Let’s say, you’re already contributing the maximum amount to your 401(k) and you’re wondering what else you could possibly do to save for a comfortable future or even early retirement? What are your retirement options? Depending on your situation, there are several options. Some are driven by your taxable income and others are not.
Retirement Option One:
The common option is a ROTH IRA. But, that isn’t really new. People have known about ROTHs for years. This is a type of qualified savings account in which you deposit “after-tax” money, it grows tax-free and you are not taxed upon withdrawal. Unlike your 401(k) or IRA (and others), you are never “required” to withdraw. You can also withdraw your basis prior to age 59 ½ with no penalty. This is greatly simplified but covers the basics of a ROTH account.
Running the calculations to their conclusion, let’s say that a 40-year old put $500/month into a Roth until age 65 and earned 7% on the investment. That would be 300 payments of $500 for a total of $150,000. A couple of clicks on the old financial calculator and we find that this account would hold $405,000! That’s absolutely awesome!
Most people become more conservative when they retire. So, let’s assume a 5% ROI after age 65. Also, this saver wants to start reaping the rewards of their 25-year savings plan by taking $30,000 in tax-free income from the account. Nothing abnormal with this. How long until the account spends to zero? This account carries to age 87 or a total of 22 years.
What happens after that? They take a $30k/year pay cut! The account is exhausted.
Another Retirement Option:
What if there were another type of account that acted in a similar way, but with other benefits? Imagine depositing the same amount into this new account for the same period and actually having about 44% more tax-free income? Imagine that while this happens your account is subject to much lower risk!
Looking at the first ROTH account, can you imagine that if 2007/9 hit 2 years before you retired? To recap that period:
- The SPY (a good S&P measurement) peaked on 10/15/07 at 157.52
- 17 months later, it bottomed at 67.73
- Total loss, if you pulled out at the bottom, 57.13% OUCH!!
- The SPY next passed 157 on 4/15/13
- Your recovery time was just over 4 years
Assuming you bought and held, your $500k account would now be worth $214,989. There are other ways to grow the money without taking on that potential for loss. There may be other potential benefits for you as well. As they are very specific to you as an individual, I’m not going to go into that discussion in a broad forum like this.
Each of these options has a utility based upon the needs of the individual. Each is a tool and some are better while others are worse.
Is the right tool in here?
The thing about tools is that you should always choose the right tool for the job! Contact us is you have any questions.
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