You know you should be saving for retirement, and contributing to your employer-sponsored 401(k) is a great start. But your employer’s retirement plan is only one part of a well-rounded savings strategy.
“Personal finance begins with the basic decision between consuming and investing,” says Drew Winters, a finance professor at Texas Tech University.
A good retirement plan will balance the consuming you need to do today with the steps—including investing, insurance and tax strategies—that can support and protect your ability to consume what you need in the future.
Start by saving
Your retirement savings is the foundation of a comfortable retirement. Experts suggest spreading your investments across a variety of accounts, potentially including:
- A tax-deferred 401(k) or traditional IRA (contributions are typically tax-deductible, and retirement withdrawals are taxed as ordinary income)
- A Roth IRA (no immediate tax deduction, but retirement withdrawals generally will be tax-free)
- Taxable accounts, such as a brokerage account or CD.
This multi-faceted approach gives you flexibility: If income tax rates increase during retirement, for example, you could withdraw from non taxed accounts first to reduce your tax liability.
You can save by eliminating debt, too. “For many people, a house payment is their biggest expense,” Winters says. “One of the best things you can do is get to retirement owning your home.”
Consider other sources of income
You may decide to continue working beyond age 65. Some workers stay on at their full-time jobs. Others work part-time in their field, own a rental property or make money from a hobby they love.
No matter how you earn it, extra income can strengthen your retirement plan. Delaying your need to draw on your retirement savings lets your money keep growing. Even a few hundred dollars a month could help you delay taking Social Security, which means a larger monthly benefit in your later years.
Offset risks with thoughtful planning
Longevity risk—the chance you’ll outlive your retirement funds—is one of retiree’s biggest concerns. Others include inflation, which will eat away at the buying power of your savings, and the possibility you’ll need long-term care.
Ideally, your retirement plan will contain strategies that defend against these risks. For example, it might use an annuity to protect against longevity risk, stocks to guard against inflation and long-term care insurance to pay for extended nursing. A SunTrust Investment Services financial advisor can help determine what strategies can best protect your financial plan.
Make sure your plan is complete
A comprehensive retirement plan also will address what happens after you’re gone. Anyone with children or significant assets should have a will and a trust. These legal documents detail who will care for your children and which people or charities will inherit your assets, such as your savings and house, when you die.
If you have substantial assets, smart estate planning can reduce the taxes your heirs will pay on their inheritance—so more of what you worked to accumulate over your lifetime will pass on to the people and causes you care about most.
No single retirement plan works for everyone, and life changes may require adjustments from time to time. Start investing—and planning—for retirement sooner than later, Winters says, and then modify your plan as your situation evolves. “Most people put it off far too long,” he says. “If you start early, your savings have time to do a lot of your work for you.”