How to Choose the Best Retirement Plans for You

Retirement planning is a crucial aspect of financial management that requires careful consideration and informed decision-making. So how do you choose the best retirement plan? To put it simply, the best retirement plans are ones that align with your financial goals, risk tolerance, and desired lifestyle post-retirement.

There’s no one-size-fits-all answer to the question, “What is the absolute best retirement plan?” because everyone has different means, priorities, and retirement ambitions. Tailoring a retirement plan that best suits your specific needs, while more involved, will give you the best hope of living the post-retirement life of your dreams.

This article will guide you through some of the basic steps in how to choose the best retirement plan for you, covering various aspects such as assessing your current financial situation, determining your retirement goals, understanding different types of retirement plans, and evaluating crucial tax considerations.

1. Assess your current financial situation

Before you can determine what is the best plan for retirement, it’s essential to assess your current financial standing. Take stock of your income, expenses, savings, assets, debts, and liabilities:

• Income can include the money you earn from various sources, such as salaries, wages, bonuses, rental income, dividends, and interest. For example, your monthly paycheck from work or quarterly dividends from stocks are sources of income, but during retirement these sources may be less consistent.
• Expenses are the costs associated with living and maintaining your lifestyle. They include rent or mortgage payments, utilities, groceries, transportation, entertainment, and healthcare expenses. For instance, your monthly rent or mortgage payment, grocery bills, and utility bills are common expenses.
• Savings are the portion of your income that you set aside for future use or emergencies. This can include contributions to retirement accounts, savings accounts, investment accounts, or other savings vehicles. Examples include contributions to a 401(k) retirement plan or deposits into a high-yield savings account.
• Assets are items of value that you own, which can be converted into cash. They include cash, investments, real estate, vehicles, jewelry, and collectibles. Examples of assets include stocks, bonds, mutual funds, real estate properties, and valuable artwork.
• Debts are financial obligations that you owe to creditors or lenders. They include mortgages, car loans, student loans, credit card balances, and personal loans. For instance, if you have a mortgage on your home or outstanding balances on your credit cards, these represent debts.
• Liabilities are the legal obligations to settle debts or financial responsibilities. They encompass both current and long-term obligations. Examples include accounts payable, accrued expenses, and long-term loans. If you owe money to a creditor, it represents a liability on your balance sheet.

Most people know what these things are individually, but few have the deep understanding of their financial situation required to provide a solid foundation for making informed decisions about retirement planning.

2. Determine your retirement goals

Once you have a clear understanding of your financial situation, it’s time to define your retirement goals. Determine the age at which you plan to retire and estimate your retirement expenses. Consider the following self-assessment questions to help further define your retirement goals:

• At what age do you want to retire? 
• What kind of lifestyle do you want in retirement? 
• What are your expected retirement expenses? 
• Do you have any specific financial goals for retirement?
• Do you plan to downsize or relocate when you retire? 
• What major milestones or life events do you want to achieve in retirement? 

While there are no hard and fast rules about how to prepare for retirement, to get a rough estimate before you meet with your retirement advisor, you can consider the following, unofficial “rules” for setting money aside for the future:

What is the $1,000 a month rule for retirement? One commonly used rule of thumb is the $1000 a month rule, which suggests that for every $1,000 in monthly expenses you anticipate in retirement, you should aim to have $240,000 in retirement savings.

What is the 3% rule in retirement? Another useful guideline is the 3% rule in retirement, which states that you can withdraw 3% of your retirement savings annually to cover expenses, assuming a balanced investment portfolio. These rules serve as rough estimates and may vary based on individual circumstances.

3. Familiarize yourself with the types of retirement plans

Retirement plans come in all shapes and sizes and cover a variety of income and employment situations. While the list below is in no way comprehensive, it does present some of the more common types of retirement plans, their advantages and drawbacks, and who they’re ideal for.

Types of retirement plans

• Defined Benefit Pension Plans
• 401(k) Plans
• Individual Retirement Accounts (IRAs)
• Roth IRAs
• Simplified Employee Pension (SEP) IRAs
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs
• 457 Plans
• 403(b) Plans

Read more: Where is the safest place to put your retirement money?

Defined benefit pension plans 

Defined benefit pension plans are employer-sponsored retirement plans that provide employees with a predetermined retirement benefit based on factors such as salary history and years of service.

Pros	Cons
Employer matching contributions provide additional retirement savings Tax-deferred growth allows for compound interest over time Flexibility to choose investment options based on risk tolerance and preferences	Contribution limits may restrict higher-income individuals Limited investment choices compared to IRAs Early withdrawal penalties and restrictions on access to funds

Individual retirement accounts (IRAs)

IRAs are personal retirement accounts that individuals can establish independently to save for retirement, offering tax advantages depending on the type.

Pros	Cons
Wide range of investment options, including stocks, bonds, and mutual funds Tax-deferred growth for traditional IRAs and tax-free withdrawals for Roth IRAs Flexibility to choose your IRA provider and investment strategy	Contribution limits may be lower than employer-sponsored plans No employer-matching contributions Early withdrawal penalties and required minimum distributions (RMDs) for traditional IRAs

Roth IRAs

Roth IRAs are individual retirement accounts that allow after-tax contributions to grow tax-free, providing tax-free withdrawals in retirement.

Pros	Cons
Tax-free withdrawals in retirement No required minimum distributions (RMDs) Flexibility to withdraw contributions penalty-free at any time	Contributions are not tax-deductible Income limits for contributions may restrict high-earners Limited contribution limits compared to employer-sponsored plans

Simplified employee pension (SEP) IRAs 

SEP IRAs are retirement plans for self-employed individuals and small businesses, allowing employers to make tax-deductible contributions on behalf of employees.

Pros	Cons
Simple and easy to establish and administer High contribution limits, allowing employers to contribute up to 25% of employee compensation Employer contributions are tax-deductible for the business	Employer contributions are mandatory for eligible employees Limited options for employee contributions compared to 401(k) plans No catch-up contributions for older employees

Savings incentive match plan for employees (SIMPLE) IRAs 

SIMPLE IRAs are an employer-sponsored type of IRA for small businesses with fewer than 100 employees, offering both employer and employee contributions.

Pros	Cons
Easy to establish and maintain for small businesses Employer matching contributions encourage employee participation Higher contribution limits compared to traditional IRAs	Mandatory employer contributions or matching requirements Limited contribution flexibility compared to 401(k) plans No catch-up contributions for employees aged 50 and older

457 plans 

457 plans are deferred compensation plans available to employees of state and local governments and certain tax-exempt organizations.

Pros	Cons
High contribution limits, allowing employees to save more for retirement No early withdrawal penalty if separated from the service Additional catch-up contributions for employees nearing retirement age	Limited to employees of state and local governments and specific tax-exempt organizations Employer-sponsored with no employer matching contributions Withdrawals subject to ordinary income tax upon distribution

403(b) plans 

403(b) plans are retirement plans for employees of certain tax-exempt organizations, public schools, and religious organizations.

Pros	Cons
Tax-deferred contributions and investment growth Additional catch-up contributions for employees aged 50 and older Employer matching contributions may be available	Limited investment options compared to 401(k) plans Complex administrative requirements for some organizations Withdrawals subject to ordinary income tax upon distribution

Is it better to retire with a pension or 401(k)?

Pension plans offer a guaranteed retirement benefit based on factors like salary history and years of service, providing a stable income stream for retirees; however, they lack portability between employers and may limit investment flexibility, with funding obligations potentially impacting plan stability. Pension plans suit individuals prioritizing predictable retirement income and planning long-term employment with one employer.

In contrast, 401(k) plans enable employees to contribute pre-tax income to investment accounts, often with employer-matching contributions. While offering flexibility in investment choices and tax-deferred growth, they come with contribution limits and early withdrawal penalties. 401(k) plans are ideal for those seeking tax advantages, investment control, and employer-sponsored retirement benefits.

Are 401(k) or IRA plans better for retirement?

401(k) plans allow employees to contribute a portion of their pre-tax income to a tax-deferred investment account, often with employer-matching contributions. They offer flexibility in investment choices and potential for tax-deferred growth but come with contribution limits and early withdrawal penalties. 401(k) plans suit individuals seeking tax advantages, investment control, and employer-sponsored retirement benefits.

IRAs, on the other hand, are individual retirement accounts that individuals can establish independently, offering tax advantages based on the type. They provide a wide range of investment options, including stocks, bonds, and mutual funds, but with contribution limits lower than 401(k) plans. IRAs are ideal for those without access to employer-sponsored retirement plans, seeking investment flexibility, and looking to supplement their retirement savings independently.

What are the best retirement plans for young adults?

For young adults, Roth IRAs are often considered one of the best retirement plans due to their tax advantages and long-term growth potential. Young adults can benefit from making after-tax contributions and enjoying tax-free withdrawals in retirement. Additionally, Roth IRAs offer flexibility in accessing contributions penalty-free, making them suitable for individuals in the early stages of their careers who may need access to funds for emergencies or major life events. But again, the best retirement plan will depend on the specific needs of the individual.

What are the best retirement plans for self-employed workers?

For self-employed workers, Simplified Employee Pension (SEP) IRAs are commonly recognized as some of the best retirement plans available but it’ll depend on your long-term needs and your current financial goals. 

SEP IRAs offer high contribution limits and tax-deductible contributions, allowing self-employed individuals to potentially save more for retirement while reducing their taxable income. Moreover, SEP IRAs tend to be straightforward to establish and administer, making them ideal for freelancers, independent contractors, and small business retirement planning managers.

4. Evaluate tax considerations

When choosing the best retirement plan for you, it’s essential to consider the tax implications associated with each option. Understanding how taxes will impact your contributions, investment growth, and withdrawals can significantly affect your retirement savings strategy. Here are key tax considerations to keep in mind:

• Tax-deferred growth. Traditional retirement accounts such as 401(k)s and traditional IRAs offer tax-deferred growth, meaning your contributions are made with pre-tax dollars, reducing your taxable income in the current year; however, withdrawals in retirement are taxed as ordinary income. This can be advantageous if you anticipate being in a lower tax bracket in retirement.
• Tax-free withdrawals. Roth retirement accounts like Roth IRAs and Roth 401(k)s allow for tax-free withdrawals in retirement. While contributions are made with after-tax dollars, qualified withdrawals, including both contributions and earnings, are tax-free. Roth accounts are beneficial if you expect to be in a higher tax bracket in retirement or want to diversify your tax exposure.
• Required minimum distributions (RMDs). Traditional retirement accounts, including traditional IRAs and employer-sponsored plans like 401(k)s, require individuals to start taking required minimum distributions (RMDs) by age 72. Failure to withdraw the required amount can result in substantial penalties. Consider RMDs when planning your retirement income strategy and make sure that you factor them into your financial plan.
• Early withdrawal penalties. Withdrawals from retirement accounts before age 59 ½ are generally subject to a 10% early withdrawal penalty, in addition to income taxes; however, certain exceptions may apply, such as qualified medical expenses, first-time home purchases, or qualified higher education expenses. Evaluate the potential impact of early withdrawal penalties on your retirement savings and consider establishing an emergency fund to cover unexpected expenses.

5. Seek professional retirement planning advice with Avidian Wealth Solutions

Which plan is best for retirement? The one that best aligns where you are and where you want to be in the future. Choosing the best retirement plan for you requires careful planning and consideration of several factors, including your personal preferences, current financial situation, and available retirement vehicle options. Given the broad and nuanced retirement planning landscape, it can be easy to feel overwhelmed or lost without help from a financial advisor.

At Avidian Wealth Solutions, we can create a tailor-made retirement strategy that specifically addresses your needs and retirement goals. We offer high-net-worth retirement planning in Houston, Austin, Sugar Land, The Woodlands, and throughout Texas. Our team of experienced wealth advisors can help you take charge of your retirement.

Schedule a conversation with one of our retirement planning advisors today!

More Helpful Articles by Avidian: 

• Understanding Capital Gains Tax in Texas
• What is UPMIFA? The Uniform Prudent Management of Institutional Funds explained.
• What to Know About Creating a Foundation for Charity
• What Are The Benefits of Thinking About Retirement Expenses Now?
• 6 Tax Write-Offs For Small Businesses You Should Know

---

Please read important disclosures here