Thinking beyond the 401(k): Distribution planning and investments
Saving and investing for retirement is an absolute must for most Americans, and investing in your future through 401(k)s, IRAs, and other retirement-specific investment vehicles should be a top priority in distribution planning.
An area often missed in retirement planning is distribution planning to minimize potential tax impact and maximize your assets’ ability to work for you. You may want to explore additional savings and investment opportunities to supplement your long-term retirement planning. As you evaluate your options, consider when you may need to access the money you’re investing, the purpose of your investment, and your risk tolerance to help you choose the right investment tool.
Short-term investments: Savings accounts, certificates of deposit (CDs)
Money you may need in the near term, and that you can’t afford to lose, should go into protected, low-risk investments. Savings accounts can be accessed any time but earn little interest. CDs have defined time horizons, often from three months to a few years, and earn more than savings accounts. Both are FDIC insured, so you’re guaranteed not to lose money. However, CDs can charge early withdrawal penalties if redeemed early. If you’re planning to use the money to buy a car in two years or saving for a down payment on a home, you may want to consider placing money in these safe investments.
Medium-term investments: Bonds, low-risk funds
If you have savings that you won’t need to tap into for several years (up to 5 to 10 years is a rule of thumb), you may consider taking on slightly more risk or placing your money in investments that can’t be accessed for a set period. Bonds are a classic example. Certain low-risk investment funds also may be appropriate for medium-term investments. They invest in bonds, stable equities, and similar investments. In exchange for a little more risk or longer duration, these types of investments offer potentially higher returns than short-term investments.
Longer-term or higher-risk investments: Equities, real estate
For money that won’t be needed for a longer time, you might consider higher-risk investments such as stocks or real estate. Volatility tends to even out when investments are long term, even though the investment may be up or down any given year. Real estate tends to be stable for longer-term investments but isn’t without risk and may come with significant maintenance and transaction costs. It’s important to remember risk levels for these types of investments are wide-ranging. Some are stable with lower returns while some offer high-risk, high reward.
Investments that generate income: Income funds, annuities
Some investments are designed to provide income payments on a regular basis (monthly, quarterly, or annually) rather than increase in value. In the case of fixed annuities, the income is guaranteed. Income funds in vehicles like bonds or stocks that pay dividends and potentially provide income on a set schedule. Annuities are contracts, that in some cases, may guarantee regular payments for life or a set period in exchange for an initial payment. Annuities are most often used by retirees.
Other investments for specific purposes: HSA accounts, whole life insurance
Beyond typical retirement accounts, there are other vehicles that can increase in value and serve other purposes. Health savings accounts (HSAs) appreciate over time like 401(k)s and can be used to cover health expenses both now and in retirement. Whole life insurance (as opposed to term insurance) has a cash value that can increase over time.
When you consider making an investment of any kind, it is crucial to consider your whole financial situation – your goals, obligations, family situation, values, risk profile, and other factors. An Alerus advisor can help you learn more about investment options and develop a financial plan that considers your needs now and in the future.