Americans are generally more confident in their ability to afford retirement than they were last year. But many aren’t taking steps to achieve that goal.
The 2015 Retirement Confidence Survey found that the percentage of American workers who were very confident they would have enough money for a comfortable retirement increased again in 2015. In 2015, 22 percent said they were very confident, up from 18 percent in 2014. Another 36 percent of people are “somewhat confident,” while 24 percent are not at all confident. (The rest declined to state.)
When nearly one-quarter of workers say they’re not confident in their ability to retire comfortably, there’s a problem. The Employee Benefit Research Institute, which conducts the Retirement Confidence Survey, attributes the difference in confidence levels to having a retirement plan. The EBRI researchers said it didn’t matter whether the plan was an employer’s pension or 401(k) or an individual IRA, just having a plan increased confidence.
People who don’t have access to a retirement plan through their employer can achieve the same peace of mind by setting up their own retirement account. You can always save in a mutual fund or other investment vehicle, but you might not be getting tax advantages available to you. When your earnings grow tax-free, they may grow faster.
Options for tax-advantaged individual retirement savings include:
Individual Retirement Accounts (IRAs): IRAs offer tax advantages; the advantages depend on the type of IRA you select. With a traditional IRA, you contribute pre-tax dollars and your funds grow untaxed. But money you withdraw after retirement will count towards taxable income. Roth IRAs use after-tax dollars for contributions. You won’t get the tax savings now, but any withdrawals you make after retirement won’t count toward taxable income.
Annuities: An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals. You’ll make a lump-sum payment or series of payments to the insurer. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
Annuities have tax advantages that many other investments lack. Most offer tax-deferred growth of earnings. And when you make withdrawals, your gains are taxed at ordinary income rates, not capital gains rates.
Many people consider annuities insurance against living too long, since they can be structured to pay a benefit for your entire life. They can also include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments.
If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.
Life insurance: Permanent, or whole life, insurance has two components: insurance coverage that will pay your beneficiary a death benefit if you die during the policy term, and a savings component. The savings component of a life insurance policy, your cash value, grows tax-free. After your cash value reaches a certain amount specified in the policy, you can withdraw or take a loan against it, and still retain your life insurance coverage. Many people buy whole life coverage when they’re younger and have a family to take care of, knowing that they’ll also be able to tap into the cash value for college tuition, retirement or other savings needs.