Retirement Saving Strategies: Going Beyond Your 401(k)

December 09, 2013

Are you doing enough these days to prepare for retirement?  If not, you’re not alone. Nearly four out of five people feel they aren’t on track to meet their retirement income goals. 

The most common solution out there that doesn’t always require a financial guru to point out is pretty easy to identify. Save more.  The real work begins when we take the time to run a basic retirement calculator to figure out how much is needed.  The next step is to figure out where to save.

When it comes to retirement planning, most financial planners spend a great deal of time and attention on encouraging people to maximize the benefits of employer-sponsored retirement plans such as a 401(k).  It makes perfect sense to at least contribute up to the maximum amount to receive your company match if one is provided.  Approximately 70 % of small companies provide a match and 86% of large employers provide their employees with some type of matching contribution.

Even if that added sweetener of an employer match isn’t added to your retirement plan at work, there are many other aspects of 401(k) plans that make contributing to these tax-advantaged accounts a wise decision. There are high contribution limits ($17,500 in 2013 for those under 50, $23,000 for ages 50 and older).  The ease of payroll deductions is an added bonus and the majority of employees in the workforce say they wouldn’t even save for retirement if it wasn’t for their retirement plan at work.

While the primary focus during the accumulation stage of the retirement planning process is on 401(k) plans and other employer-sponsored plans, there are still other tax advantaged ways to build your retirement nest egg:

Health Savings Accounts (HSAs) – Defined contribution plans offer either tax breaks today (pre-tax 401k) or tax breaks later (Roth 401k).  Participants in a high-deductible health insurance plan can benefit from both the ability to lower taxes today with contributions to a Health Savings Account (HSA) and tax-free withdrawals when these funds are used for qualified medical expenses.  This is a win-win situation and HSAs popularity is growing because of high contribution limits ($3,250 for individual policies and $6,450 for family coverage plus an additional $1,000 to both for those over age 55).  You can even boost your retirement nest egg with HSAs because there are no penalties for using these accounts for non-medical expenses once you reach age 65. (Non-qualified withdrawals after age 65 are taxed at ordinary income tax rates.)

Roth IRAs – The ability to contribute to Roth IRAs is based on certain income limits.  (This should not be confused with Roth 401ks that are not subject to income limitations.)  The primary benefit of Roth accounts are the ability to invest after-tax money in an account that grows tax-free as long as the account has been open 5 years and withdrawals take place after age 59 ½.  Current contributions are limited to $5,500 per year ($6,500 for ages 50 or older).  There is also easier access to your funds pre-retirement since contributions are accessible tax and penalty free at any time.

Taxable brokerage accounts – If you are in a position to max out your contributions to retirement accounts such as the 401k and IRA, don’t forget about historically low long-term capital gains tax rates for investments.  Tax-efficient investments such as municipal bonds, individual stocks, ETFs, and low turnover mutual funds are good options since you will have to pay taxes on these accounts.  However, the majority of taxpayers are either taxed at the 0% or 15% tax rate for investments held over 12 months.  Here is a copy of the current tax rate table (Note: taxpayers in the 10% and 15% marginal tax brackets have a 0% capital gains rate).

Buying a home – Finally, your primary residence can also be considered a strategic aspect of your retirement plan. After all, owning a home mortgage-free during retirement means not having to pay for housing (beyond property taxes and maintenance costs), which could otherwise be a significant expense.  Many homeowners are choosing to become mortgage-free during retirement and making extra payments each month to fast track the process.  You can also invest in real estate to generate rental income or free up the equity in your home by downsizing or taking a reverse mortgage.

The next time you run a basic retirement calculation or review your 401k plan, keep in mind there are other crucial ways to save for retirement. Just be sure that you are at least taking full advantage of your retirement plan at work before looking elsewhere.  You don’t want to leave any free money on the table in the form of matching contributions and there is something to be said about the ease and simplicity of payroll deductions!