Man looking up information on retirement accounts to supplement his employer plan

Will you have enough income for the retirement of your dreams? Going beyond the 401(k)

Working hard to max out that 401(k)? Great! But here’s the thing: Do you know if it will provide enough money to fund a retirement that could last 20-30 years? Even if it does, will you be able to live the lifestyle you're used to?

Like Social Security, the 401(k) was never meant to be the end-all-be-all for retirement. Adding other types of accounts to your retirement mix, like IRAs and annuities, can help fill in the gaps and offer benefits like guaranteed income.

A rule of thumb: Save more

As people live longer, running out of money in retirement is a real possibility. Expanding your savings options—investing money beyond your 401(k) or 403(b)—can help you save more, so your retirement money can go the distance.

“Money enables choices. By ensuring you have what you need, you can take the worry out of your life,” says Sri Reddy, senior vice president of Retirement and Income Solutions at Principal®.

The retirement savings tripod

“Think of saving for retirement as a ‘3-legged stool,” Reddy says. It includes:

  • Social Security
  • Your 401(k) or 403(b) (or other employer plan or pensions)
  • Supplemented savings (like investments, savings, and annuities)

“Even if you max out your 401(k), it likely won’t be enough to cover what you need in retirement,” says Reddy. If you’re a high earner, annual limits on contributions will likely mean you can’t save as much as you need if you want to continue your current lifestyle.

So unless you have a pension or other known sources of income to supplement your 401(k), you’ll probably need to broaden your portfolio.

One option: Save with an IRA.

There are 2 primary kinds of individual retirement accounts (IRAs), each with distinct benefits:

  • Traditional IRAs may allow you to deduct contributions from your current taxable income.1 Earnings on your investment are not taxed as they grow. However, you do pay income tax on money you withdraw (contributions and earnings).2
  • Roth IRAs don't allow you to deduct contributions, because you fund it with money that’s already been taxed. Your qualified withdrawals from your Roth IRA, contributions and earnings, after age 59½, are tax-free.3

Traditional IRA or Roth IRA? It’s all about taxes.

If you expect to be in a higher tax bracket in retirement, a Roth IRA might be the best choice. That’s because the money you contribute now is taxed up front, at a potentially lower rate. However, Roth IRAs, like traditional IRAs, have limits on how much you can contribute to the account each year, based on your income.

If you are nearing retirement or think your tax rate may fall significantly after your career is over (because you won’t have income sources beyond your retirement savings and Social Security, for example), you may want to consider a traditional IRA.

“A traditional IRA is also a good choice if you anticipate living in a lower-tax area when you retire,” says Reddy. “It’s better to put your money in tax-deferred now and take it out in the future at a lower tax rate.”

Before you open an IRA, make sure you’re contributing the maximum to your 401(k) to take advantage of any employer-matching contribution. Then, you can invest any additional money in an IRA or other savings options.

Another option: Guarantee income with an annuity.

A deferred annuity is another type of tax-deferred investment account. Deferred annuities have 2 main phases:

  • Savings phase: You pay premiums (either as a lump sum or installments) into the annuity.
  • Income phase: When you’re ready to retire, the annuity is converted into guaranteed income payments. Withdrawals of deferred annuity earnings are taxed as ordinary income.2,4

There are 2 basic types of deferred annuities:

  • Variable annuities invest in things that go up and down with the market, which means your balance will vary day to day. 5 These work similarly to a 401(k).
    • “Variable annuities can be a good fit for people who plan to retire in 10 or more years,” says Reddy. “They offer the highest growth potential with the option to protect against market falls.”
  • Fixed annuities provide a guaranteed interest rate for a specific period of time (typically 3, 5, or 10 years). Think of these like a CD. When the time period is up, the annuity renews at the market’s current interest rate. Earnings grow tax-deferred.
    • Fixed annuities are more conservative. You’ll get an interest rate you can count on, but you won’t be able to benefit from market upswings.

Once you reach the point of retiring and needing income, both types of deferred annuities can provide a set regular income payment, for either a certain number of years or the rest of your life.

Think paychecks vs. “playchecks”

When preparing for retirement, Reddy says to start by estimating your expenses.

“Calculate your mortgage payment/rent, utilities, food, medical costs—things you can’t live without. Next, figure out how much you anticipate getting from Social Security and other guaranteed sources like a pension. Then consider an annuity to help make up for any shortages.”

“View your money as paychecks and ‘playchecks,’” says Reddy. Paychecks (guaranteed income) pay for essentials. Playchecks (money based on market performance) fund discretionary spending.

Diversify your sources for retirement savings, and you can rest easy (and have fun!) in your next chapter.

Take the next step

1 Subject to certain limitations and restrictions.

2 If withdrawals are made prior to age 59 ½, you may be subject to a 10% IRS penalty.

Your account must be open for 5 years and you must be over age 59 ½ to be eligible for qualified tax-free withdrawals.

4 Any guarantees are based on the claims-paying ability of the issuing insurance company.

5 Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed by, any bank or savings association. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.

Guarantees are based on the claims paying ability of the issuing insurance company.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

The law governing social security benefit amounts may change because the combined trust fund reserves are projected to become depleted no later than 2034. Payroll taxes collected will be enough to pay only about 79 cents for each dollar of scheduled benefits. For complete information regarding your Social Security benefit, you can contact the Social Security Administration at 800-772-1213 or visit