Retirement Planning

Retirement Planning Guide: Best Accounts and Investments for Your Needs

If you’d like to spend your retirement sipping cocktails on a beach (or even sitting in front of the television), you can no longer rely on the government to provide you with the income necessary to make that possible. With an aging population making the future of pensions questionable, it’s more important than ever to take wealth building into our own hands. Yet only 36% of non-retired Americans think they’re on track with their retirement savings. If you’re in the unprepared majority, it’s time to start thinking about your retirement planning.

We get it — the myriad of options for retirement savings and the complexity of differentiating between them can get overwhelming. It’s easier to go with whichever account type your workplace recommends, or maybe even not bother at all because you “still have plenty of time.” But if you want to make the most of tax incentives and compound interest, earlier is better.

Here’s a guide to everything you need to know about your options for traditional retirement accounts, how to venture into more modern ways to save for retirement, and how to track everything to ensure you’re on track.

Traditional retirement accounts

Before we go into any fancier, more exciting ways to invest, let’s start with the basics: understanding the most common types of traditional retirement accounts. By that, we mean accounts offered in conjunction with the government and your employer rather than investments you control yourself.

We’ll be covering:

  • Roth and traditional 401(k)s
  • Roth and traditional IRAs
  • Defined Benefit Plans
  • 403(b)s
  • 457(b)s

This isn’t an exhaustive list of all the accounts out there, but it covers the most common choices.

401(k)s 

A 401(k) is usually the first port of call for retirement savers. Why? It offers both tax breaks and, in many cases, employer-matched contributions — ensuring that you can put aside as much as possible. However, not everyone is eligible; it comes down to what your workplace offers.

You can read the full details about how contributions work on the IRS website, but the most crucial detail is that everything you add to your account will be a tax deduction — the more you contribute, the lower your taxable income will be. However, you’ll have to pay tax on whatever you withdraw in your retirement. 

You’ve probably also heard of Roth 401(k)s — so what’s the difference? It all comes down to when you get the tax break. When you have a Roth 401(k), you’ll be contributing your after-tax income, so there’s no tax break up front. Yet you won’t have to pay tax on anything you withdraw in your retirement, which is the opposite of how a traditional 401(k) works.

So, should you choose a traditional or Roth 401(k)? It depends on when you want your tax break. Most people assume they’ll earn less in retirement, in which case a traditional 401(k) makes more sense. But then again, you never know what tax rates could be in the future. Also, younger people are more likely to be on lower incomes, so a Roth account could make more sense for them (since they could benefit more from a tax break in later life).

Or why not save a little to both accounts?

IRAs

While most people would agree that a 401(k) should be your first choice for a retirement account, Individual Retirement Accounts (IRA)s are a close second. They also make a good option for those who have already hit the maximum contribution threshold for their 401(k).

IRAs aren’t generally offered in conjunction with your workplace (although there are also a few less well-known types of IRAs that work this way), which means you won’t be able to benefit from matched contributions. However, you’ll get a tax break from an IRA, so they have plenty going for them.

As with 401(k)s, there are two types of IRAs: the traditional type and the Roth variety. And they work in much the same way — traditional IRAs give you a tax break up front, whereas Roth IRAs give you a tax break when you withdraw money in retirement. 

Other retirement accounts

Although the vast majority of people will end up using either a 401(k) or an IRA to save for retirement, it’s worth giving an honorable mention to a few other account types that don’t usually get quite so much attention.

Defined Benefit Plan

If you’re lucky enough to be eligible for a Defined Benefit Plan, consider yourself very fortunate — for the most part, they don’t make them like that anymore. This is a workplace plan where your employer promises exactly how much income you’ll get in retirement, regardless of what the economy does by then or how long you live for,

Often, the amount you get is contingent on how long you’ve worked somewhere. There are often tax breaks for these plans too.

403(b)

A 403(b) account — sometimes called a Tax-Sheltered Annuity (TSA) — is practically identical to a 401(k), but it’s only available for certain public sector workers (and some employees of tax-exempt organizations). 

Most people will only get the chance to open one of the two, but if your employer offers both, then there’s nothing stopping you from having a 403(b) and a 401(k).

457(b)

Another account that consists of letters and numbers is the 457(b), and again, it works in basically the same way and with the same Roth or traditional options. This account is for state and local government employees, usually in place of the options above.

However, it has a few extra perks — for instance, you can withdraw your funds without a penalty (most accounts charge a penalty of 10% for early withdrawals). 

Alternative ways of retirement planning

The accounts we’ve explored all have some significant benefits, above all the tax advantages. If you can save some money on tax, either today or later, then why wouldn’t you settle for them as the perfect way to plan for retirement? Actually, there are a few reasons.

Drawbacks of traditional investment accounts

For one, you won’t have the discretion to invest your money however you want. Depending on the type of account you opt for and the institution that hosts it, you’re probably only going to have a few funds to choose between if you go the traditional route. You almost certainly won’t be able to invest in specific companies or more unusual assets.

Some people might be glad to have this restriction if they don’t really understand how investing works, but for those who are informed and would like to capitalize on that, it can be a frustrating experience. 

Also, not everyone is eligible for the account types with the best benefits. Self-employed individuals and business owners will be limited to more niche accounts with fewer benefits — although they can benefit from tax deductions with accounts like SEP IRAs and solo IRAs, employer contributions don’t quite have the same pull when you’re your own employer. In this case, the pendulum can swing more toward doing your own thing.

Then there are higher-earning individuals, who face more limits on how much they can contribute to each plan and may be left in a situation where they’ve maxed out their 401(k) and IRA but still have money left over they’d like to be contributing to retirement.

Finally, most of the accounts we’ve outlined have restrictions on when you can withdraw your funds, with the current minimum age for most accounts being 59 ½. For instance, there’s a 10% penalty for withdrawing money early from a 401(k), and most other accounts offer something similar. If you’re thinking about going for FIRE or you’d like to grow your money while also having the option to spend it on something else along the way, you might be uncomfortable with this.

Fortunately, traditional accounts aren’t the only way you can save for retirement. 

Building a diversified portfolio 

We live in a world where people do all kinds of unconventional things with their money and manage to see serious financial success. Just look at the warehouse manager who ended up becoming a millionaire after betting $8,000 on Shiba Inu coin on a whim. We no longer need mutual funds and 401(k) accounts to be wealthy.

Although taking this level of risk isn’t for everyone (and for good reason), it might make you question why you should limit yourself to the same-old retirement accounts when there are so many more choices out there. Why not make a diversified portfolio for your retirement that includes some of the conventional accounts above but also some newer, alternative investments?

We’ve mentioned cryptocurrencies already, so let’s start there. Given the massive returns that many investments in this category enjoy, you might be interested in building a cryptocurrency portfolio to help you maximize your retirement savings. (But be sure to research how the coins work before you go ahead.)

Yet although they might get the most publicity, cryptocurrencies aren’t the only kind of alternative investment out there. For instance, many peer-to-peer lending and crowdfunding investment options allow us to invest in things that are usually off-limits, such as real estate projects and startups. These also have potential for large returns (although, again, they can be risky).

Or maybe you just want to be able to pick and choose your own company stocks, which apps like Robinhood let you do with minimal fuss.

You could also consider delving into unusual assets like precious metals, foreign currencies, and even art — the list is practically endless. However, it’s usually best to pick an area you have some knowledge about already rather than picking something random because it sounds good. Don’t become a wine investor on a whim when you’ve been a teetotal your whole life.

Track your retirement savings

Whether you decide to opt for a traditional account, a tailored portfolio, or a mixture of the two, one thing is for sure: you need to stay on top of what you’re saving. It might be easy enough to know how much you’ve saved for retirement so far if you have everything in a Roth IRA, but it gets a little more complex if you have five cryptocurrency wallets, twenty stocks, and a bar of gold too.

Fortunately, using a portfolio tracker app like Money Minx lets you keep on top of everything in one place — you can add more than 21,000 different institutions, including your mortgage. 

You’ll have the option to either add your accounts manually (perfect for physical investments) or sync them automatically. For example, you might add your Robinhood account, which you can do simply by logging onto the app.

Once you’ve added everything, you’ll see the following screen to let you know your total net worth across all your holdings and accounts.

This gives you an instant visualizer of how your investments are doing. Plus, other tabs give you a breakdown of your allocation and performance in case you want to keep tweaking your portfolio. In this example, we have a portfolio made up of 98.96% deposits — not exactly diversified. But when we look at the allocation for similar investors, we can see they have a much more colorful portfolio on average and take some inspiration from that. 

Retirement planning starts today

When it comes to retirement, it’s easy to convince yourself that it won’t make any difference if you get started in another few months (or even years), but it really is true that you should get started as soon as possible. Remember: the tax breaks and returns you make this year will make interest next year and the following year, resulting in an ever-increasing balance. 

If you decide to take a more proactive approach to investing, don’t forget to track how your holdings are performing. It only takes a few minutes to connect your accounts to Money Minx, figure out what your total net worth is across multiple investments, and make your retirement plans — in addition to plenty of advanced features. Why not create your free account today and find out for yourself?

Sarah Bromley is a personal finance and fintech writer based in the U.K.

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