Four Minimum Retirement Accounts to Consider
Everybody wants to retire in the best financial shape they can, like people who go to the gym to tone their muscles. But if all it took to get your retirement accounts into shape were a visit to the gym, we’d all be in great shape. Because only about half of Americans believe they can retire snugly, let’s look at what amounts to a basic retirement package.
We’ll also discuss some accounts with bells and whistles.
Unfortunately, we need elements of our wealth to contribute to our retirement in the end, so let’s list the token four accounts you need when you head into retirement:
Mirror Income in Retirement
Remember that the four accounts I’m listing today work to contribute, replacing income in your retirement years. Your social security account I’m not listing because it’s automatic. Anyway, we’ll discuss Social Security below.
I’m not sure the four accounts listed are even the floor a retiree needs. So, go ahead and collect as many accounts as you can to contribute to your retirement. Mix and match them.
Discuss your retirement plans with your financial advisor before deciding on life choices. Essentially, keep track of all your retirement accounts to avoid misplacing any. This blog is not financial advice and can’t substitute for a personal financial advisor.
Rather, retirement concepts and their definition form the basis of discussion. One more thing: These four accounts amount to in some people’s opinion a base retirement, and these four accounts some people consider a token retirement. Numerous accounts exist to help you take advantage of tax-deferred opportunities for retirement.
But Wait! Where’s Social Security?
The accounts above don’t include your social security account, home equity account, brokerage account, Roth IRA Certificate of Deposit, or triple-tax advantaged Heath Savings Accounts, among others. For example, your social security account is a given factor in retirement. After your monthly payments get adjusted for inflation, they remain constant. Looking for wiggle room takes real focus, so I just took it for granted when listing four accounts.
How Does Each Account Contribute to Retirement?
Now, let’s talk about how those four accounts contribute at retirement time. Most people have a monthly income. They draw up a budget that keeps tabs on their expenses, with ceilings, so expenses don’t amount to more than their income. In retirement, the income and expenses often equal one another, at 100%, but many retire with less, even at 60%.
Whatever, the amount of money coming into a retirement fund must equal the amount of money going out for expenses. The higher the income the better. If you made $100,000 a year before you retired, experts believe you should put away a million dollars to retire comfortably.
Typical Checking Account
At one time, I couldn’t figure out why people kept tens of thousands of dollars in a checking account when they could put it in a high-yield savings account and make a little money. So why do people keep a lot of cash in a checking account? The funds in the account assign two functions to your checking account. It’s the account you pay all your bills from, and on the other hand, it also acts as a rainy day account.
During economic downturns, having cash around allows you to pay for things without selling anything. You don’t want to sell property of any sort when the economy is in a down-swing. So, it’s good to have cash on hand to weather plagues, like COVID-19, for instance. Retirement time is no different.
As for the function of the primary account, your checking account is where the funds for social security are deposited, along with distributions from your IRA accounts, your certificate of deposits, your high-yield savings account, any pensions, or other accounts.
High Yield Savings Account
By a high-yield savings account, I’m not talking about IRAs but your typical passbook savings accounts. To find a high-yield savings account, you must do a Google search because high-yield savings accounts are offered by online banks that don’t pay overhead for physical buildings like your neighborhood bank does.
So, once you’ve found a high-yield savings account online, please don’t go to your banker and expect them to meet or beat that yield. Instead, add money to your high-yield savings account online and count it to your retirement. Once retired, look at the amount of principal the account has and the amount of interest and do the math, taking the dividend regularly and taking out an annual stipend to fund retirement. There are no tax issues whatsoever with high-yield passbook savings.
IRA Account
An IRA account is a tax-deferred savings account explicitly earmarked for retirement, so you can start saving toward retirement early in life; before long, you can afford a tax-deferred retirement IRA CD and move money into that. You don’t pay taxes on an IRA until you use it.
Because the time frame for using your money differs for a CD than for a savings account, you’ll enjoy a larger yield with an IRA CD.
So, what do you do with it when you retire?
Work-Related Savings Account
While some people are unimpressed by social security payments every month, those funds can play a significant part in people’s retirement packages. Many people do not know that the social security dollar amount on your pay stub your employer matches every paycheck. You only pay one side of the SSI stub. Your boss pays the other side.
Work-related savings accounts can give you the same advantage: matching funds from your employer! So, take a work-related savings account seriously if your employer offers one. For one thing, you can often pick from investment choices, which, if you know what you are doing, can increase your 401 K’s performance.
This tax-deferred account allows you to save money tax-free at retirement. Just be careful to study the work-related savings account so that your benefit is clear to you before signing up. Once you’re in, remember that every time you change your address, you must update your address with your employer, even if you left years ago, to keep getting statements.
Other Important Accounts
Brokerage Account
Unless it’s specified as a retirement account, a brokerage account is not a tax-deferred retirement account. Typically, you keep your portfolio, stocks, bonds, mutual funds, and ETFs in your brokerage account. You can use the funds whenever you want; many people use it to fund retirement as, for instance, an IRA account. While it performs well for long-term investing strategies, like retirement, a brokerage account’s funds can be cashed out at any age. It’s a great idea to have one. If you don’t have a brokerage account, consider opening one, particularly in your 20s, 30s, or 40s.
Home Equity
Many people use their home equity account for retirement. A home equity loan often serves as people get older. Another option, reverse mortgages, comes off as fee-heavy, and though you can add the fee to the loan amount, it makes the seller poorer. If you consult your financial advisor, they may warn you off reverse mortgages.
If the housing market goes up, selling your home and downsizing your space works as a strategy. In addition, it eliminates maintenance costs associated with owning a home. Hey! That money from the sale could go into an actual brokerage account!
Health Savings Account
While complicated and full of hoops, the triple tax-advantaged health savings account offers a kind of self-insurance in a tax-deferred account. It comes out of your payroll deductions at work. An HSA must be part of a high-deductible HSA-approved insurance plan. I label it self-insurance. Any “high deductible” policy means self-insurance to me.
The HSA allows the owner a little peace of mind if they decide to retire early, say at age 52, to hit the golf course for example. If they’re nervous about their health insurance coverage, about the time frame between COBRA and Medicare, the HSA solves the problem. Other people discover that tax-deferred savings look as attractive as a work-related savings account like the 401K.
The money they put into that account can be used for health expenses before retirement. If the health care qualifies, you take the savings out, and the government won’t tax you for early withdrawal. Once you’re retired and enrolled in Medicare, you can use the HSA for cash like a 401K account.
Retire Tax-Free
Retirees can mix and match any two, three, four, etc. accounts to make retirement work. for example, ask your financial advisor if you can retire on social security and a home equity account if you don’t have a lot of money stashed away.
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