Are you ready to retire? According to a recent survey, 39% of Americans cite fears of outliving their savings and investments in retirement.1 If this sounds like you, it’s critical to start understanding where you are, where you need to be, and how to bridge the gap in order to have the retirement you envision.
Catching Up on Your Retirement Savings
Retirement readiness looks different for everyone. Taking stock of any gaps between the retirement you envision and the retirement you've saved for can help you understand the extent to which you may need to play catch-up.
Not Your Parents’ Retirement Plan
Historically, defined benefit pension plans played a prominent role in retirement income strategies. However, over the past 30+ years, the paradigm has shifted, and the burden of saving and investing for retirement now falls largely on individuals, rather than employers.
To determine how close or far away you are from achieving your retirement goals, you will first need to define what you would like your retirement to look like and how much income you will require. To help determine your retirement goals, you may want to consider the following:
- What does retirement mean to me? Your vision of retirement will determine your savings target.
- How much income will I need? The answer may impact your retirement strategy and the investments you choose.
- How much time do I have until retirement? When you retire, you stop contributing to your nest egg and begin drawing from it. Thus, the age at which you retire will affect the resources needed to fund your retirement, as well as the level of risk you take with your investments.
- How much have I saved so far? The more you have saved—and the more income sources you have during retirement—the less you may need to rely on investment income to meet your needs.
Bridging the Retirement Gap
If you are concerned about your finances in retirement, you may want to consider some of the following investment-related strategies for potentially optimizing your nest egg.
Maximize tax advantages. Contributing to a 401(k), traditional IRA, Roth IRA, or other qualified plan may offer tax deductions, tax-deferred growth, employer matching, and/or tax-free distributions, depending on the types of accounts you utilize. Tax-advantaged investments—such as municipal bonds and annuities—may boost after-tax returns in non-qualified accounts.
Use catch-up contributions. If you are age 50 or older, you may be allowed to make what are called “catch-up contributions” to your 401(k) or IRA(s). This refers to an amount you can contribute over and above the annual IRS limit for savers under age 50.
Contribute to taxable accounts. If you have already maximized your 401(k) or IRA contributions, you can contribute to taxable investment accounts and select tax-efficient investments.
Consider increasing investment return potential. By selecting investments that offer higher potential returns, you may be able to realize higher growth rates in your portfolio. However, you may need to accept a higher level of risk. Keep in mind, as retirement approaches, people generally scale back the risk in their portfolio.
If you have a big gap to meet, you may also want to consider non-investment strategies such as delaying retirement, working part-time before you retire, working part-time during retirement, or re-evaluating your retirement goals. If you need help determining your retirement readiness, an experienced Financial Advisor can help identify your income needs, allocate your investment portfolio, monitor your progress, and adjust your strategy as your situation and priorities evolve.
Footnotes:
1 Transamerica Center for Retirement Studies, “Post-Pandemic Realities: The Retirement Outlook of the Multigenerational Workforce.” Available at https://transamericainstitute.org/docs/default-source/research/post-pandemic-retirement-realities-multigenerational-workforce-report-july-2023.pdf. Accessed August 1, 2023.
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. This article does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Interest on municipal bonds is generally exempt from federal income tax. However, some bonds may be subject to the alternative minimum tax (AMT).
If you are investing in an annuity through a tax-advantaged retirement plan such as an IRA, you will get no additional tax advantage from the annuity. Under these circumstances, you should only consider buying an annuity because of its other features, such as lifetime income payments and death benefits protection.
Annuities are offered in conjunction with Morgan Stanley Smith Barney LLC’s licensed insurance agency affiliates.
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