Saving for retirement is not like it used to be. The days when you could put some money in the bank or rely on the value of your home to pay for retirement are long gone. Instead most people will have to rely upon a number of complex investment strategies to save for retirement. These strategies do provide advantages over traditional methods such as letting money sit in bank accounts and will produce much higher returns and tax relief if you know what you are doing or have the help of a financial professional.
Keep Paying Yourself First
It is a good idea to keep saving for retirement even as you get older. Automatic savings on a biweekly or monthly basis provides the benefit of dollar-cost averaging which can significantly grow even a conservative investment portfolio over time. You can contribute to a Roth IRA until the age of 70 and to an annuity as long as you wish. There are even investment products called split annuities that retirees are able to contribute too even once they are already receiving an income from them. There is good reason to keep saving even into your retirement years and putting 10% of your income away every month is a good wealth building strategy that will ensure a financially comfortable retirement.
Deferring Income Tax
This is one of the most important principles to understand when saving for retirement. Federal income tax legislation allows everyone to set aside money for retirement in various types of tax deferred vehicles. Tax deferral essential means that you don’t pay tax on the income you’re earning until it comes time for you to withdraw it. This can lower your taxable income during your working years which is presumably when you will find yourself in the highest tax bracket during your lifetime. Most people have access to tax deferred retirement savings accounts such as IRAs and 401Ks through their employers or financial institutions. The advantage to these investment vehicles is that employers can match the employees’ contributions. Such contributions can effectively double your savings over time and they are tax deferred. The drawback to IRAs is that the level of contributions is restricted and persons with higher incomes are prevented from participating in them. Fortunately there are some other tax-deferred instruments you can take advantage of in saving for retirement. There is no limit to the amount of money you can place in annuities and annuities are tax deferred. Nor are there income restrictions on annuities, so people with higher incomes would be wise to take advantage of them. If you have reached the limits of your IRA you can still keep your savings tax deferred by investing in a deferred annuity. Like bank accounts, annuities are insured so the money you invest is safe.
Avoiding Tax Penalties on Retirement Savings
There are tax penalties on savings for retirement that you should be aware of. If you take funds out of an annuity or a retirement account before you reach the age of 59½ you will have pay the normal income tax and an additional 10% in tax penalties. This means that you should not put funds you think you might need in the near future in tax deferred retirement investment if you are under 50 or 55. Persons under the age of 50 should keep a large percentage of their savings outside of these types of investment vehicles in order to avoid the tax penalties. Most investment retirement planners will recommend that individuals under 50 avoid buying annuities for this reason.
There is an exception to this rule if you have access to a TSA or Tax Sheltered Annuity where you can take funds out of the retirement savings investment that without paying the penalty. Unfortunately at this time, TSAs are only available to certain government employees such as school teachers and federal workers.
Inflation and Retirement Savings
If you want to have a comfortable retirement you have to adjust your savings for consideration of inflation. The standard rate of inflation is around 3% a year so if you are maintaining your retirement savings in an account that earns less than 3% interest you are actually losing purchasing power over time. The only way to compensate for inflation is to diversify your investment portfolio which should include an assortment of dividend paying equities, bonds and potentially even real estate investments. Indexed annuities are another viable options as they have a rate of return which matches that of the stock market. This will increase the value of the investment over time and protect your retirement savings from inflation.