Retirement Investment Options
Every adult needs to plan for retirement, no matter your age. From understanding what retirement plan options are available, to ways you can generate income during your retirement, MECU has you covered. Because the retirement planning process can be overwhelming, we suggest working with a financial advisor at MECU to determine the best retirement investments for you.
Common Retirement Plans
Retirement planning begins with understanding your retirement investment options. Most companies offer some form of a retirement plan for their employees. Here’s a brief overview of the most common types of retirement accounts.
401(k) Plan: Many Baltimore employers offer a 401(k) plan. The 401(k) retirement plan allows you to contribute a portion of your pre-tax dollars into an investment account. Luckily, it is common for employers to match employees’ contributions up to a certain percentage - sometimes up to 6%. Some employers will require an employee to work for a set amount of years before they become vested, which means they may not own all of the funds or the company match until they reach that threshold. Learn more about vesting from the IRS.
Contribution limits for 401(k)s can change, so check with your company’s human resources department for the most updated information or contact a financial planner for guidance. You can begin drawing money from your 401(k) plan at age 59 ½. And importantly, note that you are required to withdraw funds starting at age 70 ½ unless you are still employed. Visit our 401(k) calculator for help planning.
Traditional IRA: A Traditional IRA is a retirement plan that allows you to contribute a certain amount of money each year and invest your contributions tax-deferred. This means that once you withdraw the money, you’ll have to pay the taxes. You can set up this account individually and not rely on an employer, but many employers offer an IRA option as part of employment. IRA limits are much lower than 401(k) limits, and if you make a withdrawal before you are eligible, you will be forced to both pay the income tax and a 10% penalty.
Some IRAs are target-date funds tied to your expected year of retirement, so they will automatically adjust the risk of your holdings to be more conservative as you approach retirement age. But many people enjoy customizing their investments and adjusting those occasionally based on a strategy they’ve created, sometimes with the assistance of a financial planner.
Roth IRA: If you can afford to set up another retirement account outside of your employer-sponsored plan, or don’t have a retirement plan from work, consider a Roth IRA. Unlike a 401(K) or Traditional IRA, contributions to a Roth IRA are made with taxed dollars but importantly, will not be taxed when withdrawn. Since contributions are made with your own money, not tax-deferred, you can withdraw funds at any time, tax-free and without penalty.
Roth IRAs are great retirement accounts if you expect your tax bracket to be higher when you withdraw the money. There are eligibility and contribution limits, which a financial advisor from MECU can explain to you. Some people opt to roll over their 401k from a previous job into a traditional IRA or a Roth IRA to keep retirement savings on track. Speak with us to learn more about your options.
Simple IRA: A Simple IRA (Savings Incentive Match Plan for Employees), is like a 401(k) in that both employers and employees can contribute towards it. These retirement accounts are used by smaller companies with less than 100 employees. Employers must match employees’ contributions up to 3% of compensation or 2% nonelective contributions. Simple IRA plans require that all contributions are 100% vested, no matter the length of employment. Visit our Roth vs. IRA calculator to compare.
Income-Generating Retirement Investments
Once you are close to retirement age and built-up your nest egg, it’s time to finally start withdrawing money from your retirement savings. Many people realize that despite their retirement savings strategies, they don’t quite have enough to retire comfortably. To avoid having to go back to work, work with a financial planner or advisor to develop some strategies for how you can also generate income during your retirement. Here are some of the common ways people ensure an income during their retirement.
Bonds: Bonds are considered more stable than stocks because they are similar to a loan in that an investor will receive interest and the face value once it matures. Government and municipal bonds may also offer tax-free income.
Retirement Income Funds: Retirement income funds can produce ordinary retirement income on a monthly basis and are types of mutual funds that appeal to people who prefer to be hands off with their portfolio. Retirement income funds automatically invest money in a diversified portfolio of stocks and bonds. They also allow you to access your money whenever you’d like.
Immediate Annuities: Immediate annuities offer guaranteed income for life, beginning right away, which make them another option for retirement income. This insurance product works by allowing you to make a deposit to an insurance company and in return, receive regular payments for the rest of your life or a specific period of time, e.g., ten years. They also give you the ability to choose the frequency to which you are paid (monthly, annually, etc.). The amount of money you gain from an immediate annuity depends on the current interest rates. For example, the higher the interest rate, the higher you would in turn receive.
Real Estate: A rental real estate investment is another way a retiree can generate income during retirement. There are negatives to renting out space of course, such as maintenance, damage, natural disasters, and so on. However, the rewards you may receive are often extremely advantageous. These can include appreciation on the property over time and certain tax advantages.
There are many other investment products and strategies for producing retirement income and investing for retirement. We recommend speaking with a financial advisor to ensure you understand the pros and cons before deciding or making any transactions.