Retirement is changing — people are living longer, jobs with pensions are increasingly rare and retirees are relying on their 401k savings more than ever. Some old retirement strategies don’t work as well as they used to and some are just plain wrong. Here are some unorthodox retirement strategies that really work so you can bring your retirement plan to the 21st century.
Click through to find retirement savings strategies you can use to grow your nest egg.
1. Plan For a Retirement That Could Last 30 Years — or More
A few generations ago, people started working in their early 20s, worked for the same company for 40 years until they finally retired with a pension and a gold watch at 65, and lived for 10 more years in retirement. Today, people might still retire at 65, but they could live for 30 more years or even longer, and it’s unlikely they’ll have just one employer or work at a job that offers a pension.
Your retirement strategy must assume you need enough money to last at least 30 years. The key to a robust nest egg is to save consistently and as early as possible.
2. Use a SEP-IRA to Save If You’re Self-Employed
“A common misconception is that it is harder to save for retirement if you are self-employed,” said Nancy F. Doyle, CFA, of the Doyle Group. “If you are self-employed, one easy way to save for retirement is a Simplified Employee Pension, which is also known as a SEP-IRA. According to the IRS, you can contribute the lesser of 25 percent of your compensation or $56,000 for the 2019 tax year. This contribution reduces your taxable income and builds your retirement nest egg. It is a win-win if you work for yourself.”
3. Postponing Paying Taxes Isn’t the Best Strategy for Everyone
“The concept of not paying taxes on retirement savings is a myth,” said Bobbi Rebell, CFP and co host of the Money with Friends podcast. “The truth is that you pay tax — it is just a question of when, and on how much income.”
Depending on the investment vehicle you choose, you’ll either pay taxes on the money when you earn it or when you withdraw it in retirement.
“For example, with a 401k, you avoid paying taxes until you take the money,” she said. “This has always been the default, but it might not be the best choice for everyone. We now have both Roth 401ks and Roth IRAs, so everyone should take the time to really think about what is best for them. You can to pay the tax on retirement funds now, and let the money grow post-tax, in a Roth. Or, you can avoid paying the tax in the near term, get the deduction, and let the full amount grow pre-tax, knowing that you have to face the taxes later on.”
Think about your financial situation and decide if it’s more cost-effective to pay taxes now or in retirement, depending on your tax bracket. A combination of pre- and post-tax accounts might work for you.