Answering "How can I save for retirement?"

8 ways to save for retirement

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People often get it wrong.  Some think Social Security is supposed to completely fund your retirement.  But you know it’s only one component.  Others think if they participate in a 401(k) plan offered by their employer, ample retirement income is assured.

If you are talking with an individual or speaking before a group, you may be asked: “How can I save for retirement?”

1. Contribute to your 401(k) at work.  You want to maximize your contributions.  Some people think retirement is far away.  It’s not.  If your company offers a match, you want to get every benefit coming to you.

2. Put your money to work.  You likely have options on how your retirement savings can be invested.  Your tolerance for risk is an important consideration.  Assuming you are comfortable thinking long term, let that influence your choice of investments.  Sticking with cash or a money fund might be the safest way to protect your principal, but you will see little growth while we have low interest rates.

3. Fully fund your IRA.  It’s easy to forget about it.  Individuals are allowed to contribute $6,000 per year.  This reduces your taxable income, which is a good thing.  Why?  Because it’s very hard to save after tax dollars.  If you are over age 50 and haven’t been keeping current with your contributions, you can take advantage of the catch-up contributions rule and contribute a little bit more.

4. Set up a retirement plan for your side business.  Many people do something on the side.  They might do consulting.  They might run an online store.  Maybe they are a writer.  If you’ve organized your side activity as a business, you should be entitled to set up a retirement plan funded specifically by income from that business.  This can be a good way to shelter income from your side business from taxes.

5. Buy life insurance.  There are many good reasons to buy life insurance early.  It serves dual purposes.  Early in life, it provides protection, in case tragedy strikes.  The cash from the death benefit can be used to replace income.  Over time, whole life insurance builds cash value, meaning it serves as a savings vehicle too.  The growth you are achieving is not taxed as income because it’s sheltered.

6. Buy an annuity.  If an employee receives an annual bonus and retirement savings is a priority, they might consider buying an annuity.  Annuities typically operate under a dual structure consisting of an accumulation or growth phase and the distribution phase.  A person owning whole life insurance that has accumulated cash value can often convert their policy into an annuity when they need regular income.

7. Participate in your company’s stock purchase plan.  Many firms allow employees to direct a portion of their monthly earnings towards buying stock in their company.  This might even be offered at a modest discount.  Unlike conventional stock purchases, the transaction should be commission free.  This is another way to divert income into a form of savings.

8. Use the annual bonus.  Some employees are paid via a regular salary and an annual bonus.  The bonus is often divided into components: One might be straight cash while another might be shares of stock and a third could be stock options.  The logic is the firm wants employees invested in the success of the company.  The shares of stock often have a required holding period before they vest or become your own.  The stock options often allow purchase at a price higher than the stock was trading at the moment the options were awarded.  This can be another good savings vehicle, but you need to be aware of the danger of concentrated positions.

There are many ways employees and clients can direct money towards retirement.  Generally speaking,  it’s better when the money is automatically deducted from your paycheck vs. you disciplining yourself to write monthly checks yourself.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” can be found on Amazon.

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