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Retirement Plan vs Retirement Account

Retirement Plan vs Retirement Account

August 04, 2023

The most common answer I get when I ask someone if they have a retirement plan is "Yeah, I have a [401k/403b/deferred comp/pension/etc.] through work." 

First of all, that's great.  I hope you're participating and getting whatever employer contribution is available.  I appreciate that we colloquially refer to these workplace retirement accounts as retirement plans, so I'm not saying the answer isn't technically correct (which is "the best kind of correct" according to my best friend) but I am saying that it's easy to forget that you may still not have any plan for retirement.  

It's important to understand how all sorts of different factors are going to affect your ability to retire comfortably.  Some of the biggest factors are taxes, market risk, other income sources, sequence of returns, and estate planning goals. 

Most people desire to get a better return on their investment, and I agree that you really should try to get the best rate of return that you can.  Oftentimes, however, I find that what's more important is to understand cash flow and taxes.  The biggest difference I see if client rates of return often come more from avoiding mistakes than from better asset allocation, though that can often help.  

So how do those "other" factors make a difference? 


Though there are some tax "avoidance" strategies, most savings just come from carefully choosing when to pay taxes.  Chances are if you don't own a business you don't have a ton of options to avoid taxes.  Some common areas to easily lower taxes we often see clients not take advantage of:

  • Not using 529 accounts for college savings (in CT you can even deduct some contributions from your state income tax) 
  • Not maximizing HSA contributions, or using the accounts to pay for medical expenses when folks can afford to pay "out of pocket" 
  • Not doing the math on Traditional (pre-tax) vs Roth (post-tax) contributions to retirement accounts

Market Risk

I know we all want to get a better rate of return. It's important to understand our risk tolerance and the relationship between risk and reward.  Sometimes when folks try to get a better return by investing in something risky, they subsequently are more likely to sell at a loss out of fear.  So stay within your comfort zone, and make sure to plan to stay invested for the long run.  If you're unsure of what a proper allocation is or what your risk tolerance is, schedule a time to meet and we can review. 

Other Income Sources

Other income sources can include social security, pensions, rent from investment properties, and any other types of passive income one may have.  Social security, and when someone takes it, can play a major factor in how much money you'll need from other sources.  You can start receiving these benefits as early as 62 or can delay to as late as age 70. 

Why would someone delay if they can take it at 62?  For someone whose "normal retirement age" (as defined by the Social Security Administration) is 67, they would get a 30% drop in their benefit for taking it at 62, and an 8% increase for each year they delay.  For couples, there are survivorship options that come into play as well.  There is no one right answer for this, it really depends on your situation, hence, why you should have a plan and not just an account!

There are similar factors in pensions, but all pensions are different.  If you want to discuss how any of this can impact you, contact us and we'd be happy to set up a consultation.  

Sequence of Return

Sequence or return risk is something that folks heading into retirement fear, even if they don't know it by name.  The idea is that with negative returns early on in retirement, it may be much harder to recover from those losses.  When you're building wealth, it's more important to just stay invested so you don't miss the good days.  But when taking distributions, it's much more important to have assets not subject to market risk such as Cash, CDs, some types of Annuities, etc.  Read more about sequence of returns risk here

Estate Planning Goals

It's human nature to want to leave some sort of legacy.  That doesn't have to mean a trust fund or major donation but for the most part, we want to be remembered for doing good. If you know making better financial decisions can help send your grandkids to college, or you want to make sure to leave a significant amount behind for your alma mater or charity of choice, there may be an impact on how you should plan your retirement.  

Passing on assets to family or other people will have a different set of tax consequences than passing on assets to charity.  It's hard to make these choices when it comes time to retire, which is when most people start thinking about estate planning - another reason retirement planning should start to happen at a young age.  

Passing assets on to a charity may leave open the possibility to see some tax savings during our lifetime if managed correctly.  Often these strategies should involve the help of your financial planner, a lawyer, and an accountant.  

Either way, there are major consequences that could affect your portfolio more than the asset allocation in your 401k.  

So, Where Does One Get Started? 

Start by thinking critically about what matters to you.  What are your most important goals?  What do you want your legacy to be?  These things may change, but I generally find it's better to have a goal to work towards and change it later than to start planning without a target.  This is where the value of working with a financial advisor can become much more obvious.  So call your advisor, or schedule a time to meet with us. 

The most valuable asset we all have is time.  Don't give it away by delaying the process.  The best time to get started was always yesterday, but the second best time is always today.