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Northwestern Mutual's Michael Cole walks you through some of the key questions you need to consider before determining your best retirment savings strategy.
In this blog, Financial Advisor Michael Cole tackles the question, "Which is the best account to save for retirement?"
This is a common question we routinely get from beauty pros. The short answer is, "It depends on your individual situation."
There are various factors that contribute to determining the most appropriate retirement account, and it starts with answering some questions.
First, is this account just for the beauty pro? Or is it for employees as well?
Second, how much do you plan on contributing each year? Each retirement account has different limitations on annual contributions.
Third, do you make pretax contributions now to reduce your tax liability this year? Or is it better to pay taxes now to have tax-free income in retirement?
Fourth, do you anticipate having passive income in retirement that would increase your tax exposure? This relates back to your decision on paying taxes now, or later in retirement.
Fifth, for employer-sponsored plans, how much do you want to contribute to your employees’retirement plan? How much do you want to contribute into your own retirement account? Last, but not least, what is your exit strategy and how long do you envision working?
Picking the type of account is only half the solution. The next question is "How do I invest these dollars?"
Remember, a retirement account is just an account, like your savings or checking account. Once your hard-earned dollars are in the account, then you need to determine how to invest those dollars. Of course, there are more questions:
What is your tolerance for market fluctuations?
How much of your investment should be in equities opposed to fixed income? Would you prefer investments where a team is overseeing your investment? Or do you prefer a less expensive investment that is designed to track how the market performs? It is very important to understand the cost of investing, as that will have an immediate impact on your rate of return.
So, we have effectively answered the question with more and more questions. But that is what separates our firm from many others. We want to help you discover in detail the goals you want to achieve through retirement planning, or any other financial goal. Once we understand your goals and individual situation, then we can make recommendations that will best serve your needs.
A few final thoughts... We want to see our clients diversified in three ways. First, our clients are diversified within the stock market, which acts as a hedge against risk. Second, our clients are diversified into assets not correlated to the stock market. When the market declines during our retirement, it is important to own assets that are off the rollercoaster of the market. Third, our clients are diversified in tax structure to minimize the impact of taxes in retirement.
If there is one thing to remember, start saving now! The most powerful dollar you save is the one you save today. As Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it."
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