Stansberry

Maximizing Your Retirement Savings: A Comprehensive Guide to Retirement Plans

Throughout your career you will come across employers that offer a variety of savings plans that can assist you in your journey toward retirement. In this piece I will discuss some (but not all) of the more common plans that may be available to you through your employer, but also additional plans that function outside of employer plans.

Understanding the available options is crucial to enhancing your financial freedom in retirement. Make sure to participate in plans subsidized by your employer or those offering tax-deferred or tax-free growth. The single best advice that I can give anyone starting their career is to review these plans carefully and contribute what you can, as early as you can. Doing so provides real benefits throughout your career and in retirement.

For the purpose of this article, there are two types of plans: employer sponsored retirement plans and employee sponsored retirement plans. As the names imply, an Employer Sponsored plan is offered by an employer at low or no cost. An Employee Sponsored plan, on the other hand, is independent of an employer and one that can be established independently.
One compelling aspect of the Employer plans is that often there will be a match that your employer provides for every dollar that you contribute. This can greatly increase the savings rate of contributions and can have a meaningful long-term impact on the size of your retirement “nest egg”. You should always speak with your benefits representative to understand what you can contribute to take full advantage of any employer match.

Unfortunately, when we are young, retirement seems many years away and we may not take it as seriously as we should. That may be a costly mistake. Participating in these plans early in your career allows you to take advantage of the power of compounding… simply, your accumulated savings in previous periods, grows at an ever-accelerating rate which works to your advantage and the longer your time horizon, the longer your ability to take advantage of the effects of compounding.

Believe me when I say this… start as early as possible and your future self will thank you!

Importantly, there are various retirement plans, each with its own set of benefits. The specific advantages depend on factors such as tax treatment, contribution limits, accessibility of funds, and employer involvement. Here are some common types of retirement plans along with some of their corresponding pros and cons:

401(k) Plans:

One of the most popular types of employer-sponsored retirement plans is the traditional 401k. Estimates suggest that up to 80% of employers offer this type of savings plan.

This is funded through employee contributions. With this, plan participants can contribute a portion of their pre-tax income to the plan up to $23,000 (2024). If you are over age 50, there is also a $7,500 “catch-up” which currently enables you to contribute up to $30,500 (2024).

From a tax perspective, this contribution can also reduce taxes paid for the year as the pretax contribution reduces your overall taxable income. Additionally, this strategy of investing allows assets to grow tax-deferred until you start withdrawing during retirement. For these retirement accounts, tax deferred growth means that if you buy an investment for $1,000 and sell it at some future date for $10,000, you will pay no capital gain taxes!

As I mentioned earlier, some employers will also offer matching contributions, which can significantly enhance your retirement savings over the duration of your career.

Lastly, this type of plan is highly portable, enabling individuals to rollover 401(k) funds into another employer’s plan or an IRA when changing jobs.

This strategy is not without its drawbacks. Often within 401k’s there are limited investment options which mitigate your ability to fully diversify assets. In addition, any withdrawals before age 59½ may be subject to a 10% penalty (with some exceptions). Also, these accounts are subject to Required Minimum Distributions (commonly referred to as RMDs) currently at age 73. Meaning you will be required to start drawing on these assets and when you do, that distribution is considered income and taxed accordingly. If, however, you are still working for the employer (and you do not own more than 5% of the company) you can delay required distributions until the year after you retire.

Traditional IRA (Individual Retirement Account):

Another common retirement savings vehicle is the Traditional IRA or Individual Retirement Account. This savings plan allows you to contribute $7,000 a year and after age 50 there is a “catch-up” contribution of $1,000 bringing the total contribution to $8,000 in 2024.

Importantly, IRAs are different from 401k plans in that IRAs are an employee sponsored plan. This means that you can contribute to an IRA outside of a company sponsored savings plan but, as such, there will be no employer match. To contribute to an IRA, you must have earned income, and depending on your income level, some of these contributions may be tax-deductible. Deductible IRA contributions may effectively lower your taxable income for the year.

Like the 401k, the IRA offers tax-deferred growth allowing the investments to grow in a more meaningful fashion until withdrawal in retirement. Unlike the 401k, IRAs generally offer far more investment options than 401ks.

The Traditional IRA is a retirement account, so any distribution prior to age 59½ may be subject to tax penalties. Furthermore, at age 73 you will be subject to the same required minimum distribution as the 401k and distributions are taxable as income at your marginal tax rate. Please note that contributions to one employee sponsored plan will impact the degree to which you can contribute to a Traditional IRA.

Roth IRA:

Like a Traditional IRA, Roth IRAs are also employee sponsored plans meaning you can contribute outside of an employer plan.

Both Traditional and Roth IRAs allow annual contributions of $7,000, with an additional $1,000 “catch up” for those over age 50 (2024). Unfortunately, the Roth has certain restrictions based on income, so make sure to confirm your eligibility.

Roth IRAs are great for a variety of reasons. Unlike the Traditional IRA, you contribute after-tax money but the investment each year grows tax-free (vs. tax deferred) and there are no RMDs at age 73, so you can let this money grow without ever drawing on it. But if you do need to draw on this account in retirement, that income will be tax-free to you as long as you meet the requirements (you must be at least 59 ½ and had the account open for 5 years). This means that if you invest 100k over the course of your life and that is now worth 500k (assuming greater than 5 years has elapsed), you will pay zero taxes on that 400k gain EVEN when you draw income from the account.

If, on the other hand, you find yourself not needing this income in retirement, you can leave a nice tax-free account to your heirs. A nice problem to have!

For this particular retirement solution, detractors are that contributions are not tax-deductible but also the eligibility restrictions I mentioned earlier. Specifically, the threshold is phased out for single filers with a MAGI of $146,000-$161,000 or greater in 2024.

An important side note is that back in 2006 a ROTH 401k was developed, which is a hybrid retirement strategy with many features of the Roth and the 401ks. Specifically, you are able to save after tax money into a 401k structure through an employer sponsored plan. These plans don’t have the income restrictions of an employee sponsored Roth IRA so if your employer offers it, you can contribute regardless of income level. Additionally, the Roth 401k has the higher contribution level associated with that of a 401k ($23,000/yr or $30,500 after age 50 in 2024).

SEP-IRA (Simplified Employee Pension IRA):

If you are self-employed, you might consider a SEP. A SEP IRA or Simplified Employee Pension IRA is an employer sponsored retirement account and can be good for employees but may also be advantageous to small business owners. With this particular type of employer sponsored plan, for eligible employees it is fully funded by the employer requiring no employee contributions. Also, as with other employer sponsored plans, employees may also make contributions to outside employee sponsored plans such as Traditional or Roth IRAs.

There are several features that make SEP plans compelling.

First, if you are the employer, employer contributions to a SEP IRAs can be tax-deductible. In addition, SEPs can allow you to contribute at an accelerated rate. In fact, in 2024 a business owner can contribute the “lesser” of $69,000 or 25% of compensation.

What does this mean for employees? As stated earlier, a SEP is exclusively funded by the employer. Employers are required to contribute the same percentage of salary that they themselves are taking for their SEPs. This means that if an employer is taking 20% of their income as a contribution to their SEP, they must do the same for all eligible employees. This can be a great solution for the employee making $100k/year as, if eligible, this will require the employer fund that employee SEP account with $20k. As with other retirement accounts, investments for both the employer and employee grow tax-deferred until retirement at which point, they must take distributions which will be taxed as income.

This type of plan is generally best for small business owners with few employees because the administration of these plans is simple but be aware of contribution commitments should you have several eligible employees.

SIMPLE IRA (Savings Incentive Match Plan for Employees):

A SIMPLE IRA is an employer sponsored plan that can be offered within small businesses with fewer the 100 employees. Like a SEP IRA, SIMPLE IRA plans are easier to administer than 401ks, making it a compelling solution for employers.

This plan allows both employer and employee contributions, with potential employer contributions following one of two formulas:

1. Employers contribute dollar-for-dollar what the employee contributes, up to a max of 3% of your compensation. Typically, employers must perform this 3% match of employee compensation, if employee contributes at least that amount.

2. Make either a matching contribution of up to 3% of the employee’s annual compensation or a nonelective contribution for each employee of 2%.

For the employee, the contribution limit in 2024 is $16,000, with over age 50 employees able to make an additional $3,500 catch-up contribution. This limited contribution makes the SIMPLE IRA one of the less popular retirement savings solutions.

Pension Plans:

Certain institutions may offer Pension Plans. Common careers that utilize this retirement plan may include Teachers, State and Local government, Utilities, Protective Services, Nurses and Unions.

Pension Plans are employer funded plans that may offer guaranteed income in retirement that is generally a percentage of the income that you earned while working for the employer. In some cases, employees may also contribute to their pension fund through salary deductions and these combined contributions (employer and employee) are invested over the years to generate returns and build up the pension benefit.

Pension funds are typically invested in a diversified portfolio of assets such as stocks, bonds, and other securities with a goal of growing assets to fund the retirement benefit for the employee. During the working years, individuals are in what is referred to as the accumulation phase, where these investments can grow as with other investment strategies. During this time there is generally a vesting period which is a required time an employee must work to be entitled to the full benefits of the pension plan. As the employee works longer the percentage of benefit increases.

At a defined retirement age, the individual will generally receive payments from their pension that can come in a variety of forms including lump sums, annuity payments or both. With the annuity option, the pension will provide income for the rest of the retiree’s life or even the life of the retiree and the spouse.

While these retirement solutions are excellent sources of income in retirement, the retiree often does not have much control over how assets are managed, so benefits may not always keep pace with inflation.

As discussed, each retirement plan has specific rules, limitations, and eligibility criteria. Choosing the right plan depends on individual circumstances, long term financial goals, tax considerations and investment preferences. Consulting with your SAM Wealth Manager may help in making informed decisions based on your unique situation.
Importantly, it is never too early to begin saving and planning for retirement. The power of compounding coupled with a longer time horizon will, even with smaller contributions, come together to create meaningful value and wealth for your future self!

Stansberry Asset Management (“SAM”) is a Registered Investment Advisor with the United States Securities and Exchange Commission. File number: 801-107061. Such registration does not imply any level of skill or training. This presentation has been prepared by SAM and is for informational purposes only. Under no circumstances should this report or any information herein be construed as investment advice, or as an offer to sell or the solicitation of an offer to buy any securities or other financial instruments.
SAM does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

MEET THE AUTHOR

Chris Gilmor, CFP®

In Chris’s role as a Senior Wealth Manager, he focuses exclusively on client relations and is dedicated to bringing a high level of service. Throughout his career he has worked closely with both institutional and individual investors.

Chris worked for Prudential Securities in New York before leaving to pursue his MBA in Finance & International Business from Tulane University in 1996. Upon completion of his MBA, Chris moved to San Francisco where he joined Fisher Investments as an Investment Consultant managing high net worth client accounts totaling over $200 million in assets. Following that he worked at Silicon Valley Bank in their Institutional Assets Management Group developing and managing client relations for venture funded corporations.

Prior to joining SAM, Chris was a Senior Investment Advisor and member of the Investment Policy Committee with MCM Wealth, a regional Register Investment Advisor. Chris is a CERTIFIED FINANCIAL PLANNER™ professional and holds a series 65 license. He resides in Mill Valley with his wife and daughter where he enjoys tennis, biking, hiking, and spending time with his family.