There are plenty of ways to craft a retirement plan. You could ask your family and friends for advice and they can offer differing opinions. Yet, they could actually be the best retirement plan for them and their situation. The problem with simply following what worked for someone else is your situation may be different. Your income, desired retirement lifestyle, region and legacy goals may be different. As complicated as financial planning can be, don’t shy away from having a retirement plan specific to your needs. The best retirement plans will accomplish your financial goals without compromising what matters most to you.

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The best is not one-size fits all plan

To help you craft the best retirement plan, let’s start with the fact that everything will not work for you. There are several finance gurus out there who will tell you they don’t believe in one financial instrument, but love another. The tools you should you to accomplish your financial goals has little to do with beliefs. There are going to be times investing in the market makes more sense that purchasing an annuity. There will be times when having an annuity makes more sense than purchasing cash-value life insurance. For others, the best recommendation is to have the majority of your investments in real estate, while starting a business is best for someone else. Most financial instruments have a certain situation it works well for and if you fall within that scope, you should take advantage of the benefits. If your circumstances fall outside of the recommended solution, then it doesn’t make sense for you to use that financial instrument. Saying “it depends” is not as simple as telling someone to “never” use a particular retirement strategy, but imagine if you wanted to purchase a new car. Now imagine the sales person always recommended a Honda Civic without learning anything about the number of people in your family, the number of miles you drive a year or your budget. They simply tell you this car has great ratings, great mileage and is one of the most reliable cars on the road. Sure, there recommendation will be right from time to time, but it’s not right for everyone, all the time. This is why you should be wary of people who recommend a particular financial instrument without learning anything about your unique financial situation. To help you make an informed decision, this article will discuss the options available and how to craft them into the best retirement for you.

Defined Contribution Plans

The most common type of retirement plan available is the 401(k). This is considered the best retirement plan by many because in addition to being invested in the stock market, your money is going in pre-tax and many employers offer a match of some kind. The benefit of your money going in pre-tax (before being taxed) is that your money is is not considered taxable income today. As a result, there is the possibility you could trade a higher tax bracket today for a lower one when you retire. You are taking on some risk as you never know what is going to happen to taxes in the future.

The defined contribution plan became popular in the 1980’s because people were paying taxes on as much as 70% of their income. The thought was if you could forgo paying taxes in 1980 on your $100,000 income, then you could retire in 2020 on that same income. The key difference is you would be taxed at 24% today, instead of at 59% in the 1980’s. The difficulty many faces today is the question of whether taxes are going to continue to drop from the current historical lows or are they going to increase. It wouldn’t be fun to forgo paying taxes today to pay higher taxes when you retire. Another risk is the fact you may have to pay a prepayment penalty to access your money before 59½ years old. Of course, that is assuming you can access your money early at all. Many plans offer some sort of access to your plan through loans, but it is not a guarantee.

Final Thoughts on Defined Contribution Plans

401(k)’s and other defined contribution plans are one of the best retirement plans because you have the ability to grow your money tax free. If you have a match, that is free money that only helps you reach your financial goals quicker. Make sure you consider how long your money needs to be vested before the company match is yours permanently. Most companies require five years with them before you can keep the match. Meaning, if you leave the company before the fifth year, they will take back some, if not all of the match.

Traditional Independent Retirement Account (IRA)

The traditional IRA is a great way to have the benefits of a 401(k), with more control and options. Most 401(k) plans have limited investment options for you can choose between. In addition, some of these options have much higher fees than if you were able to open your own IRA. An additional benefit to having an IRA is you can rollover (or transfer) the money from your defined compensation plan whenever you leave an employer. Oftentimes, people believe they must accept the money or transfer it to another employer’s 401(k). In fact, studies show most people will have on average of 13 different jobs in their lifetime. Imagine having to keep track of 14 different retirement plans.

Final thoughts on an IRA

By having your own IRA, you can bring all of your accounts together in one place. Just like the 401(k), the IRA allows your money to grow tax-free until you withdraw it at retirement. At which time you will be taxed accordingly. Accessing your money early can open you up to taxes and penalties.

Roth IRA

The Roth IRA is considered the best retirement plan for those who qualify for it. It is a great compliment to your defined contribution plan because it is funded with after-tax dollars. This means the money you put into your Roth has already been taxed, so you

won’t have to pay taxes on the growth or distributions. To avoid any taxes and penalties, you cannot touch your money before 59½ years old. To qualify, you must make less than

$140,000 for tax year 2021. If you are filing jointing, you need to make less than $208,000 to qualify for a Roth. There are limits on how much you can contribute each year though. The most you’ll be able to pay annually is $7,000, but most people will have lower limits because of age and income.

There is “backdoor” option available where you can qualify for a Roth, even though you make more than the income limits. For the scope of this article, we won’t dive into that option, but I did want to make sure you were aware.

Final thoughts on Roth IRA

This is why the Roth IRA is a good compliment to your other investments if you can qualify. The limits are too low for you to make this your sole retirement strategy, but there are few options available to grow and access your money tax-free in retirement.

Pension Plan

Pensions, also known as defined benefit plans may be the best retirement plan for you because you have an income stream for life. Pensions take most of the retirement planning burden off of your plate and move it to the employer’s. Based on a formula, your employer will provide you a fixed monthly retirement income for the rest of your life. A common formula is to take your years of service, multiplied by your pension multiplier and then multiplied by your final average salary. If your pension multiplier is 2% and you worked 30 years with an annual salary of $100,000 – your pension equals $60,000 per year ($1,153.85 per week). Unfortunately, fewer than 20% of companies offer a pension to new employees. If you have this option available, you likely work for a government agency or municipality.

You may need additional retirement income since your pension is connected to the number of years you are employed. If your retirement lifestyle requires $150,000 per year and your pension is bringing in $60,000, then you need to generate an additional $90,000 per year. Because your pension is tied to your years of service, it makes your decision to leave a company important. In addition to fulfillment and job satisfaction, you need to make sure you are factoring your pension into your overall salary. Consider how much it will impact your retirement to leave 5 years early and whether you can make up that amount. Since your pension is only worth the ability of your employer to pay it in the future, you need to consider the financial stability of the company offering you an income for life. Will they still be around in 50 years to continue mailing you your monthly check?

Final thoughts on pension plans

The best retirement plan to most people is the predictability of a pension. People like to know how much money they can spend and when they will get more. People are living longer and knowing you can’t outlive your money is a good feeling. The downside is whether the company will be around and how your pension treats your spouse and loved ones. If you were to pass within three years of retirement, what happens to the rest of the money? Do they pay your spouse until she passes or is it a set number of years (if any), they will pay her?

Real Estate

Real estate retirement strategies are the best retirement plan for those who like to hold tangible assets. Oftentimes, as you accumulate more wealth, you will start looking for ways to purchase land. A long-term strategy could be to hold the property until it appreciates to a certain value. Others want to turn their real estate into recurring revenue by building apartment complexes or renting out a building. By turning the monthly rental income from real estate into retirement funds, you are able to hold onto your asset, while still accessing some of the money.

Since the real estate market can fluctuate, the option to rent can help you bide your time while you wait for a rebound in a down market. There are risks when using real estate to craft the best retirement plan. It is best to have a plan that incorporates real estate, along with ensuring you have money that is invested in assets that move upward when the overall economy is moving down. If all of your money is invested in solutions that perform well when the economy is thriving, but poorly when the economy is tanking, you will find yourself being forced to sell your assets in a down market. (locking in losses).

Final thoughts on real estate

Real estate strategies can be a key part of the best retirement plan for you. You have access to income by renting the property and you have a generally appreciating asset. You can increase your income by living in a duplex and renting out the other bedroom. If you have multiple rooms to rent, you can generate enough money to cover your entire mortgage. Real estate has tax benefits and can be passed on to future generations. The risk is associated with the fact that real estate normally follows the economy. Meaning, the asset does well in a good economy and can perform poorly in a recession. If all of your assets perform best in a booming economy, then you are going to want to balance your retirement risk by finding assets that perform well in a poor economy.

Business Ventures

Many business owners invest their money into their business in the early going. As a result, most of their money in tied in their business and their business ends up being their greatest asset. As you look to pass your business onto your loved ones or sell it altogether, you will have plenty of questions. Should you maintain a percentage of leadership to ensure the transition goes smoothly? If so, for how long and at what price? What do you do with the money once your business is sold? If you take in all the money as income, you may have a significant tax burden. If that is the case, it could make sense to spread the income around with an annuity or other investment options. Depending on how liquid you need your money to be, your money may be better served investing in long term strategies. You don’t need to invest it all long-term, you can leave a portion liquid so you can access it easily.

As a business owner, you can also invest in your business by offering a SEP IRA. The SEP IRA has a lot in common with the traditional IRA, it is just for business owners. The business owner can contribute up to 25% of their compensation or $57,000, whichever is smaller. Employers like the SEP because it is similar to a profit-sharing plan in the sense, you can contribute at your own discretion.

Final thoughts on business ventures

It took a lot of hard work and sacrifice to build your successful business. It will take an equal amount of intentionality to transition to retirement. Whether that is selling the business outright or passing it onto the next generation. You need a comprehensive exit strategy to ensure you can retire from the business if and when you are ready. You can take a step toward securing your retirement by opening an SEP IRA or Traditional IRA. You also have the option to start moving some of your assets from the business so you are not so dependent on any one retirement strategy.

Guaranteed Income Annuities (GIA)

If you liked the sound of a pension, but your company is not offering you one, no problem. You can create your own income stream for life with a GIA. There are many types of annuities, with a variety of fee structures, but it is important to know all annuities are not created equal. For this article, we are only talking about a GIA. There are two ways to fund your annuity. You can have a deferred annuity, which means you pay into it periodically and then you annuitize (activate) it just before your retirement. Once your annuity is annuitized, you cannot add any additional funds to it. The good news is it will start to send you retirement checks each month thereafter. The second option is referred to as an immediate income annuity. In this instance, you can trade a large sum of money and the annuity immediately starts paying you a monthly income for the rest of your life. An additional benefit of your GIA is you can design it with pre-tax dollars or after-tax dollars. If you use after-tax money, then you have the opportunity to only pay taxes on the gains. Meaning the money you put in won’t be taxed when you take it out. You could also design your GIA with pre-tax dollars if you are looking to lower your tax burden today.

However, all of the income you receive in retirement from your annuity will be taxed.

Final thoughts on GIA

Annuities are complex legal contracts between you and an insurance company. This means in most cases, once your money is in, you and your money are locked in for life. As a result, you want to make sure the GIA is the right strategy for you and your retirement needs. For a GIA to be the best retirement plan for you, you need to make sure the insurance company is going to be around for the long haul. The promise to pay you an income the rest of your life is tied to whether the company continues to exist the rest of your life. If the company dies before you, so does your income.

Cash Value Life Insurance (CVLI)

Cash value life insurance is unique in the sense that you must qualify for the life insurance policy to have access to the future cash value. CVLI has fees attached to it and requires a monthly payment to maintain the policy. The payment is divided between what goes toward your cash value (equity) and what goes towards the fees. Think of it like a mortgage payment. When you first take out a mortgage, most of your money is going to go towards interest (fees), with little towards the balance. Then as you continue paying your mortgage each month, you will notice more and more of your payment is being allocated towards the principle. This causes your mortgage balance to decrease, thus causing your equity to increase. Most CVLI illustrations do not show much equity (cash value) the first decade because most of your money is being allocated toward fees.

When it comes to accessing your equity, you will need to take out a policy loan in most cases. The policy loan can be paid back, or if you have accrued enough cash, you can just have the outstanding balance taken from your death benefit. This means if you have a $20,000 outstanding balance on a $100,000 life insurance policy, then your death benefit would be $80,000. When you access the cash value, you generally only pay taxes on the growth.

Final thoughts on CVLI

When you access the cash value in retirement, you should expect to be taxed on the growth. It is important to keep in mind that CVLI is a complicated contract between you and your insurance company. This means you need to make sure this is the best retirement plan for you, because it is hard to change directions once you start allocating your money to the policy. As a result, CVLI is typically an option you explore if you are wealthy and already maximizing your contributions to your other retirement accounts.

Final thoughts on the best retirement plan

Finding the best retirement plan depends a lot on your unique situation and your retirement goals. The best retirement plan will combine several strategies to deal with the variety of risks you are likely to face. I like to tell people to start where they are. If you own real estate, a business or work at a company that offers a 401(k), start there. Your employer’s 401(k) or 403(b) will usually have a match that can help you grow your wealth even quicker. Start by contributing up to the match. Next, consider opening your own IRA account. This gives you an opportunity to contribute even more to your retirement, while usually having access to more investments at a lower fee. Don’t forget about the possible impact taxes can have on your retirement income. See if you can incorporate a tax-free distribution strategy into your retirement plan with a ROTH IRA. As you can see, you can go several directions with your retirement plan. However, one thing is for certain, you need to work towards saving the maximum legal amount for retirement each year.

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