I was talking with a friend today and he asked me what I thought about different retirement options. I’ve done a great deal of research and investigation into the options available here, so, as a standard response, I told him that it depends on your goals. 🙂 – Doesn’t everything? However, after thinking about it a bit more, I thought it would be a good idea to share my thought process concerning retirement.

I should first begin with a disclaimer – I don’t do a whole lot of “retirement savings”, not because I don’t want to save for retirement, but because I don’t trust the government to have my best interest at heart, and don’t like the idea of them telling me what I can and can’t do with my money (and penalizing me for deviating from those rules). I know all the reasoning behind the government involvement, and in a lot of cases it is probably necessary, but I just can’t let myself believe that they won’t get greedy when they need to fund their programs (read Social Security and Medicare) after the baby boomer generation has retired. I just don’t trust them to keep their hands out of the cookie jar when the time comes for me to access that money. That said, here are my tips/considerations for retirement savings:

1. The best retirement savings vehicle, bar none, is a company sponsored 401k plan. Not because it’s pre-tax, or even because it is automatic (two great features), but because it is free money if you have an employer match. Even if it is only half of a certain percentage, it’s free money that you won’t get elsewhere. If you are not maximizing your contributions to a company sponsored 401k (to get the maximum match you can from your employer) that’s definitely the best place to start. Maximize your company match before you do anything else – it will grow faster than you might believe.

2. If you are really serious about saving for retirement, the second step is that you have to make it automatic. Like many books on the subject say (My favorite is “The Richest Man in Babylon“), you have to pay yourself first. If you don’t have an automatic method for contributing to a retirement fund (or anything else for which you want to save), you will have to be more dedicated and will be less successful than you would with one. It really is that simple, but don’t take my word for it – try it and see.

3. After that, your choices for retirement really depend on your beliefs. The first question to ask yourself is “Do I expect to be making more (have more income) in retirement than I am making now?” If the answer is yes (and I realize that is an aggressive goal, but it’s definitely one of mine), then Roth 401k or Roth IRAs make a whole lot of sense. Same goes for if you are expecting oversized returns on your invested retirement money. In the Roth version of retirement savings, you contribute money to the account after taxes have been paid (at your current tax rate), but you do not pay taxes when you pull the money out in retirement (at the higher tax rate). (You have to trust the government on this one – they have said that money won’t be taxed…)

4. If you expect to be making more now than in retirement (which is realistically true of most people, although we don’t like to admit it), you are better off with a traditional IRA account, since you get a tax break on money contributed today (at your higher tax rate), but you have to pay taxes on the money when you withdraw it in retirement (at the lower income level = lower tax rate.)

5. The next question to ask is “How much do I want to be involved in the investment side of my retirement account?” If you don’t want to worry about researching the investments, monitoring the results, and reallocating when necessary depending on goals and the market, you are better off getting a normal IRA account where they charge very low or no fees and investing most of your money in index funds. I like Scottrade or TDAmeritrade, but there are lots of options out there. Designed to mirror the returns of different markets, they often outperform mutual funds in the same categories and have much lower, if any, fees for doing so. It’s all automated, so you aren’t paying for a sometimes sub-par manager to make investment choices for you.

6. If you are very active in investments and would like to have more control over where you put your retirement dollars, look into a self-directed IRA. These are specialized accounts that allow you to invest your retirement funds as you see fit – they can often be structured to include more “risky” investment classes like real estate and private equity investments, with all the tax savings of a traditional IRA.

7. Finally, if you want to save more than the allowable amounts in IRAs and 401ks (once again, the government telling me what I can and can’t do) look into setting up your own business with a SEP plan – the allowable contribution limits (pre-tax, which is the important benefit of using these vehicles) are much higher for these types of accounts. If you go this route, you’re probably going to need help from your accountant or tax professional to set it up correctly – they are much more complex for a reason (or everyone would do it.)

Finally, a word of caution. It’s important to remember that you have to have a plan for your own retirement, and that no one is going to care more about that plan then you. If you don’t care much about whether you are going to have money for retirement, no one else will either, and hiring someone else to manage it might help them to progress towards their retirement, but won’t necessarily help you progress towards yours.