Saving for a comfortable retirement may be the most important investment anyone makes throughout their lives. However, it’s not as easy as simply saving and not spending. Most financial professionals recommend taking the retirement saving approach in a stepwise fashion, rather than saving a lump sum of cash. With a wide spectrum of financial products out there to choose from, including life insurance, there are precious few reasons to save heaps of cash, and indeed it could end up doing more harm than good.
“Aim for a good balance between liquid and growth-focused investments.”
When is it actually wise to save cash? USA Today and others recommend beginning the journey to retirement through cash savings. Before using funds to buy investments, savers should park a small but consistent amount of their paycheck in a savings account insured by the Federal Deposits Insurance Corporation. This is an emergency fund, and can be drawn on for big expenses that are absolutely vital. This includes high medical bills, car repairs or anything else unexpected.
Ideally, an emergency fund should be in cash. Of course, this high degree of liquidity translates into an often low rate of return. This is why cash savings are only useful up to a point – most say roughly six months of basic living expenses. After this goal has been reached, savers can move closer to their ultimate destination of a safe retirement.
401(k) and IRA
The next logical step for a retirement-focused investor would be a 401(k) or an Individual Retirement Account. These assets are extremely beneficial because of their tax advantages. Workers should take full advantage of the options offered to them from their employer regarding a 401(k) or IRA.
- Matching 401(k): This is the best option if it’s available, since the employer will automatically invest in your retirement for you.
- Roth IRA: Although taxes are paid on the initial investment, any growth is free of taxes.
- Non-matching 401(k): This is still not a bad option, and also confers tax advantages.
- Traditional IRA: Works well for workers with a long way to go before retiring.
The plan you choose depends on your individual goals and preferences, just as much as it depends on what is actually available. Consulting a financial advisor may not be a bad idea when faced with multiple retirement saving options.
Life insurance as an asset
To get a mix of tax-advantaged savings and access to cash value, the right life insurance policy may be the best of both worlds. Even for clients with investments in an IRA or 401(k) already, life insurance can offer a dependable source of income when a family will need it most. In some retirement life insurance plans, the owner can see their cash value grow tax-free, and also borrow against that cash in a tax-advantaged loan. It could even be used to supplement income in retirement.
Life insurance is an underappreciated retirement saving tool, but it may turn out to be the best choice for many individuals. Death benefits are most often exempt from taxation, and there aren’t any contribution limits, unlike IRAs. The funds also grow safely and securely.
With the help of a financial professional, it’s possible to see the advantages of a life insurance policy for retirement saving. Instead of tying up investments in cash or spending too much on taxes, these assets prove to be some of the best choices for prudent savers.