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Maxed out on your IRA and 401(K)? What’s the next step?

If you are contributing the maximum amount to your 401(k) or other employer-sponsored retirement plan each year, that’s good. And if you’re also “maxing out” on your Individual Retirement Account (IRA) annually, that’s even better. But what then? If you’re already fully funding your 401(k) and IRA, can you put away even more for retirement? Should you?

The answer to this last question is almost certainly “yes” — because you could spend a long time in retirement. How long? Consider these statistics from the Society of Actuaries:

• A man who’s reached age 65 in good health has a 50% chance of living 20 more years and a 25% chance of living to age 92.

• A 65-year-old woman has a 50% chance of living to age 88 and a 25% chance of living to 94.

• There’s a 50% chance that at least one member of a 65-year-old couple will live to 92 — and there’s a 25% chance at least one of them will reach age 97.

Because you have a reasonably good chance of spending two, or even three, decades in retirement, you clearly need to accumulate substantial financial resources before you retire. So, if you consistently reach the contribution limits on your 401(k) and IRA, you’re making a smart move, as both these vehicles offer the potential for tax-deferred earnings and a variety of investment choices. But if you can still afford to put away more money, or if your income level prevents you from contributing to a Roth IRA, you may want to look at these possibilities:

Life Insurance Retirement Plan — A Life Insurance Retirement Plan (LIRP) is essentially a life insurance policy that can potentially help you generate tax-advantaged income during your retirement years. Until you begin taking withdrawals, the cash value of your policy has the potential to grow tax deferred. Then, when you retire, you can take tax-free payouts from your principal. (After the entire principal is paid, payouts are treated as loans against the contract.) And your beneficiaries will receive the balance of the death benefit income tax free, minus any loans or loan interest.

Annuities — You might find that a fixed annuity can be an appropriate way to supplement your retirement income. Like a LIRP, a fixed annuity’s earnings have the potential to grow on a tax-deferred basis. Also, fixed annuities generally offer some type of guaranteed rate of return over the life of the annuity contract. And perhaps most importantly, you can structure your annuity to provide you with an income stream you can’t outlive. (Keep in mind, though, that annuities are generally more appropriate for investors who are at least 45 years old.)

While you can certainly get some key benefits from a LIRP and a fixed annuity, you need to fully understand all aspects of these investment vehicles and make sure they are suitable for your situation and individual needs. Consequently, before investing, consult with a financial professional.

But don’t wait too long. By preparing for your retirement well ahead of time, you can boost your chances of enjoying the type of “golden years” lifestyle that you’ve envisioned.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor, John Zezini. Contact John by phone at (916) 933-9888 or email john.zezini@edwardjones.com.

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Posted by on Mar 18 2012.
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