With such a wide variety of options, saving for retirement can be a bit intimidating. Many young and even middle-aged people do not know where to begin in planning their saving strategies. Which plan is right for you and your lifestyle? There is no set in stone answer to the question of which plan is the best overall retirement strategy. However, there are a few important things to consider that can help you get a start on selecting the right option for you. Two key factors to examine are the estimated annual appreciation rate and when you will have to pay taxes on the money. Take a look at the graphs below to find out where some of the most popular retirement savings plans fall into these categories.
401(k): Although average annual appreciation rates on 401(k) savings can vary, with current rates, you can expect a yearly appreciation of around 5% on the money that you and/or your employer contributes to your 401(k) account.
403(b): If a charitable organization, a church, or a public schooling system employs you, then you are eligible to select a 403(b) retirement savings plan. Similar to a 401(k), annual appreciation rates can vary, but the recent 10-year average is 8.06%. Source: https://bankrate.com/calculators/retirement/403-b-calculator.aspx/
Savings Account: If you choose to utilize an individual savings account, your bank will determine your annual appreciation rate. The current average rate is 0.06% on savings accounts. Source: https://money.cnn.com/2013/10/01/pf/savings-account-yields/
CDs: CD (also known as a certificate of deposit) appreciation rates can vary based on the maturity of the CD you select. The average 6-month CD has a rate of 0.16% while 5 year CDs have a rate of 0.86%. Source: https://bankrate.com/finance/cd-rates-history-0112.aspx/
Savings Bonds: Savings bonds appreciation rates can change every six months. One of the most popular savings bonds, a Series I bond, is a non-marketable bond that earns a combined fixed interest rate and an inflation rate that is adjusted semiannually. The annual appreciation rate for the current period (November 1, 2016-April 30, 2017) is 2.76% for Series I Bonds. Source: https://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#now/
HH Bonds: An HH bond is a US Government savings bond that pays semi-annual interest. The appreciation rate of your HH bond will depend upon when you purchased the HH bond. If it was issued between January 2003-August 2004, the rate would be 1.50%. If it was issued before December 2003 and is less than 10 years old, the rate will be 4.00%. Source: https://treasurydirect.gov/indiv/research/indepth/hhbonds/reshhbonds.htm/
Simple IRA: The money placed into a simple IRA account by your employer or yourself can appreciate at different rates, depending on the designated custodian for your savings plan and how much money you have in the account. The annual rates can vary from 0.30%-1.65%. Source: https://ally.com/bank/ira/ira-account/
Traditional IRA’s and Roth IRA’s (Due to varying rates this includes no graphs – sources to be added at end of page)
These IRA options are a way to save for retirement that gives you tax advantages.
Traditional IRA contributions can be fully or partially deductible. Earnings, gains, and amounts in your IRA are not traditionally taxed until distributed.
Roth IRAs are similar to traditional IRAs except you can make contributions to your Roth IRA after you reach the age of 70.5 and you cannot deduct contributions to a Roth IRA. You can also leave money in your Roth IRA as long as you live.
Interest rates on IRA & Roth IRA depend upon the types of investments you select.
Pre-Tax vs. Post-tax investments: After weighing the appreciation rates of your saving strategy, you should consider when you will be required to pay taxes on the money you have allocated to that savings plan. Pre-tax or tax deferred investments give you the chance to postpone paying taxes on the amount you contribute and the earnings you gain until a later date. Typically, when you start withdrawing from that account, you will start paying taxes on the money. Post-tax investments allow you to pay taxes on your money today while creating a source of tax-free income in the future. Consult your tax advisor about the best investment options for you.
Hopefully some of this information will allow you to start narrowing down your selection of retirement savings strategies. There is no right or wrong answer, as some people may prefer to pay taxes today while others would prefer to wait and pay taxes in retirement on the money they have set aside. Appreciation rates tend to vary greatly over time. Perhaps there is no perfect solution to your saving strategy, but there are certainly plenty of options out there.
- Source for Traditional IRA:https://irs.gov/retirement-plans/traditional-iras/
- Source for Roth IRA: https://irs.gov/retirement-plans/roth-iras/
- Source for Traditional and Roth IRA Interest Rates Statement: https://bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx/
- Pre-Tax and Post -Tax Investment Graph sources: