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Beyond the 401k: The “Where to Invest Next” Order of Operations

Beyond the 401k: The “Where to Invest Next” Order of Operations

The goal of retirement is to live out your golden years in comfort, correct? Then it’s critical to make the most of your retirement savings strategy. And for many, contributing to an employer-sponsored 401k plan is the perfect starting point. These plans offer the opportunity to grow money tax-free and are usually matched by employers – in 2022, most companies are offering a 3% – 6% match on their employees’ contributions.

As we head into 2023, the elective deferral limit for anyone participating in a 401k plan will be $22,500 (an increase from $20,500 in 2022). With the catch-up contribution limit, that amount is $30,000 for those aged 50 and over.

For high earners, these annual limits won’t be enough to help you save what you need to continue your current lifestyle in retirement. So, to create that comfortable retirement you’ve always dreamed of, you’ve got to put your earnings to work.

Look Ahead as Far as Possible and Be Precise When it Comes to Anticipating Your Retirement Expenses

No matter what your retirement plans include – golfing, traveling, writing a book, lounging, or spending time with family – even high-earners can outlive their assets if not well prepared. Our high-net-worth (HNW) clients know their 401k alone won’t be a silver bullet for retirement. For that reason, most HNW individuals have no more than 20% of their wealth wrapped up in their 401k accounts. Yes, they max out their accounts, but then they leverage additional investment vehicles to increase their retirement income streams.

If you’re in the top 1% of earners, it doesn’t make sense to choose the same investment strategies as the masses (especially if you’re building generational wealth). Instead, look towards the future you envision, and leverage multiple techniques to create more volume, diversify taxes, and spread out risk.

First Up, IRAs

Individual Retirement Accounts (IRAs) are a natural starting point after maxing out your 401k. Traditional and Roth IRAs offer tax savings, only differing in when that savings is captured. Traditional IRAs utilize pre-tax money for contributions and are taxed upon withdrawal in retirement, whereas Roth contributions are funded with post-tax dollars, but retirement withdrawals are tax-free. Additionally, Roths have no Required Minimum Distributions (RMDs). In other words, this type of account allows you to begin withdrawing money on your timeline and not the one determined by the IRS.

In 2023, you’ll be able to contribute up to $6,500 to both types of IRAs – $7,500 for those over 50.

Take note that Roth IRAs do have income limits:

  • For single filers: $138,000 to $153,000
  • For married couples filing jointly: $218,000 to $228,000
  • For married and filing separately: up to $129,000

Don’t worry – even those exceeding the income limits can convert a traditional IRA into a Roth later through a legal loophole known as the backdoor Roth IRA.

Ideal for: Young professionals who expect their tax bracket to stay the same in retirement.

Next, Health Savings Accounts (HSAs)

Health Savings Accounts are lauded for their triple-tax advantage: they are funded with pre-tax dollars, experience tax-free growth, and qualifying medical expenses are covered with tax-free withdrawals. No longer are HSAs used just to cover healthcare expenses today; they’re tools to save for healthcare and other costs in retirement. A 65-year-old couple will spend an average of $315,000 in out-of-pocket medical fees in retirement. Why not start saving for future healthcare expenditures now? Or, withdraw the funds and use them as you need in retirement – once you reach the age of 65, the funds can be used as you see fit but will be taxed as income.

If you ensure that your HSA funds are well invested, you will accrue quite a lot by retirement.

Ideal for: Anyone with a high-deductible health plan.

Your Next Options: Alternative Investments

If you are maximizing savings in retirement accounts or like to spread your savings between various types of accounts, the following options can help ensure well-rounded savings for retirement.

Taxable Brokerage Account – This option is hands down the most flexible for high-earners with a substantial capacity to save. There are no income limits or annual funding limitations, and unlike other retirement accounts, the assets here can be accessed anytime, for anything. While you won’t benefit from tax breaks, you will be in control of buying and selling a wide variety of securities, and with careful planning and strategy, taxes can be controlled. You can even consider using advanced trading strategies, like trading on margin, that are not available in retirement accounts. Trading on margin involves the use of leverage with the goal of amplified returns. Beware, returns fluctuate more in good markets and bad markets. You will want to educate yourself and exercise caution before determining if trading on margin is appropriate for you.

Ideal for: Investors with extra savings and high-risk tolerance.

Real Estate Investments – If you’re looking to diversify your portfolio, real estate is a great option. Whether you invest in residential properties to rent out, buy and flip houses, or purchase a commercial property to lease, the possibilities for curating passive income streams into your retirement are endless (not to mention the considerable tax advantages for those who own rental properties).

Ideal for: Investors with large cash reserves and an understanding of the real estate market.

Invest in a Business – Since 2015, the US Securities and Exchange Commission (SEC) has allowed startups and small businesses to seek investors through brokers or equity-crowdfunded campaigns. In other words, many online crowdfunding platforms now allow anybody to invest in a small business or startup. Keep in mind this option is exciting but risky. Do your homework and familiarize yourself with the process, risks, and the company you’re considering investing in. Alternatively, you could assist a friend or family member with starting their own business.

 Ideal for: Investors passionate about entrepreneurship and comfortable with the potential risks.

Life Insurance and Annuities– While these products are typically used as a benefit upon death, some people like the features associated with insurance contracts, especially the tax deferred growth. However, like everything in life, there are pros and cons to consider. Insurance products are not our first pick of solutions for someone who has a strong growth objective. They can work well for estate planning reasons, income strategies, and for conservative investors.

Creating a Long-Term Plan

If you’re expecting your existing quality of life to follow you into retirement, it’s important to prioritize a retirement plan that will provide reliable income. And that means investing in more than just your company’s 401k plan. If you’re ready to put your extra money to work, set up a call. We can help you determine which of the savings vehicles discussed above will make the most “cents” for the long, happy, and comfortable retirement you desire!

More About the Author: Sheena Hanson

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