What is a good investment for retirement? In today’s post, I shall be answering this question, to help anyone who may be thinking of creating a portfolio of retirement assets that will support their lifestyle. I know you are here today because you are also looking for answers as well, so read on till the end of this post to find out more.
According to reports released by the Centers for Disease Control, the life expectancy for those who retire at 65 in the U.S population is 18.8 years. This means that anyone who is about to retire should prepare to fund about 2 decades of their daily expenses.
To ensure that you have a financially secure retirement, you ought to plan early in life, or right now, if you have not done so already. You need to ensure that your portfolio is balanced, or diversified so that it can withstand market shakeups, as you wait for the accumulation of capital gains from your assets.
To do this, you need to pick good investments for retirement. (Also read: Best Investment For Retirement Income (Plus Suggestions)
In the retirement marketplace, you can access most of the investments through the retirement plans offered by different service providers, and as you will find out, the first and major step will lie in deciding on the type of plan you need. Having the right retirement plan will help you access the most suitable assets for investments as well as the right investment structure, as you shall see in the next section.
Defined Contribution Plans
Defined Contribution Plans, or DCs, as they are popularly abbreviated, have been around since the early 1980s, and are a commonality in the present-day retirement marketplace. About 86% of Fortune 500 companies offered only DC plans such as 401(k)s, as opposed to traditional pension schemes in 2019. Other types of DC plans include 403(b) and 457(b).
- 401(k) – common amongst small, medium, and big employers alike. ( Read more about: Is an IRA Better Than a 401(k)? | The 2022 Detailed Guide)
- 403(b) – offered to employees of public schools as well as certain tax-exempt organizations
- 457(b) – mainly offered to state and local government employees.
The contribution limit for each of the plans above is $20,500 for those below 50 years or $27,000 for those above 50 years.
Most DC plans are structured as Roth versions, in which the employees get to contribute after-tax dollars so that they can take their withdrawals tax-free upon retiring.
Individual Retirement Plans (IRA Plans)
An IRA is a retirement saving and investment vehicle established by the U.S. government to enable its workers to save for their retirement years. The contribution limit for IRA plans is $6000 for those aged below 50 and $7000 for those aged above 50.
There are many different types of IRAs, including the ones discussed below:
This is a tax-advantaged IRA that allows you to make contributions using pre-tax dollars. You will only get taxed when taking withdrawals during retirement.
With this type of IRA, individuals contribute to their accounts using post-tax dollars, which allows them to take tax-free withdrawals during their retirement years.
This type of IRA allows the unemployed spouse of a worker who has an earned income to fund their own retirement plan. The working spouse’s taxable income should, however, be more than the contributions they make to any of the IRAs. A spousal IRA can either take a traditional or Roth structure.
Such IRAs are set up like traditional IRAs, with the only difference being that they are usually for small businesses and their employees. Only the employer is allowed to contribute to this plan, with the contributions made going to each of the employees, as opposed to a trust fund. Self-employed individuals can also create SEP IRAs. The contribution limits for SEP-IRAs are 25% of compensation, or $61,000, whichever amount is less.
With 401(k) plans, employers are required to pass non-discrimination tests every year, to see to it that their highly compensated employees are not contributing too much to their plans, in relation to the rank-and-file. SIMPLE IRAs are designed to bypass all these requirements since all employees are entitled to similar benefits. The employer can choose to:
- Contribute a 3% match
- Make a 2% non-elective contribution, regardless of whether the employee saves nothing in their SIMPLE IRA.
Self-Directed Individual Retirement Account
A self-directed IRA (SDIRA) is a unique type of IRA that allows an investor to hold assets that are otherwise not allowed in the IRA plans discussed above. SDIRAs present you with more freedom to decide on the type of assets you want to hold, which can be such a great opportunity for you to maximize your earning potential.
Most SDIRAs are named after the type of asset that is mainly supported by the self-directed IRA custodian. The name of the SDIRA should, however, not fool you, since most SDIRAs (unless in special cases), allow you to add a wide range of all IRA-approved assets for this type of plan.
If you come across a gold IRA, you should know that the main asset supported by the IRA custodian is gold, but you can also use this account to invest in other assets such as silver, platinum, and palladium. With a Real Estate IRA, the IRA custodian mainly supports real-estate-based investments, but you may most likely be allowed to hold other assets in your account.
The assets you can hold in an SDIRA include:
- Precious metals
- Private Equity
- Private lending
- Limited Liability Companies
- Bowling alleys
- Life settlements
- Retirement homes
- Show horses
- Renewable energy e.g. solar energy, biofuel, water, and wind energy.
- Mineral rights
- You are not allowed to add life Insurance products and collectibles to your self-directed IRA
- Self-directed IRA custodians do not offer investment advice. They are only required to oversee your activities, without interfering with any decisions you make, provided that they are allowed under the laws stipulated by the IRS.
Frequently Asked Questions on “what is a good investment for retirement”
1. What is the best SDIRA custodian?
If you are interested in opening a self-directed IRA, then there are many SDIRA custodian options for you. You can check out our list of recommended custodians, or you can do an online search to find out which companies are at the top of the industry. Some of the things that you should check about SDIRA custodians before deciding on the ones to settle on include:
- Customer experience/ customer care availability
- Consumer trust ratings
If you come across several negative ratings and comments about a specific SDIRA custodian, then you should stay away from them.
2. Are there any other viable investments that are good for retirement?
Yes. If the options presented above are not good enough for you, based on your financial objectives, then you can try out the options listed below:
- Thrift Savings Plan (TSP)
- Guaranteed Income Annuities
- Traditional Pensions
- Solo 401(K) plans
- Non-qualified deferred compensation plans
- Cash-balance plans
- Cash-value life insurance plan
3. Which retirement plan is best for you?
In most cases, you will mainly have access to an employer retirement plan, and it may be the best you have. You may, however, supplement such a plan with an IRA, by rolling over some of your retirement funds in the employer plan to your IRA.
If you already know that most of your retirement savings held through the employer-sponsored plan are tied to paper assets, you might want to consider opening a self-directed IRA instead of a regular IRA, so that you can get the opportunity to diversify your retirement investment portfolio.
4. Can I have more than one retirement plan?
Yes, you can. There are, however, some complexities that are involved with doing this, since you are not allowed to exceed the annual contribution limits.
If you intend to open another retirement plan to supplement your existing one, then you should talk to your financial advisor, accountant, or IRA custodian to establish how much you ought to contribute to each plan, and in what order. Doing this will help you avoid any unnecessary conflict with the IRS.
Thank you for reading: what is a good investment for retirement? I hope that you have enjoyed it and that you are now better informed on how to make better decisions. If you have any questions or thoughts to share, drop them in the comments section, and I will get back to you ASAP!
I wish you well,
Eric, Investor and Team Member at Gold Retired!