Retirement Strategy: How Retirement Savings Strategy Has Changed

There was a time when a retiree could rely on a pension or defined benefit plan with a set income. 

Today, fewer individuals retire with a pension or a defined benefit plan. The burden and risk of saving for retirement and managing withdrawals increasingly fall on individuals.

Not all retirement savings strategies are the same.

As responsibility shifted, complexity increased with myriad options, making picking the right plan even more critical. Now individuals, business owners, and employees can choose from various plans with varying flexibility, contribution limits, and tax advantages.

The traditional 401(k).

Defined benefit plans have been replaced by defined contribution plans or what we consider a traditional 401(k), where employees contribute either pre or post-tax contributions through payroll deduction, and employers match a certain percentage with pre-tax dollars.

The Safe Harbor 401(k).

A byproduct of the Small Business Job Protection Act of 1996, the Safe Harbor strategy combines the best features of the traditional 401(k) and the SIMPLE IRA, making it very attractive to a business owner. With a Safe Harbor plan, an owner-operator can avoid the significant administrative expenses of a traditional 401(k) and enjoy higher contribution limits.  

The SIMPLE 401(k) and IRA.

Designed for small business owners who don't want to deal with retirement plan administration or non-discrimination tests, the SIMPLE 401(k) or IRA is available for businesses with fewer than 100 employees. Each has advantages and drawbacks that small business owners must consider before choosing which plan type works best for them.

The Solo 401(k).

An innovative plan designed for sole proprietors with no employees other than a spouse, with the ability to contribute more than other traditional plans both as an employee and an employer profit sharing. The employee portion can be either pre or post-tax(Roth).

The SEP-IRA.

This employer-funded plan gives business owners a simplified vehicle to contribute toward workers' retirements (and, optionally, their own). The employer contributions are 100% vested from the start, and the employer can supplement the SEP-IRA with another retirement plan. 

The Keogh Plan.

The Keogh is designed for small, unincorporated businesses. There are defined benefit, money purchase, and profit-sharing variations; the defined benefit variation is a qualified pension plan offering a fixed benefit amount. 

Traditional and Roth IRA

Designed for individuals with earned income who can contribute either pre-tax dollars to a Traditional IRA or post-tax dollars to a Roth IRA.

Didn't you know you had so many choices?

If you are an employer, you may not have realized you have such an array of choices in retirement plans. But you do, and asking the right questions may represent the first step toward implementing the right plan for your future or company. Be sure to ask a qualified financial advisor or business retirement plan consultant about your options today.

The day will come to reap the rewards of your retirement plan.

With careful planning, you'll choose the right plan, contribute and invest the savings appropriately, and then harvest the rewards of your hard work along with your Social Security.  

A good retirement strategy has many elements.

It sets financial objectives. It addresses your retirement income: how much you may need, the sequence of account withdrawals, and the age at which you claim Social Security. It establishes (or refines) an investment approach. It examines tax implications and potential tax advantages. It considers possible healthcare costs and even the transfer of assets to heirs. 

A prudent retirement strategy also entertains different consequences.

Financial advisors often use multiple-probability simulations to assess the degree of financial risk to a retirement strategy in case of an unexpected outcome. These simulations can help to inform the advisor and the retiree or pre-retiree about the "what ifs" that may affect a strategy. They also consider sequence-of-returns risk, which refers to the uncertainty of the order of returns an investor may receive over an extended period.

Let a retirement strategy guide you.

A well-designed plan and strategy brings clarity, reduces risks, and builds confidence. Ask a financial professional to collaborate with you to create a retirement plan and strategy personalized to your goals and dreams. When you have this strategy, you will know what steps to take to pursue the future you want.