Most Common Retirement Options and How to Take Advantage of Them
Landsberg Bennett Private Wealth Management
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In the tapestry of life, retirement often represents a time of relaxation, reflection, and the pursuit of long-held passions. It's the golden horizon where work takes a backseat, and life's simple pleasures come to the fore. But to truly savor this phase, meticulous preparation is crucial. Enter the realm of retirement planning.?
This process, which encompasses setting financial milestones and strategies for achieving them, serves as a roadmap to a smooth and fulfilling retirement.?
By identifying potential income avenues, gauging expenses, and establishing a sound savings plan, individuals can create a robust foundation for their post-work years.?
While the technicalities might seem a tad overwhelming, remember: this planning helps pave the way for those cherished moments of leisure and adventure in retirement.?
Dive into this guide to understand how to chart out this crucial journey and make the most of your retirement years.
What are the Most Common Retirement Options??
5 Most Common Retirement Options and How to Take Advantage of Them
The Traditional IRA stands as a notable choice for retirement savings in the USA. By allowing individuals to contribute pre-tax dollars, the account ensures that funds can grow tax-deferred until their eventual withdrawal during retirement. To truly optimize the benefits of a Traditional IRA, it's wise for individuals to begin their contributions as early as possible, capitalizing on the accumulative advantages of compound interest.
2023 Traditional IRA Computation
Contribution limit
The contribution limit for Traditional IRAs in 2023 is $6,500 for individuals under age 50, and $7,500 for individuals age 50 or older. This limit applies to the total amount you can contribute to all of your Traditional IRAs in a given year.
Tax deductibility
Your Traditional IRA contributions may be tax-deductible, depending on your income and whether you or your spouse are covered by a retirement plan at work. If you are covered by a retirement plan at work, your deduction may be limited or eliminated, depending on your income and filing status.
Withdrawals
Withdrawals from Traditional IRAs are generally taxable as ordinary income. However, there are some exceptions, such as qualified distributions made after age 59? and certain early withdrawal penalties.
Example
Let's say you are a single individual under age 50 and you have no retirement plan at work. You can contribute up to $6,500 to your Traditional IRA in 2023 and deduct the full amount from your taxable income. Your contribution will grow tax-deferred until you withdraw it in retirement. When you withdraw the money, you will pay taxes on the amount withdrawn, but you will have had the benefit of tax-deferred growth.
Operating differently from its Traditional counterpart, the Roth IRA has its singular appeal. Contributions to a Roth IRA are made with after-tax dollars. However, the significant benefit lies in retirement: withdrawals, inclusive of earnings, are tax-free.?
Given this structure, individuals looking for tax-free income in retirement often find the Roth IRA beneficial. It's especially valuable for those who anticipate being in a higher tax bracket in retirement or those who value the flexibility of tax-free withdrawals.
Roth IRA 2023 Computation
Contribution limit
The contribution limit for Roth IRAs in 2023 is $6,500 for individuals under age 50, and $7,500 for individuals age 50 or older. This limit applies to the total amount you can contribute to all of your Roth IRAs in a given year.
Income limits
There are income limits for Roth IRA contributions. For married couples filing jointly, the phase-out range for 2023 is $218,000 to $228,000. For single filers and heads of household, the phase-out range is $138,000 to $153,000. If your income is above the phase-out range, you cannot contribute to a Roth IRA.
Tax treatment
Roth IRA contributions are made with after-tax dollars, but your money grows tax-free and you can withdraw it tax-free in retirement, as long as you meet certain requirements.
Example
Let's say you are a single individual under age 50 and your income is below the Roth IRA income limit. You can contribute up to $6,500 to your Roth IRA in 2023 with after-tax dollars. Your contribution will grow tax-free until you withdraw it in retirement. When you withdraw the money, you will not pay taxes on it, because you already paid taxes on it when you contributed it.
Sources:
Internal Revenue Service (IRS):
Publication 590-A (2022), Contributions to Individual Retirement Arrangements (IRAs): https://www.irs.gov/pub/irs-pdf/p590a.pdf?
2023 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work: https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
Often provided as an employment benefit, the 401(k) allows employees to contribute a portion of their wages to this retirement account. Many employers also match a percentage of these contributions, providing an added incentive for participation.?
One of the primary ways to take advantage of a 401(k) is to contribute at least enough to capture any employer match, essentially obtaining "free money" for retirement. Over time, these contributions and any matched amounts can significantly grow, thanks to compound interest.
401(k) 2023 computation
The 2023 401(k) contribution limit is $22,500 for individuals under age 50, and $30,000 for individuals age 50 or older. This limit applies to the total amount you can contribute to all of your 401(k) plans in a given year.
To calculate your 401(k) contribution, you can use the following formula:
401(k) contribution = employee contribution + employer match
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The employee contribution is the amount of money you choose to contribute to your 401(k) plan from your paycheck. The employer match is the amount of money your employer contributes to your 401(k) plan on your behalf.
For example, let's say you are a 35-year-old individual who earns $100,000 per year. You and your employer have agreed to a 50% match on your first 6% of salary. This means that you will contribute $6,000 to your 401(k) plan in 2023, and your employer will contribute an additional $3,000. Your total 401(k) contribution for 2023 would be $9,000.
It is important to note that the IRS also sets a limit on the total amount of money that you and your employer can contribute to your 401(k) plan in a given year. This limit is $66,000 for individuals under age 50, and $73,500 for individuals age 50 or older.
Source:?
Internal Revenue Service (IRS):
Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Though becoming less common in the modern employment landscape, pensions or defined benefit plans promise a specified monthly benefit in retirement. These benefits are typically based on factors such as salary, years of service, and age.?
For those fortunate enough to have a pension, it's essential to understand the terms, such as when one is "vested" or when to ideally start drawing benefits to optimize the monthly amount.
2023 Pension Calculation
Your Primary Insurance Amount (PIA) is a big part of your Social Security benefits. It's figured out from your earnings over your working life. To get this, the Social Security Administration looks at the 35 years you earned the most. They average these years and then use a set formula on this average to find your PIA.
Your earnings history is just the total money you've made from jobs that paid into Social Security. This history helps figure out your PIA.
To see your PIA, you can make an account on the Social Security Administration website.
To get an idea of your Social Security pension, you can use your PIA and earnings history. So, if your PIA is $1,000 and you've earned $2 million in total, you might get around $2,000 every month from Social Security. But remember, this is just a guess. The real amount you get can be more or less depending on things like when you retire or your age.
If you want to know about your private pension for 2023 in the US, you should talk to the people who handle your pension plan. They'll tell you how it's worked out.
Most of the time, private pensions are based on how much you earn and how long you've worked there. Some might also go up a bit each year to match rising prices, which is called a cost-of-living adjustment (COLA).
If all this sounds confusing, it might be a good idea to talk to a financial advisor. They can help you understand your pension and what you need to do to have enough money when you retire.
While HSAs are primarily designed for medical expenses, they can also serve as a retirement tool. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.?
After the age of 65, individuals can withdraw funds for any purpose without penalty, although non-medical withdrawals are subject to income tax. To utilize an HSA for retirement, individuals should consider contributing the maximum allowable amount each year and investing the balance to grow over time.
2023 Computation
To compute the Health Savings Account (HSA) balance at retirement in 2023 for the United States, you can use the following formula:
HSA balance at retirement = (Annual HSA contribution) x (Years until retirement) x (1 + Average annual return)
Where:
Annual HSA contribution: The amount of money you contribute to your HSA each year.
Years until retirement: The number of years until you reach your retirement age.
Average annual return: The average annual return on your HSA investments.
For example, let's say you are a 35-year-old individual who contributes $3,650 to your HSA each year. You plan to retire at age 65, so you have 30 years until retirement. You assume that your HSA investments will earn an average annual return of 7%.
Using the formula above, your HSA balance at retirement would be:
HSA balance at retirement = ($3,650) x (30 years) x (1 + 0.07) = $180,488.60
Of course, this is just an estimate. Your actual HSA balance at retirement will depend on a number of factors, including your annual HSA contributions, years until retirement, and average annual return.
Here are some tips for maximizing your HSA savings for retirement:
Contribute to your HSA each year. The more you contribute, the more money you will have in your HSA at retirement.
Invest your HSA savings. HSA funds can be invested in a variety of assets, such as stocks, bonds, and mutual funds. By investing your HSA savings, you can potentially grow your money over time.
Use your HSA funds for qualified medical expenses. HSA funds can be used to pay for a variety of medical expenses, including deductibles, copays, coinsurance, and prescription drugs. By using your HSA funds for qualified medical expenses, you can save money on your out-of-pocket healthcare costs.
Choosing the Right Retirement Option for You
Deciding on the appropriate retirement option requires thorough research and a deep understanding of your financial landscape. Every facet of your finances needs to be assessed, ensuring that you're considering both immediate and future needs.
Taking a comprehensive look means reflecting on your existing savings, future retirement goals, possible health needs, and any other financial aspirations or commitments for your post-working years. Questions such as: Do you plan on traveling? Will you be supporting any family members? Or do you wish to engage in hobbies that might need funding? These considerations can shape the retirement choice that's right for you.
This is where the guidance of a wealth management company can be beneficial. These companies provide detailed insights, allowing you to see the bigger picture. By examining your current financial situation, your aspirations, and potential challenges, they can suggest retirement plans tailored to your individual circumstances.
Remember, planning for retirement isn’t just about setting aside money. It's about creating a strategy that lets you live comfortably and fulfillingly in your later years. With appropriate advice and consideration, you can make decisions that align well with your retirement vision.
Disclaimer:
Landsberg Bennett is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Advisory services are offered through Hightower Advisors, LLC. All information referenced herein is from sources believed to be reliable. Landsberg Bennett and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Landsberg Bennett 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 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 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.