Why Should You Invest in Retirement Plans?
Many employers offer retirement plans as part of employee compensation. They include 401(k)s, 403(b)s, and defined benefit (pension) plans. These investment tools can provide employees with valuable tax advantages. But they must be used effectively.
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Tax-advantaged savings
Many Boeing retirement plans offer tax benefits to encourage investment. Individual retirement accounts, like 401(k)s and traditional IRAs, allow people to save on a pretax basis; earnings grow tax-free until withdrawals are made in retirement. Members of the government and uniformed services can participate in the Thrift Savings Plan (TSP), which is a savings option similar to the ones available in many employer-sponsored retirement plans like 401(k)s and 403(b)s. These plans often offer matching contributions from employers, which means they will match the employee’s contribution up to a certain amount or percentage. Pensions provide another benefit: They pay until death and aren’t dependent on your current employer’s success as a business. However, they do have limitations. Typically, these retirement plans offer less portability and flexibility than defined-contribution plans like 401(k)s and 403(b)s. And they don’t have the same contribution limits as IRAs, which are available to everyone regardless of employment status or income.
Tax-free growth
The investment options available through retirement plans and IRAs offer a wide range of potential returns. Some options, like equity investments, offer a higher potential for growth but come with more risk. Others, like debt or fixed-income investments, offer a safer approach but may earn less in the long run. Whether you choose an equity or bond fund, try to diversify your portfolio. This will help ensure that your investments can continue to grow if one or more experiences setbacks, such as a stock market crash. If you’re already enrolled in an employer-sponsored retirement plan, take advantage of any company match offered.
Guaranteed income in retirement
One significant advantage of pension plans vs. 401(k) and 403(b) plans is that retirement income typically pays until death, eliminating the possibility of outliving your savings (a significant risk with IRAs and other defined-contribution accounts). But even with a traditional pension plan, there are still expenses like housing, food, healthcare, property taxes, and cellphone service to cover. To help address these inflexible costs, some pre-retirees use lifetime income annuities to secure guaranteed income from a portion of their savings. This approach may give customers the confidence to invest the rest of their savings to grow their retirement assets. But as the retirement market is anything but predictable, many customers’ appetite for risk may decrease over time. As a result, it’s essential to have a diversified plan that includes guaranteed income in retirement.
Tax-free withdrawals in retirement
Retirees can draw on funds in their tax-advantaged retirement accounts when they need short-term liquidity. But if they withdraw these assets too soon, they may incur a 10 percent penalty. That’s why creating an investment strategy that maximizes the benefits of your retirement plans and other tax-efficient assets is essential. A system that takes a total return approach—which incorporates portfolio income and appreciation —may help you avoid the 10% withdrawal penalty and have a smoother transition into retirement. You may be automatically enrolled in your company’s 401(k) or defined contribution plan if you’re a rank-and-file employee. And if you’re self-employed, there are other options, such as SEP and SIMPLE IRAs for small business owners or Individual 401(k)s, allowing sole proprietors to make higher contributions each year.
