No matter what stage of life you are in, it is never too early to begin planning for your retirement. In fact, the earlier you start planning, the better chance you have of being able to enjoy your golden years comfortably. Whether you are interested in retirement planning for self-directed 401k or another way to save for retirement, here are four ways to help you plan for your future and some benefits and drawbacks of each option.
1. Individual Retirement Accounts
An individual retirement account holds investments and comes in two different forms: a traditional IRA and a Roth IRA. With a traditional IRA, investment funds are taxed only when an individual makes a withdrawal. With a Roth IRA, the money invested has already been taxed, and withdrawals are not taxed provided an individual has had the IRA for at least five years and is over the age of 59 1/2. In general, a traditional IRA is better for those whose tax rate is lower after retirement, while a Roth IRA is better for those with a higher tax rate after retirement.
2. Real Estate Investments
Another way to save for retirement is to acquire and rent out real estate property. In this scenario, the property owner collects rent each month and accrues a profit once mortgage payments, insurance, taxes, and repairs are paid for. A bonus of real estate investments is their ability to appreciate. Due to appreciation, a property owner may decide to no longer be a landlord after a few years and make a profit from selling the property. A potential drawback of owning and renting real estate property is dealing with problematic tenants, so be cautious of this aspect.
3. 401k Plans
A 401k plan is an account sponsored by an employer and includes various investments, including bonds, stocks, and mutual funds. One benefit of a 401k is the employer match system, where the employer contributes a set amount of money to an employee’s retirement account based on what the employee contributes. Another benefit is that contributions do not count as income, potentially putting the account holder in a lower income tax bracket. This is also a low-risk investment, protected by the Employee Retirement Income Security Act of 1974.
4. Brokerage Accounts
A riskier option, but one with a lot of reward potential, a brokerage account is used by investors to buy and sell bonds, stocks, and mutual funds. It works similar to a personal banking account but permits people to interact with other investments as well as the stock market. Although brokerage accounts come with the possibility of losing money, they can still be a valuable piece of a retirement portfolio. When deciding how much to invest in these higher-risk opportunities, important considerations include a person’s current age and other assets.
IRAs, real estate investments, 401k plans, and brokerage accounts are all good ways to help save for retirement, and it is wise to have a varied retirement portfolio that includes two or more of these. Start planning early to ensure that you live comfortably in your golden years.