Different options exist to help you save for retirement, no matter if you work for a business that offers a retirement plan or work for yourself.
Like lots of things in life, your path to saving for retirement may have some twists and turns. One year, you might save more; the next, less. A retirement plan you save in by yourself may be a priority for a while, and an employer-sponsored option in other years.
Whatever is available (and in your budget), it’s useful to understand the retirement savings options you can use and expand on. That way, your path to the retirement you envision can be as more solid (and straightforward) as possible. Here’s help.
It’s a generalization, but most people probably have access to two main types of retirement plans: those they open and own all by themselves, and those provided by an employer.
- If you open and fund a retirement plan all on your own, it’s probably either an individual retirement account (IRA) or a Roth IRA. A Roth is created with funds you’ve already paid taxes on, so you’ll generally owe no income taxes when you withdraw that money in retirement. An IRA, on the other hand, is a retirement savings account created with pre-tax funds, so you’ll pay income taxes when you make retirement withdrawals.
- If your employer provides a retirement plan as a workplace benefit to you, it’s probably a 401(k) or a 403(b). Like an IRA, these are both created with pre-tax funds; your tax obligation happens in retirement. One of the most well-known features of these types of plans is an employer match, if available; that’s when your employer contributes a certain percentage of what you contribute as a match.
This list isn’t all encompassing, by any means. There are annuities and brokerage accounts, as well as health savings accounts, to name just a few. (See more on integrating those into retirement planning below.) And, you can be actively saving in multiple types of retirement plans—tucking away funds in a 401(k) through your work, while also putting funds into an IRA. One doesn’t preclude the other.
A couple of key bits of information: Not every retirement plan is the same. Your 401(k) won’t be the same as your friend’s 401(k), and vice versa. Some workplaces may offer options like a Roth 401(k); some may have a pension, or defined benefit plan. If you’re confused what’s available to you, check with your human resources manager or department. Or, contact a financial professional.
In general, “invest as much as you can, as long as you can, in as many ways as you can,” says Heather Winston, a financial professional and product director with Principal®. That’s because diversity in retirement savings accounts can equal diversity in income sources (and tax obligations) during retirement.
So how do you create and prioritize all those options? Think about it this way:
- If you have a job that offers an employer-sponsored retirement plan like a 401(k), save enough to get the full match. That match is essentially free money.
- Next, consider saving more in your 401(k).
- If you meet the income limitations, think about starting or adding to a Roth IRA.
- Because there aren’t income limitations to IRAs, see if you have funds available to contribute to this option.
- Once you’ve fully funded a 401(k), IRA, and Roth IRA, consider adding to a health savings account, brokerage account, or annuity.
Money that you save in 401(k)s and IRAs is invested across what are called asset classes. There are two main types of asset classes: fixed income and equities.
| Fixed income | Equity funds | |
|---|---|---|
| May be made up of | Bonds and certificates of deposit, among others | Stocks |
| Returns and risk | These generate lower returns, with lower potential growth but less risk, too, and stability over time. | Potential returns come from company profits and dividends. Generally more volatile but with greater potential for growth. |
Most retirement savings are not invested solely in fixed income or equity funds; they’re allocated in both (called diversification) to help balance your portfolio growth as the market cycles up and down. That diversification may also reflect your risk tolerance and timeline. For example, if your investments have more time to grow, you may have more tolerance for risk.
In general, you’ll have several paths you could take; which you choose depends on your time and comfort level, as well as what’s available for a specific investment option. Those include:
- Your investment options are decided for you. 401(k) plan investment options are typically determined by the employer or group, sometimes called the plan sponsor, that sets up the retirement account.
- You choose a target date or risk level. A target date approach lets you pick a date—generally based on your age at normal retirement—and the investment mix adjusts to generally become less risky as you near retirement. A target risk approach has an investment mix tied to a specific risk category. Some take more risk (and use more equities) and some take less risk (with more fixed income). If your risk tolerance changes, you can change your fund, too.
- You opt for a managed account service. This uses your information to develop an investing plan and a portfolio of investment options, using an advisor and investing strategies. It can be more personal and aligns with your risk tolerance, timeline, other savings, and goals.
Whatever ways you choose to or are able to save, remember “your plan for retirement should be designed to meet your needs and wants in the long term,” Winston says. “But more than that, your plan for retirement is uniquely yours.”
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