“The question isn’t at what age I want to retire. It’s at what income.”

– George Forem

Retirement planning generally refers to an allocation of financial resources towards retirement. Through saving and compounding the growth of your investments, the ultimate goal is to generate an income without having to work. Historically, the road to retirement was a traditional asset allocation model during the accumulation phase and income vehicles during distribution. However, we’ve had a paradigm shift in conventional methods and investment strategies. Portfolio construction has drastically changed and should adapt to the new world. Our portfolio allocation takes an innovative and multi-dimensional approach in an effort to consistently grow client assets while managing risk and reducing volatility.

In order to retire, your goal is to build up your assets, so that you are able to create your own pension, establishing predictable annual income for your distribution phase.

There are seven important steps in developing your personal pension.

Identify your desired annual income at retirement

Calculate your current income

Identify the income gap, with consideration for taxes and inflation

Calculate your retirement sustainability quotient

Assess the plan. Is it sustainable? (Considerations: inflation, longevity, sequence of returns)

Calculate your financial legacy value

Use your nest egg to allocate various investment vehicles to create your personal pension

Annuity vs. 401(k)

Annuity	401(k)
A 401(k) is a tax-deferred retirement account you can often get through your employer. You contribute money to it, customarily as a regular deduction from your paycheck. You don’t have to pay taxes on earnings contributed to a 401(k) at the time you make them. An exception to this, though, is a Roth 401(k), which you fund with after-tax money.	An annuity is basically a life insurance policy set up to work as an investment. Put another way, an annuity is a contract between you and a life insurance company. You give the insurance company money, either in a single large premium or in small regular premium payments. In return, the insurance company promises to pay you a certain amount every month. Usually the payments start when you retire and continue until your death.
The money in your 401(k) is invested in mutual funds, exchange-traded funds (ETFs) or other investments as you choose. When it comes time to stop working, you can withdraw funds from the account to pay for your retirement. You don’t have to pay taxes on the money until you withdraw it. The funds in a Roth 401(k) are, again, exempt, as you’ve already paid taxes on your contributions.	Although you can fund an annuity with pre-tax money in a 401(k), you usually would purchase an annuity with after-tax money. The earnings from the annuity are then taxable when you withdraw them. However, the initial amount paid for the annuity is usually not taxable because, like a Roth contribution, you’ve already paid taxes on it. The exception is an annuity purchased with pre-tax money. In this case, the original contribution would be taxable when you make withdrawals.

Annuity

401(k)

A 401(k) is a tax-deferred retirement account you can often get through your employer. You contribute money to it, customarily as a regular deduction from your paycheck. You don’t have to pay taxes on earnings contributed to a 401(k) at the time you make them. An exception to this, though, is a Roth 401(k), which you fund with after-tax money.

An annuity is basically a life insurance policy set up to work as an investment. Put another way, an annuity is a contract between you and a life insurance company. You give the insurance company money, either in a single large premium or in small regular premium payments. In return, the insurance company promises to pay you a certain amount every month. Usually the payments start when you retire and continue until your death.

The money in your 401(k) is invested in mutual funds, exchange-traded funds (ETFs) or other investments as you choose. When it comes time to stop working, you can withdraw funds from the account to pay for your retirement. You don’t have to pay taxes on the money until you withdraw it. The funds in a Roth 401(k) are, again, exempt, as you’ve already paid taxes on your contributions.

Although you can fund an annuity with pre-tax money in a 401(k), you usually would purchase an annuity with after-tax money. The earnings from the annuity are then taxable when you withdraw them. However, the initial amount paid for the annuity is usually not taxable because, like a Roth contribution, you’ve already paid taxes on it. The exception is an annuity purchased with pre-tax money. In this case, the original contribution would be taxable when you make withdrawals.

Tips to Plan for Your Retirement

1Savings for retirement requires lots of financial planning. There are many considerations that go into how you build your finances for your golden years. If you find yourself overwhelmed at the prospect of dealing with this, let wealthology help. Let us help guide you to a better tomorrow.

2A big difference is that an annuity offers a guaranteed payment for as long as you live and as long as your spouse lives. That means, at least with most annuities, you can’t run out of money. A 401(k), on the other hand, can only give you as much money as you have deposited into it, plus the investment earnings on that money.

3If the market goes down, annuity payments keep coming. The same can’t be said of a 401(k), which is subject to market cycles. That also means that if your 401(k) investment choices do well, you could have more money. With an annuity, you don’t benefit if the market is up, unless you take your chances with a variable annuity.

4There are limits on the amount you can contribute to a 401(k). For 2019, contribution amount is $19,000. It increases annually, and if you’re 50 or over, you can put in another $6,000 a year. The contribution limit is $19,500 in 2020, and those aged 50 or older can contribute an additional $6,500. Your employer may match all or part of your contributions as well, which will further increase the amount going into your 401(k). With annuities, there are no such limits, so some people buy them with one-time payments of sometimes $1 million or more. If you’ve maxed out your 401(k) contribution and want to sock away more, an annuity will let you.