Will you have enough income for your dream retirement? Investing beyond a 401(k)
Working hard to max out that 401(k)? Great! But here’s the thing: As people live longer, running out of money in retirement is a real possibility. Like Social Security, the 401(k) was never meant to be the end-all-be-all for retirement. Expanding your savings options—investing beyond your 401(k) or 403(b)—can help you save more, so your retirement money can go the distance.
“Money enables choices. Ensure you have what you need to help take worry out of your life,” says Sri Reddy, senior vice president of Retirement and Income Solutions at Principal®.
Below, we’ll explore other retirement savings options, like IRAs and annuities, that can help fill in the gaps.
Retirement savings options
“Think of saving for retirement as a ‘three-legged stool,” Reddy says. It includes:
- Social Security
- Your 401(k) or 403(b) (or other employer plan or pensions)
- Supplemented savings (such as 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,” Reddy says. If you’re a high earner, annual limits on contributions may mean you can’t save what you need to continue your current lifestyle.
So unless you have a pension or other sources of income to supplement your 401(k), you may want to broaden your portfolio.
One option: Save with an IRA.
There are two primary kinds of individual retirement accounts (IRAs):
- Traditional IRAs allow you to deduct contributions from your current taxable income.1 Earnings on your investments aren’t 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
Learn more about how retirement accounts are taxed.
Another option: Guarantee income with an annuity.
A deferred annuity is another type of tax-deferred investment account that has two 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 two 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).
- “They offer the highest growth potential, and for the risk-adverse client, variable annuities can offer options to protect against market falls,” Reddy says.
- Fixed annuities provide a guaranteed interest rate for a specific time period (typically three, five, or 10 years). When that time 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 benefit from potential market upswings.
Once you retire and need income, both types of deferred annuities can provide a regular income payment for a certain number of years or for the rest of your life.
Bottom line: Diversifying your sources for retirement savings may help you build your nest egg so you can rest easy (and have fun!) in your next chapter.
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.
3 Your account must be open for five 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 www.ssa.gov/mystatement.
Sri Reddy is a Registered Representative of Principal Securities, Inc. Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Company®. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., member SIPC and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.