Making the most of your retirement strategy
When preparing for retirement, it’s important to build a strategy that makes the most sense for you. Typically, a retirement strategy is built off of your employer’s 401k plan, IRA accounts (the most common being traditional or Roth), and taxable savings.
Think of these different accounts like players on a team. You’re the coach, and it’s time to make some game-winning decisions. Of course, you should always seek an assistant coach (financial advisor) to help advise you along the way.
Hierarchy of savings
Making the most out of your retirement strategy begins with understanding the hierarchy of savings.
Since we don’t have unlimited funds to save for retirement, you need to make sure that your hard-earned money is being allocated to the highest priority retirement account first. More often than not, your priority will be your 401k, followed by your IRA account(s), and finally taxable savings. Keep in mind that you should still contribute to other investment accounts whenever possible.
Going beyond deciding which retirement account you should contribute to first, you will then need to consider how to invest in each of these retirement accounts. The most simple strategy would be to reflect the same asset allocation across the board, though there are always different strategies to explore depending on your risk tolerance.
Retirement withdrawal strategy
Planning for retirement is more involved than just allocating your money to the proper account and investments. You also need to consider what to do when it comes time to live off of your savings and investments. Different retirement accounts have different tax implications depending on whether or not the initial contributions were pre-tax or after-tax, and therefore can influence which account you pull from first.
In addition to this, there are other factors to consider like: taking distributions from the poorer performing accounts first, whether or not you will be in a higher or lower tax bracket in retirement, or your individual risk tolerance.
No matter what, it all comes down to your goals. Everyone has their own risk tolerance, time horizon, and goals, and their retirement strategy should reflect that. The same goes for you. If you work out your own goals, risk tolerances and understand the hierarchy of savings, developing a solid retirement strategy will be that much easier.