Every adult must plan for retirement, no matter the age. From helping you understand available retirement plans to exploring ways to generate income during retirement, Middlesex Savings Bank has you covered. Because the retirement planning process can be overwhelming, we suggest working with a financial advisor at Middlesex Savings Bank to determine the best retirement investments for you.
Common Retirement Plans
Retirement planning begins with understanding your investment options. Most companies offer their employees some form of retirement plan. Here’s a brief overview of the most common types of retirement accounts.
• 401(k) Plan: Many Boston-area employers offer 401(k) plans. The 401(k) retirement plan allows you to contribute a portion of your pre-tax dollars into an investment account. Employers commonly match their employees’ contributions up to a certain percentage—sometimes as much as 6%. Some companies require employees to work a certain number of years before funds become fully vested, which means employees may not own all the funds or the company match until they reach that threshold. Learn more about vesting from the IRS.
Contribution limits for 401(k) accounts can change, so check with your company’s human resources department for the most updated information or contact a Middlesex Financial Group Advisor for guidance. You can begin drawing money from your 401(k) plan penalty free at age 59 ½. It’s important to note that you are required to withdraw funds starting at age 70 ½ unless you are still employed. Middlesex Savings Bank can also help you roll over a 401(k) from a prior employer if you’ve changed jobs.
• Traditional IRA: A traditional IRA is a retirement plan that allows you to contribute a certain amount of money each year and invest your contributions tax-deferred. This means you’ll only pay taxes once you withdraw the money. You can set up this account individually without relying on an employer, but many employers offer an IRA option as well. IRA contribution limits are much lower than 401(k) limits, which means your maximum annual contribution is lower with an IRA. On the other hand, IRAs tend to offer a wider variety of investment options. If you make a withdrawal before you are eligible, you’ll be required to pay both income tax and a 10% penalty on the withdrawal.
Some IRAs are target-date funds tied to your expected retirement year, so the risk of your holdings will automatically adjust to be more conservative as you approach retirement age. Many people with IRAs enjoy customizing and strategically adjusting their investments, sometimes with the assistance of a financial planner.
• Roth IRA: If you can afford to set up another retirement account in addition to your employer-sponsored plan, or if don’t have a retirement plan through your workplace, consider a Roth IRA. Unlike a 401(K) or traditional IRA, contributions to a Roth IRA are made with taxable income; however, these funds will not be taxed when withdrawn. Since contributions are made with your own money and not tax-deferred, you can withdraw funds at any time, tax-free and without penalty.
Roth IRAs are great retirement accounts if you expect your tax bracket to be higher when you withdraw the money. There are eligibility and contribution limits, which a financial advisor from Middlesex Savings Bank can explain to you.
Some people opt to roll over their 401(k) from a previous job into a traditional IRA or a Roth IRA to keep retirement savings on track. Contact Middlesex Savings Bank to learn more about your options.
• Simple IRA: A Simple IRA, or Savings Incentive Match Plan for Employees, is like a 401(k) in that both employers and employees can contribute. These retirement accounts are used by smaller companies with fewer than 100 employees. Employers must either match employees’ contributions from 1-3% or make a 2% nonelective contribution instead. With Simple IRA plans, all contributions are 100% vested, no matter the length of employment.
Income-Generating Retirement Investments
Once you are close to retirement age and have built up your nest egg, it’s time to finally start withdrawing money from your retirement savings. Many people may find that despite careful savings and well-thought-out strategies, they don’t have quite enough in the bank to retire comfortably. To enjoy a financially secure retirement and avoid having to go back to work, consult a Middlesex Financial Group Advisor to develop strategies for generating income during your retirement. Here are some of the common ways to ensure you have supplementary income during retirement.
• Bonds: Bonds are considered more stable than stocks. They are similar to loans in that investors will receive both interest and the face value of the bond once it matures. Government and municipal bonds may also offer tax-free income.
• Retirement Income Funds: Retirement income funds are types of mutual funds that can produce income on a monthly basis and appeal to people who prefer to be hands off with their portfolios. Retirement income funds automatically invest money in a diversified portfolio of stocks and bonds. They also allow you to access your money whenever you’d like.
• Immediate Annuities: Immediate annuities can offer guaranteed income for life, beginning at the time of purchase, making them another great option for retirement income. You can purchase immediate annuities through an insurance company by paying a lump sum called a premium. In return, you’ll receive regular payments, which can either be lifelong or paid over a specific period of time, such as 10 years. Annuities also allow you to choose the frequency of your payments (monthly, quarterly, annually, etc.). The amount of money you gain from an immediate annuity depends on current interest rates. The higher the interest rate, the more money you receive.
• Real Estate: A rental real estate investment is another way you can generate income during retirement. This involves renting out a property you own and using the rent you collect as income. While there are potential drawbacks to renting, such as maintenance costs, damage, natural disasters and so on, it can be financially beneficial. Benefits include appreciation of your property over time and certain tax advantages. This option may work best if your mortgage is already paid off or if the rent you’re collecting is more than the mortgage payment you owe.
There are many other available investment products and strategies to help you produce retirement income. We recommend speaking with a financial advisor at Middlesex Savings Bank to ensure you understand the pros and cons of each. Contact us today to learn more about how to plan for a comfortable retirement in the Boston, Massachusetts area.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult with a tax or legal professional regarding their individual situation.
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