Retirement and Long-Term Saving

Throughout your life, you will likely have different goals you set for yourself, milestones you aim to reach, and dreams you hope to see turn into reality. In most instances, these goals will come with a price tag. Take retiring early- a goal that took off in popularity during the 2010s, and even started its own movement! Followers of the Financially Independent, Retired Early Movement, also known as F.I.R.E. Movement, aimed to be reach financial stability as soon as possible.

Through lifestyle changes and strategic financial decision making, proponents of the F.I.R.E. Movement sought retirement in their 30s with enough financial investments to sustain 60+ years of non-employment. To achieve this kind of goal, an individual must start early- F.I.R.E. would likely be unattainable at a starting point of age 30- and must devote a major portion of their earnings to investments and other savings- generally 50% or more of what they make! If you've read other sections of this website, you probably recognize this scenario as the Time Value of Money playing out and the reason why investing is important. 

While the F.I.R.E. movement is an extreme example, many financial goals require significant time and habitual contributions of monetary resources to see actualization and eventual fruition. Knowing the kinds of intentional choices and timing that goes into planning for the future and saving long-term makes it very clear why early dedication is so important to successfully meeting your financial goals.

Based on the long-term benchmark you are planning for, you will likely seek out an account or investment vehicle that will work as hard and as efficiently as possible to help foster your desired goal. Saving for retirement is perhaps one of the best examples of a financial goal wherein specific accounts have been designed to support this major life milestone.

As noted in the Saving & Investing Basic topic page, there are two types of retirement accounts: ones that you open as an individual, and ones that you have access to through an employer based on your role as their employee.

Individual Retirement Arrangement

Individual Retirements Arrangements or IRAs are retirement savings account created by the federal government. These accounts are designed to help individuals save for their retirement years and are not connected to any employment or work obligation. Since most college students do not have access to Employer-Sponsored retirement options while in school, IRAs are a great way to save for retirement at a young age.

The following chart outlines important information to know for investing through an IRA: 

Overview of IRAs

 

Employer-Sponsored Accounts 

While generally not a viable option for students, another way individuals can oftentimes save for retirement is through accounts sponsored by their employers. The most common types of employer-sponsored retirement accounts are: 

• 401k Accounts
• 403b Accounts 

The following chart outlines important information to know for investing in the most common types of employer-sponsored retirement accounts: 

Overview of 401k & 403b Accounts

 

457b Plan

In addition to 401k and 403b accounts, another common type of employer-sponsored account is a 457b plan. This type of retirement account is made available exclusively for civil servants- individuals employed by local, state, or federal governments. 

457b plans have many similar attributes as 401k and 403b accounts:

• Contribution amount is generally $23,000 (2024)
• You can make both pre-tax (Traditional) and post-tax (Roth) contributions
• Earnings in account are taxes as “Ordinary Income” and not “Capital Gains”

However, there are several important differences to be aware of:

• In the three years before retirement, 457b plans allow you to contribute up to double the annual limit or 100% of your salary, whichever is less.
• Can access funds in the account before retirement age if you are no longer with the employer that sponsored the plan
• May have more limited investment options offered by 457b Providers
• Employers rarely offer a matching contribution

If your employer happens to offer you access to a 403b plan AND a 457b plan, you can contribute to both up to the allowed contributions separately! Just be sure to know the different rules and regulations between each account type. Read more about 457b plans on the IRS website or this article on Forbes Advisor.

Additional retirement accounts or benefits you may come across during employment include:

SIMPLE IRA

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) generally allows both employees and employers to contribute to your traditional IRA. This is usually offered through a small business that may lack the financial means to offer 401k accounts. These plans are easy to manage and let you put tax-deferred or traditional contributions in savings for your retirement. These accounts work the same as an IRA, however the most important differences to know are: 

•  There may be an employer matching component similar to that of a 401k or 403b account up to 3%. Alternatively, the employer can make a non-elective contribution of at least 2% for all employees.
• To be eligible for this plan, the business or employer must have at most 100 employees who have earned at least $5000 in the previous year.
• The limit to contribute to a SIMPLE IRA is higher than a standard IRA; contribution limits is $16,000 (2024); "Catch-up” contributions for those age 50 or older is $19,500 (2024)
• No  access to Roth contributions

Want to know more about SIMPLE IRAs? Visit the IRS topic page on SIMPLE IRAs!

SEP

A SEP IRA (Simplified Employee Pension Plan) is similar to a SIMPLE IRA in that an employer can use the existing infrastructure of an IRA account to offer retirement benefits to their employees. However, a SEP IRA consists of only employer contributions.

While SEP plans are not as commonplace as other types of retirement plans, individuals with access to this type of plan will want to be aware of the following:

• Contributions are not defined from year to year, but your employer must contribute equal amounts to all employees. 
• Contributions cannot exceed 25% of each employee's pay. 
• If you want to make a withdrawal before age 59.5, you will pay a penalty and income tax on the amount you are withdrawing. At age 70.5, there will be a required minimum distribution that you must take.
• You may be able to open a separate IRA plan (like a Roth or Traditional IRA) at the same time as your SEP plan, allowing you more ways to save for retirement.
• There are no catch-up contributions available for people aged 50 or over. Additionally, there is no Roth option available, meaning you can’t fund the account with post-tax income.

Read more about SEP IRAs on the IRS website.

Employee Stock Ownership Plan

ESOPs (Employee Stock Ownership Plan) are retirement plans in which employers or companies contribute its own stock to the plan for the benefit of their employees.

This differs from an Employee Stock Option where an employee has an opportunity to obtain company equity at a pre-set, generally discounted, price. 

Learn more about Employee Stock Ownership and Option Plans on Investopedia!

What about Pensions or Defined-Benefit Plans?

Up until the 1980s, defined benefit plans or pensions were the predominant vehicles employees had for retirement savings. These plans were funded by employer contributions throughout the duration of an individual's time as an employee and oftentimes based on their salary. Defined-benefit plans provided a guaranteed income even after an employee retired; generally speaking, the longer someone worked for their employer, the higher their pension payments would be. While pension plans had similar vesting requirements as other types of retirement plans, the obligation of continuous, employer-back contributions meant significant costs for companies. Due to the expense, very few employers or industries still offer pension plans. Fields where pension plans may still be offered include: 

• Protective Services 
• Transportation 
• Construction 
• Manufacturing 
• Military Services 

Typically, if an organization's workforce is part of a union, there is a greater chance that a pension plan may still be offered to employees. However, it is likely that pension plans will be phased out and not offered for new employees, but may be acknowledged or "grandfathered" for employees that have been with their employer for a significant amount of time. 

Learn more about pensions and defined-benefit plans on Investopedia.com

 

In addition to saving for retirement, there may be other life events or major expenses you want to save for in other types of accounts designed to support long-term savings. Generally speaking, these accounts may offer moderate growth while aiming to preserve the overall capital in the account. Moreover, these saving vehicles may offer opportunities to broadly save for anticipated expenses, or to save for a specific expense like education or healthcare costs. Below are types of accounts that you may want to consider as you reflect on your Long-Term Saving needs and goals: 

General Savings Vehicles

Certificate of Deposit

A Certificate of Deposit or CD is a savings vehicle that entails depositing money with a bank or credit union for a designated term. In exchange for letting the financial institution hold on to your money during that time, they will pay you interest at an agreed upon rate. Once your CD has reached maturity or completed the agreed term of deposit, your funds are returned to you plus the accrued interest. During this time your money is deposited in the CD, the financial institution you are working with will most likely use your deposited funds to lend to other members or consumers, but at a higher rate than what you essentially "lent" the bank! Other things you might want to know about CDs include:

• Varied deposit terms: You can choose from a variety of terms for how long your deposit will remain. Common terms include 3 months, 6 months, 12 months, 18 months, 2 years, 3, years, 4 years, and 5 years.
  • Generally speaking, the longer you deposit your money for, the better rate you might be offered.
• Limited access & penalties: Withdrawing money before the term is over or before the deposit has reached maturity will result in fees or other monetary penalties. Depending on the free structure, you may be at risk of losing a majority of the interest your CD earned.
• Varied terms across banks and credit unions: Though CDs work the same across different financial institutions, the available terms, rates, and fees will vary between banks and credit unions. 
• Fixed rates: Regardless of economic conditions, the deposit rate you agree to will not increase or decrease. 
• Insurance/protection: CDs are insured in the same manner as your checking account or traditional savings account. 

Along with knowing the baseline factors that impact CD accounts, another aspect of CD use you may want to know is called Laddering. 

Laddering is a saving strategy that involves depositing a lump sum amount across several CDs varied by term. For example, an individual who wants to deposit $5,000 into a CD may choose to deposit $1,000 into five different CDs, each with different terms: 1 year, 2 years, 3 years, 4 years, and 5 years. Over the course of the next five years, this individual would see one of their CDs mature, and they could choose to reinvest their savings or repurpose the money for another financial goal or need. 

You can learn more about CDs through the Better Money Habits platform!

Government Bond

A government bond is a debt-based investment where you can loan money to the government. In the United States, bonds are offered at the federal level in the form of Treasury or Savings Bonds, as well as at the state and local level, called Municipal Bonds. Bonds are similar to CDs in that you generally agree to lend your money for a specified term and at a specific rate of return for interest. Once your bond has reached maturity, the principal is returned to you. Depending on the type of bond you have, you may receive interest throughout the duration of your bond term at a set rate, such as every 6-months, or will receive the entire sum of accrued interest at the time you withdraw your funds.  

Most government bonds, particularly bonds offered by the U.S. federal government, are considered competitive savings options due to higher interest rates offered on the products compared to other types of saving accounts. Furthermore, U.S. government bonds tend be considered less risky than other types of investments as the likelihood of the government defaulting on the bond is very low. 

Before using a bond as a savings vehicle, it is important to remember the following: 

• The U.S. government offers a variety of debt-based investments. Your pay-out schedule of interest will depend on the type of bond you have. 
  • Currently, there are two types of bonds, Treasury Bonds Savings Bonds. There are two types of U.S. Savings bonds available- EE Bonds and I Bonds. 
• Most bond offerings will require a deposit term of 5 years, 10 years, 20 years, or 30 years. Accessing funds before their maturation date will likely result in a fee or loss of interest. 
• Government bonds tend to be seen as low-risk investments in stable economies. The income is fixed and is guaranteed to be paid back to you. 
• May be a competitive savings choice for mid-term and long-term savings timelines. 
• Interest rate risk means that there could be opportunity risk of getting a better return somewhere else if interest rates are low. If inflation rises above the return rate of your bond, your investment might lose money.
• Municipal Bonds may not be as easy to access compared to U.S. Government Bonds. Check with your state or local county's treasury department to see what municipal bonds may be available and how they can be purchased. 

To read more about current U.S. Government Treasuries and Bonds, visit TreasuryDirect.gov!

Corporate Bond

A Corporate Bond is a debt obligation that investors can buy through various companies and corporations. Companies issue these bonds in exchange for an agreement to pay interest on the amount given and return the money when the bond matures. Similarly to government bonds, when working with a well-known, high performing or profitable company, the risk of bond default may be generally low. However, you give up the potential for greater returns that company equity typically offers- it doesn’t matter how much the company profits or how high its stock price climbs, your return is based on the interest rate of the bond. If you think a Corporate Bond may be an appropriate savings vehicle to meet your savings timeline and goals, consider the following: 

• Companies may use corporate bond investments for their expenses like equipment, research and development, paying stockowners, paying debt, or other financial necessities.
• Maturities can range from short term (less than three years) to long term (more than 10 years). Long-term bonds usually have higher interest rates, but it comes with additional risks.
• Accessing the bond before maturity may not result in the same types of fees or penalties as accessing government bonds before maturity. If you decide to access the bond before the maturity, be sure to ask about "markdowns".
• Interest accrual and payments can vary between types of bonds. A bond that is issued at a coupon rate generally means the bond has a fixed rate for the life of the bond, regardless of movement in the markets or changes to the company. A bond with floating rates and means the interest will fluctuate or reset periodically and adjust to match changes in market interest rates. Some bonds will provide interest payouts throughout the bond term while other bond products will not provide the interest payout until the bond has matured. 
• Bonds tend to have greater income security, security of original investment, and the pricing market is very transparent.
• Rates from a corporate bond may not be as competitive as the potential growth you could see in purchasing equity or stake in the company. Even if the default risk of the corporate bond is low, there is a chance that a company could go under, and you may not receive payout of the interest or your original principal. 

Learn more about Corporate Bonds on the SEC's website.

Brokerage Accounts 

As noted in the Saving & Investing Basics page, brokerage accounts or a non-tax advantaged accounts can be used to facilitate long-term savings. These types of accounts let you freely invest at will without contribution limits, age for withdrawal restrictions, and without a connection to an employer. While brokerage accounts come with significant flexibilities, they do not have the same types of financial incentives or tax breaks offered by retirement plans and certain types of education and healthcare savings accounts, which will be discussed further in the section. In fact, maintaining a brokerage account comes with unique tax implications that depend on the type of investment you hold and for how long. To learn more about the tax implications on investing through brokerage accounts, check out this article by Vanguard, an investment firm and broker platform.

Keep in mind that brokerage accounts give you the option to select your assets, including stocks, bonds, or even baskets of these securities through different kinds of funds. When selecting your asset allocation, remember to reflect on the following: 

• Time horizon until your goal 
• Risk tolerance 
• Goals related to growth and goals related to preservation of capital 

Need additional direction for navigating brokerage accounts? Check out the resource centers from brokers like Charles Schwab, Fidelity, and Vanguard. Don't forget to take the LinkedIn Learning course on Managing Personal Investments!

Education Specific Accounts

529 Plan

A 529 Plan is a type of investment account typically sponsored by a state or state agency designed to help individuals save for education for themselves or a designated beneficiary, like a child or grandchild. The account comes with several tax advantages, including tax-deferred contributions, potential to deduct contributions from your gross income, and when used to pay for qualified education expenses defined by the plan, tax-free withdrawals at the federal and sometimes even state level. When considering opening a 529 plan, you’ll want to think about the following:

• No "defined" contribution limit for the account, however contributing more than $18,000 in the account may result in paying a federal gift tax (2024). Additionally, there may be a lifetime maximum for the account that ranges from $235,000-$550,000, based on the state the plan is sponsored in.
• The funds grow in the account tax-free as long as the funds are used to pay for qualified expenses like tuition, books, housing, trade school, and student loans up to $10,000 per individual.
• Many 529 plans will let families use the account to pay for some K-12 expenses, namely tuition at private K-12 schools, typically up to $10,000 per individual per year.
• A 529 has higher contribution limits than other educational savings accounts and does not have a limit on income. Multiple people can contribute to the account, and the money can be used for multiple people (yourself or any of your dependents). 
• The investment options in the 529 plan tend to be more limited compared to other kinds of education specific savings accounts. 
• 529s differ by state, so you may have to do more research on how the plans differ. Rules are strict, and you must use funds on a qualified expense, or you might incur a penalty or fee. Additionally, the amount in a 529 plan counts against financial aid for college. Finally, since a 529 plan is a type of investment account, you will likely see ups and downs in the performance of your account and even be looking at financial loss when you need to use the funds in the account. 

Read more about 529 plans through your state government's website or on the Saving for College series, a compilation of education financing resources, by Charles Schwab.

Coverdell/ Education Savings Account

An ESA (Education Savings Account) or Coverdell account is also tax-advantaged like a 529 plan. Contributions are made with tax deferred dollars and funds withdrawn from the account and used for qualified educational expenses are generally free from certain tax obligations as well.

• There is a limit of $2,000 per year per child. You can make contributions every year until the dependent’s 18^th birthday. There is also an income limit (adjusted gross income) of $220,000 per household or $110,000 per individual.
• The account must be emptied by age 30 unless the money is rolled over to another family member or dependent. Otherwise, you may have to incur a tax penalty.
• There is no withdrawal maximum, meaning you can pull as much qualified money as needed. Also, ESAs provide a wide range of investment options for the contributions.
• There is a low contribution limit per year, an income limit, and a time limit for the money to be used. Additionally, it is not flexible as to what the money withdrawn is spent on, and violations may lead to a fee or penalty.

Custodial Account

A custodial account is a type of investment account that is opened by a parent on behalf of their child. Custodial accounts, also known as UGMA or UTMA accounts after the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act that created them, allow parents to maintain control of investments in the account and how the assets are used while the child is a minor. At the defined termination age, which ranges from 18, 21, or 25 years of age, the account is transferred and maintained by the child it was created for. This type of account differs significantly from other ways individuals can save for education: 

• Contribution limits to the account are not defined, but contributions above the exempt amount to avoid the federal gift tax will trigger additional tax obligations. 
• There is no income limit regarding contribution eligibility. 
• Withdrawing funds does not come with penalties or restrictions, as long as they are used for the child or dependent. These funds could be used to cover college-related expenses that are outside of the definition of qualified education expenses for 529 plans and ESAs, however the child/beneficiary can choose to use the funds however they wish to do so once they have hit the termination age. 
• Earnings from the account are taxed differently compared to 529 plans and ESAs, and may not have the same kinds of tax savings available, so it is important to know what your tax obligation will look like under these accounts. 

Learn more about Custodial Accounts on the topic page for UGMA and UTMA accounts under the Saving for College series by Charles Schwab.

Prepaid Tuition Plans

Prepaid tuition plans allow you to lock in current rates of tuition, credit hours, and fees for future schooling of your child or the beneficiary of the account. Due to historical trend of rising college costs, these types of plans can mean the potential for significant savings on educational expenses. However, the existence of pre-paid tuition plans are all but phased out, and come with noticeable restrictions:

• As of 2024, only 9 states offered prepaid tuition plans: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, and Washington. Plans are only available to residents and must be used at in-state institutions.
• Funds from a prepaid plan can only be used to pay for tuition and mandatory fees. It does not cover the cost of room and board, textbooks, or any non-tuition education expenses.
• Contribution limits are not defined annually, however each state is likely to have an account maximum, and there are no income exclusions to contribute. 
• The money used to buy in the pre-paid credits is then invested by a fund manager; you will have no control over how those funds are invested. 
• Generally, the credits you purchase through a pre-paid plan are guaranteed by the sponsoring state. 
• Prepaid tuition plans tend to come with tax breaks and potential for deductions at the state level. Contributions are made with post-tax dollars, and as long as the funds are used for qualified educational expenses, earnings and withdrawals are not subject to federal income taxes.

Take a deeper dive into the differences between Prepaid Tuition Plans and 529 plans on Bankrate's website!

 

Healthcare/Medical Specific Accounts

Flexible Spending Account

An FSA (Flexible Spending Account) is an account sponsored by your employer to help you save for medical expenses not covered by your insurance, such as deductibles and co-pays, using pre-tax dollars. As medical expenses come up through the year, you can use the account to make direct payments or to claim reimbursements. Before using an FSA, consider the following:

• Contribution limits are $3,200 (2024) 
• You cannot use the funds to pay for health insurance premiums 
• Only $640 of unused funds can roll over to the next year 
• An FSA make may sense for those with planned medical expenses, such as annual purchase of contact lenses or regular co-pays for prescriptions and other appointments. 

Healthcare Savings Account

An HSA (Healthcare Savings Account) is offered to individuals with health care plans that are deemed to have a high deductible- generally a deductible that is at least $1,400 for an individual and $2,800 for a family. If you do not have a high deductible health plan, HDHP, you will not be eligible to contribute to the account. Other important information to know regarding the use of an HSA include:

• The contribution limit is $4,150 in 2024 if used in conjunction with another individual health insurance plan and $8,300 if you have a family insurance plan. At age 55, you can contribute an additional $1,000 if on an HDHP.
• The unused balance between years rolls over to the next year.
• The money in an HSA is funded through pre-tax contributions. HSAs can earn interest and some accounts even let you invest part of your HSA, so long as you have a minimum account balance of $1,000. Growth and withdrawals are not taxed as long as the expenses are qualified.
• Some employers that offer HDHPs may contribute a set amount to your HSA, even if you choose not to make contributions!
• The funds generally cannot be used to pay premiums.

Healthcare Reimbursement Account

• HRAs (Healthcare Reimbursement Accounts) are available to anyone with an employer that provides HRAs. They are set up by employers for employees’ medical expenses 
  • Contributions are made only by the employer and have no limit.
  • Unused funds may be rolled over to the subsequent year, but it is ultimately up to the employer.
  • Out-of-pocket expenses are lowered, and you have greater choice over your healthcare decisions by using the available funds. These contributions do not count toward your gross income and are tax-neutral.
  • Unused funds or remaining balances cannot be given to the employee. The money in an HRA will not earn interest. Only the employer can make contributions, and it is up to them what fixed amount they contribute.

Dependent Care Reimbursement Account

Dependent Care Reimbursement Accounts allow you to set aside pre-tax money from your paycheck for later eligible expenses. With this account, you can fund child and adult care expenses by applying for reimbursement through a claim. Typically, you and your spouse must have an income, or you must be single with a dependent to be eligible for a Dependent Care Reimbursement Account.

• The contribution limit is $5,000 per year, and there is a minimum contribution of $130. The total contribution cannot be more than your earned income.
• Any unused funds will be forfeited at the end of the year.
• These funds can be used for a dependent under the age of 13, your spouse who is unable to work or care for themselves, or another adult dependent that is unable to care for themselves (as long as they are a dependent on your taxes).
• Expenses can include physical care, in-home care, babysitters, daycare, etc..
  • Expenses that are not eligible generally include education, enrichment programs, meals, and housekeeping.

Read more about medical or care specific saving accounts on United Health Care's website or on Duke University's Benefits page. 

 

 

After you've determined the type of account you want to invest through, your next step is to open the account. 

For any employer-sponsored retirement accounts you choose to participate in, you'll be given account access through the respective plan holder, brokerage firm, or investment company that your employer is working with to offer their 401k or 403b. While opening this type of account is likely to be the most straightforward process, it is important to note that many sponsored accounts will pre-populate an asset mix or fund for you automatically. Take the time to review all of your asset selections to ensure your investments align with your timeline, risk tolerance, and growth goals. If you don't, your money may not work as hard as it can for you, nor meet the expectations you have for this particular savings benchmark. 

For IRAs and brokerage accounts, you will need to decide what company or platform will hold your account. If you use a large financial institution or bank for your everyday finances, that same entity may offer different investing accounts or be part of a larger parent company that has an investing firm component. If your financial institution does not offer investing opportunities or you aren't satisfied with the choices they provide, a simple internet search for "Setting up an IRA" or "How to open a Brokerage Account" will also give you an overview of who you can work with to open your account and the process they use for setting up your access. Be mindful that sites you encounter during this search, like Nerd Wallet and Bankrate, generally receive compensation for featuring firms and companies on their platform. That's not to say that those particular investing firms and brokerage sites aren't suitable options for you to consider, however it does mean that you may need to do additional research and think critically before deciding on who is holding your account. 

Government bonds and municipal bonds are sponsored by local, state, and federal governments. While some local and state municipal bonds may be offered through brokers, bonds through the federal government can be bought on TreasuryDirect.gov. 

Products like CDs or High Yield Savings Accounts, which are discussed in more detail on the Saving & Investing Basics topic page, can be opened through a number of banks, credit unions, and financial institutions. An internet search or a conversation with your current bank will give you better direction for where and how to open an account.

For state sponsored education savings plans like 529 plans and pre-paid tuition plans, you will likely start your research through your state government's website or the agencies that operate plans in your state. For other kinds of education savings account, many broker platforms will offer ESA and custodial account products. 

Most healthcare savings accounts will be offered directly through your employer, so it is unlikely that you will need to facilitate much in terms of opening the account. You will likely need to indicate what contributions if any you will make to the account.

 

When it comes to managing your retirement and long-term savings, there are numerous best practices to help you stay on top of your accounts: 

• Keep organized- Know what platforms your accounts are maintained through, including usernames, passwords, and pins. 
• Know your tax obligations- Many retirement and long-term savings accounts will come with certain tax advantages as well as considerations that may trigger otherwise exempt tax situations. 
• Identify contribution limits and income thresholds- Certain accounts maintain annual contribution limits, which may even include income thresholds to actually be eligible to contribute in the first place. 
• Remember what expenses or events count for qualified withdrawals- With the tax advantages that come with many of the retirement and long-term savings accounts, there are generally guidelines and other restrictions as to when money can be pulled out and what it can be used for. 
• Seek out professional help when needed- Specifically for accounts that grow through investments or do not come with guaranteed returns, don't be afraid to connect with customer service reps, broker professionals, investment advisors, or a financial planner for guidance on whether or not your account's assets should be changed or other adjustments need to be made.