For most of us, the prospect of retirement conjures up two separate and distinct visions.

One vision is of a relaxing time. We are surrounded by friends and family while doing all of the things we have always wanted to do but never had the time to do. And, if we are being honest with ourselves, we know that more medical care is going to be required because we will be older when we finally do have that kind of time.

The other is a vision of working, working, and working for the rest of our lives because there simply isn’t enough cash to do anything else. Whether that’s because of medical costs or our homes being devalued in a bad market or suddenly taking in, raising, and caring for grandchildren unexpectedly, our financial worries are very real.

401k and 403b Accounts

Many of us have 401k accounts through our various employers. You may even have more than one if you have ever changed jobs. For people who worked in the public school system or as a minister, there are 403b plans – which are another type of retirement savings account.

These are terrific and important accounts to have, but they are not the only financial instruments you should be considering.

IRAs

Even if you already have a 401k, you may be able to start an IRA account as well – even if you are nearing retirement. There are two types of IRAs.

• Traditional IRAs have deferred income taxes until you begin to draw from them. The benefit is that you will probably be in a lower income bracket once you retire, so less taxes will be drawn from your income if you are able to use a traditional IRA. However, traditional IRAs must be funded by taxable income, and contributions are subject to limitations.
• Roth IRA contributions are funded by income that has already been taxed. That means that taxes are removed from these accounts at your current (possibly a higher tax rate), but it means you will know exactly how much principal you have invested when you start to draw from it. Roth IRAs are also subject to age and income restrictions, so you should consult with your tax professional to see which is best for you.

You can have one of each if that option is available to you. IRAs are particularly useful if you are unemployed because your spouse can continue to contribute when you can’t. You can check with your bank to see if they have an IRA program as well. When you are preparing your taxes, check your numbers. Often, you can reduce your tax burden by contributing to an IRA, and you do so at the last minute. You can even fund your IRA with your tax refund.

Traditional IRAs

Traditional IRAs are great for saving with the current tax code.

If you were on track to owe $500 in taxes, you might be able to offset about $200 of that in tax credits by contributing $1,000 to a traditional tax-deferred IRA. (Keep in mind that these numbers are just for illustration.) In this case, the IRA would cost you your $1,000 contribution but you get the $200 tax credit and you would still have invested that money toward your retirement. If you do this when you are still young, you will have more tax-deferred growth potential by the time you retire – however, it is still a perfectly valid financial strategy if you are already in your fifties or early sixties. Once you’ve hit age fifty, your annual contribution amounts rise, so you can play catch up if you did not save enough when you were young. 

Roth IRAs

Roth IRAs are a bit trickier because you do have to pay taxes on your income before you can add the money to your account. However, because it has already been taxed, when you start to draw from your Roth IRA after retirement, you don’t have to pay any further taxes as long as your account meets certain criteria. Do keep in mind that every time you go up to a new income bracket, you will be paying more taxes though. Also, once the money is in the account, it should be tax free upon withdrawal. If something happens and you need to draw on it before you retire, it is both tax-free and penalty free under select circumstances*. It is your money, it is just placed somewhere that you are less likely to spend it until you retire.

While your contributions to a Roth IRA will be after taxes, you can take a tax credit on it, up to $2,000. There are restrictions on the credit, so you will need to speak with your tax professional to determine how your current income bracket fits into the qualifications before counting on it for your next tax return.

Tax-Deferred Annuities

You may have heard the term ‘annuity’ in context with lottery winners or people who get large legal settlements or verdicts. But you can make your own annuity without having to win the lottery or a lawsuit.

An annuity is an account you contribute to, then pull the funds out of it later. The contribution part is called the accumulation phase, the withdrawal part is called the annuitization phase. The concept behind annuities and annuitization is that the amount which you withdraw is steady. Similar to a pension or Social Security payout, it is reliable money that you can count on every month. 

Annuities come in fixed and variable varieties. Fixed annuities have unchanging payments (guaranteed by the issuing insurance agency), while variable annuities allow for larger withdrawals if the underlying subaccount investments of the annuity do well in the financial markets. Keep in mind, this market participation exposes your account to investment risk.An annuity can be based on a life (e.g., you get an annuity which is only good for your lifetime and then it dissolves upon your death) or a fixed time period (say, twenty years, so that sort of an annuity can survive your death).

Annuities are semi-problematic in that you will incur severe penalties if you touch them before the annuitization period. Variable annuities can come with some risk of loss when financial markets stumble. But if you are willing to set aside funds and keep them invested until it’s time to retire, an annuity may be a good choice. You can generally get an annuity through a financial advisor.

Real Estate Investments

Real estate can be a decent investment, although the location of the real estate does play a large role as to how well it will work as an investment. Buying a multifamily dwelling can be a good investment because you can live in the property and receive rental income from the other units. However, being a landlord comes with financial obligations as well. Mortgage costs are also very real, even if you’re in your eighties. As for flipping houses, if you have experience in that area, it can be another way to generate income. It quite literally pays to know what you are doing since it is not an area where you can shoot from the hip and expect fantastic results without some working knowledge. If you don’t have experience, flipping homes is generally a bad idea. Real estate is also generally illiquid in nature, which is another big consideration.

Small Business Investments

 What about investing in a small company as a silent partner? Keep in mind that this too can be risky, as the vast majority of small businesses fail within the first few years. However, the longer a small business is up and running, the more their failure risk diminishes. Pay attention to your partnership agreement and any tax implications. It’s best to talk to a certified financial professional before investing in a company, as they can give you a good idea of whether an investment is a good one – and to a lawyer, who can look over the partnership agreement and spot any issues with it.

Stocks

Much like with investment accounts, stock trading is often done by a person you hire for that specific purpose. You want a professional to manage those kinds of risks because these financial instruments come with varying degrees of risks. Blue chip stocks like energy companies, insurance companies, and large retailers might not bring in great returns, but your principle may be safer. Higher risk stocks and new IPOs (initial public offerings) can fluctuate wildly in value, as can penny stocks. You can lose your principle with these, so adjust your expectations accordingly.

Retirement can be a time of relaxation and enjoyment, but a lot of that depends on how well you have prepared for it financially. Don’t just depend on your 401k to keep your financial situation going. There are several other options that can help you build more financial stability and certainty so that you can go into retirement and fulfill the ideal you have been imagining most of your life without having to worry about returning to work.

The views depicted in this material for information purposes only, and should not be considered specific advice or recommendations for any individual. All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful.