and compounding in these qualified retirement accounts are exempt from further government taxation, allowing these plans to generate more return compared to traditional investment vehicles. Investment professionals further advise that retirees delay the withdrawal from these qualified accounts, in order to benefit from the much higher rate of compounding as no taxes are deducted until withdrawals are made.

Given these two guidelines are sound, implementing these principles for retirement savings are not the right choice for everyone. Depending on the unique circumstances of each individual retiree, there could be better alternatives towards retirement. In the end, discussing those specific circumstances with a qualified financial advisor in order to determine the best course of action for retirement savings can yield better results.

Some of the issues, which should be considered when planning one’s retirement, are following:

  • Taxable or Tax-Deferred Accounts
    A blend of tax-exempt and non-tax exempt assets can be beneficial in the long run. As retirees may require accessing their retirement savings during a mid-career or personal situation, such as a health related emergency, a balance between these two types of savings can lead to minimized income tax liability.
  • Matching Contribution from Employer
    Usually, most established companies offer a matching contribution to 401(k) plans. If the employer matches 50 cents per dollar, it effectively means a 50 percent return on investment from day one. When such matching contributions are offered by employers, it is always a good bet to fully invest with 401(k) plans.
  • Age of the Spouse Should Be Considered for Savings in the Qualified Plan
    The older spouse will be able to access the qualified savings plans sooner than the younger spouse. On the other hand, the younger spouse will have longer time to invest tax-deferred, accumulating more savings with more years of compounding, and having greater Required Minimum Distributions (RMDs) at the age of 70.5. As the RMDs enjoy ordinary tax rates, it can offer less taxation.
  • Which Retirement Accounts Should Be Accessed First?
    There are many issues to be considered in order to find the right answer. Withdrawing from both types of retirement saving accounts yield better return over time. Receiving distributions from higher qualified plans have an effect on the taxability of the Social Security Benefit after a certain age. Again, qualified plan accounts can grow tax-deferred, making it a difficult financial decision to choose the right course of action for accessing savings in retirement.

The combined Federal and State income tax rates are often very high, making it essential for retirees to plan their retirement, and understand the tax implications of their decisions earlier in life. Discussing such complex issues with a financial advisor at HFG Wealth Management can help retirees find the right answer based on their specific circumstances.



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