There are many different ways to save for retirement. Employer-sponsored retirement plans such as a 401(k) allow you to save a portion of your paycheck automatically and may even receive a matching contribution from your employer. Anyone with earned income can also open up an IRA with a financial service provider of their choice.
Regardless of which type you have or are considering opening, here’s how to make the most of your retirement plans.
1. Contribute Often
You may be unable to control what the markets will do and how much your retirement plan will gain (or lose) that year. However, one thing every investor can do is to contribute as much as possible – up to the IRS maximum every year if possible.
The more money you put into your retirement plan, the more there will be to compound over time. Compound growth is how everyday investors can turn a modest amount of savings into potentially millions of dollars by the time they’re ready to retire. This is because retirement plans are also investment accounts where the assets can grow substantially over time.
2. Invest for Optimal Growth
No matter what type of retirement plan you use, be sure it’s positioned for long-term growth. This can be achieved by assembling a portfolio of well-diversified assets such as stocks, bonds, real estate, etc.
If you’re a long way from retirement, don’t be afraid to take on a little risk. Assets with higher volatility, such as stocks, tend to produce the greatest returns over time. Although they may post losses for one or more years at a time, remember that the market is cyclical, and you will have plenty of time to recover.
3. Optimize for Tax Efficiency
Depending on which type of retirement plan you’re using, you could be saving a ton of money in taxes by remembering the following:
- Traditional-style accounts give you a tax break right now.
- Roth-style accounts will be tax-free in the future.
In both cases, savers will not pay any taxes on the money held inside the retirement plans for as long as there are no withdrawals. That’s an incredible advantage over traditional investment accounts because it eliminates the headache of figuring out how much you owe the IRS every year.
4. Supplement with Life Insurance
In addition to your retirement plans, you could also be building up money that you can use in the future while also receiving life insurance protection. Permanent life insurance policies have a cash value component and a death benefit.
Cash value is like a small bank account within your life insurance policy, where a small portion of every payment gets contributed. In the future, you can borrow against this cash value for any reason you see fit or use it to pay for your policy.
There are many different types of permanent life insurance policies. Whole Life is the most common policy for building cash value for a policyholder’s lifetime. Universal life insurance is similar to Whole Life but can adjust the death benefits. This gives the policy owner the flexibility to have lower premiums making it more affordable than Whole Life.
The Bottom Line
No matter what type of retirement plans you have or are considering getting, there are a few key ways to make them work for you. This can be done by often contributing, diversifying the assets, and optimizing your taxable situation. Additionally, supplementing your retirement plans with a cash-value life insurance policy can be a good way to add to your net worth and give you financial flexibility in the future.
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