Retirement is a complex part of every worker’s experience. Knowing how to manage to save for it, applying for benefits and making the most of it can be hard, especially during the first few years, as you have never done it before, and no one can tell you exactly what your situation is going to be exactly until it happens.
This is why making mistakes is common and why, according to research, 61% of Americans fear retirement more than death itself. Having a solid financial plan that will set you up for the future is key, so gear up and learn some tips that can make your retirement improve.
Understanding Contribution Limits
Every year, the Internal Revenue Service (IRS) changes the contribution limits to workplace retirement plans, such as 401(k)s, to keep up with inflation. In 2024, the 401(k) limit was $23,000, or $30,500 if you’re over 50, with a combined limit of $69,000 when factoring in employer matches and profit sharing.
This limit is universal and will need to be spread out over as many employer-sponsored plans as you have, as they are usually tax-advantaged.
The IRA Advantage
Individual Retirement Accounts (IRAs) are also a common complement to workplace plans, but you still cannot contribute as much as you wish. In 2024, the maximum contribution is $7,000, with an extra $1,000 catch-up contribution if you’re over 50.
There are two types of IRAs, traditional IRAs offer immediate tax deductions and Roth IRAs provide tax-free withdrawals in retirement, so picking the best option for you will be important.
Self-Employed Options
Retirement accounts are not just for traditional workers; self-employed individuals also have a fair number of options to save for retirement, like SEP-IRAs. These allow contributions of up to 25% of compensation, but still with a $69,000 limit for 2024. Non-employer matched 401(k)s offer similar benefits and have additional catch-up contributions for those over 50.
The advantage of self-employed individuals is that each venture they embark on would have the potential to have a different type of retirement account in order to maximize retirement savings while maintaining control over investments.
Manage Your Assets During Retirement
The most important thing one can do to prepare is to diversify the types of investment accounts and ensure that some of them are tax-advantaged and some of them are not. This will help to increase contributions in some ways, ensuring that there is more money to grow and that there is also some money that can be taken out without any tax penalties.
While this may seem redundant and like the best option is for every account to be tax-advantaged in order to ensure that more money is growing, having both types of accounts will help in case there are changes in tax rates. They also give flexibility in managing taxes during retirement.
Another important measure one can take is to ensure that their investment portfolio is properly diversified, with multiple accounts and asset allocation strategies.
This will ensure the minimisation of the overall portfolio risk but will allow you to have some accounts invested in required assets that will provide a bigger reward if they go well. It will also allow for each account’s investment strategy to be tailored to the specific goals you are trying to achieve at the moment.
Once all the accounts are set up and you are close to retirement, the last thing left to do is to figure out how the funds will be used and when to take out the money from each account.
Do bear in mind that many of the tax-advantaged accounts will have required minimum distributions (RMDs) imposed by the IRS and that you will have to abide by, so do take that into account in order to optimize your tax situation and create a more stable income during retirement.
