The best retirement "plans", from a financial perspective, are the ones with flexibility. Flexibility comes from account types (and the rules/ advantages of those accounts).
Each account type could be considered "a leg to stand on". The more legs you have, the better.
Every US citizen has the basic leg of social security. The worst case is your retirement savings has only one leg. I consider Social Security to be a "bond like conservative investment". This allows me to invest other areas more aggressively (and take on risk) because I know I have this one leg to fall back on.
The next most common leg is a 401k. The "rules" of the 401k suggest that the withdraws will be taxable. For my wife and I, this means this leg is taxed at 25% or 28% federal tax bracket. Ohio will take some more, we get whats left.
If someone has a pension, that is another leg. I do not have a pension, if I did, I would look at it similar to Social security. It's a conservative tool, so other investments should be more aggressive.
Roth IRAs are another leg to stand on. The rules/advantages of a Roth IRA suggest that qualified withdraws are tax free (YEAH!). Meaning whatever is taken out will not get taxed at all. The more a person can rely on the Roth, IMO, the better. The primary issue here is the only way to get a Roth is to save the money yourself. The above mentioned legs (SS, pension, 401k) get contributions from companies and the government... a Roth needs to funded by the individual which wants to use it.
Annuities are another leg. I see value in supplementing social security with more GUARANTEED income. An annuity is something you "buy" from a life insurance salesman. It is best, IMO, if a person buys an immediate annuity when they retire (and not invest in a variable annuity for 30+ years with high costs). Variable annuities are probably one of worst investments around (for retirement planning), but immediate annuities clearly have a place if someone wants to reduce the risk of running out of assets during their lifetime (the advantage of the right annuity contract would be an income stream for life, none of the other legs, except social security, can offer this feature).
Taxable accounts. If a Roth IRA is maxed ($4000/year for 2007; $5000 a year starting in 2008), a person could invest additional money in a taxable account. Gains in this account would be taxed at 10%/15% long term capital gains rates. This is a lower tax rate than the 401k plan.
The goal is to create as many legs as possible.
Other legs not mentioned including being debt free, owning house (not having a mortgage) and being in good health.
The priority of each leg depends on tax bracket now, tax bracket in retirement, how long you expect to live, and how much money you want to pass onto your kids.
Legs to stand on- how many legs do you need in retirement?
March 4th, 2007 at 08:36 am
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March 4th, 2007 at 11:28 am
March 4th, 2007 at 04:34 pm
Another leg to consider is part time work/small business, at least in the early stages of retirement. Hopefully it wouldn't be needed as a serious money stream but a mental satisfaction & engagement stream. I would imagine that the jolt from 40-50 hrs/week to 0 hrs/week is a massive one that some don't get over. Won't want to be the American version of the Japanese "wet leaf".
March 4th, 2007 at 06:04 pm
1) Savings bonds
2) Rental property
3) Maybe even a small coffee shop!
March 5th, 2007 at 06:01 am
March 5th, 2007 at 08:41 am