My 4-part retirement savings strategy is approved by a financial advisor

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• Planning for retirement is a critical financial task, and there are many ways to increase your retirement income.
• In my first meeting with my financial advisor, he used a rowboat analogy to explain why diversifying your retirement income is key. At different times, there may be different ships ahead, and that is also true for investments.
• Savings using tax-exempt and tax-deferred accounts, as well as taxable accounts and rental properties.
• Use Blooom to analyze your 401 (k) today and see how you can increase your retirement savings »

Saving for retirement is one of the most important financial tasks out there, and there are many different ideas and strategies on how to save for retirement.

One area where there is general consensus is that the earlier you start, the better (to take advantage of compound interest). It is also important to determine the optimal investment allocation, and it is best to decide with your financial advisor.

I am using four “buckets” to save my retirement savings because I have learned that having more than one stream of retirement funds is key to my financial stability. I hope my strategy can give you some ideas on how you could diversify your own retirement savings.

Why is it important to diversify your savings?

I still remember one of the first meetings I had with my financial advisor. Among other things, he told me about different “cubes” of savings. He used the rowboat analogy in a race and talked about how, at different times, different boats can be ahead.

He used an example of the market crash just as you reach retirement. If all of your savings were in the stock market, then you would have to sell at a loss to get your retirement income. A better strategy would be if you had some of your savings in other cubes. That way, you could withdraw one of them and give the stock market “rowboat” time to get ahead again. Although I considered myself quite adept at financial planning, I had never thought of it that way.

When you are younger, it may make more sense to invest in index funds in a Roth IRA account with the vast majority of your savings. This is because it may currently be in a low tax bracket and has a long enough time horizon for index funds to come close to their historical standards. However, the closer you get to retirement, the more important it is to have different savings cubes.

Tax exempt accounts

The first group where I put my retirement savings is in tax-exempt accounts. These are accounts like Roth IRA and Roth 401 (k) s. With a tax exempt account, pay taxes today on the money you contribute and then all contributions and Account growth is available to you, tax free, when you reach retirement.

Tax exempt accounts are great for younger people and / or people in lower tax brackets. If you are in a 10% tax bracket now and you estimate you could be in a 30% tax bracket later in life when you are ready to retire, a Roth IRA makes perfect sense. Why take the tax deduction now (as you would a tax-deferred account) and save 10% when you could let that money grow tax free and take it out later and save 30%?

Tax-deferred accounts

The second group I’m using for my retirement savings are tax-deferred accounts. I have four different types of tax deferred accounts that I am personally using:

• 401 (k) Employer: 401 (k) accounts are excellent, especially if your employer provides matching funds.
• Traditional IRA: Usually, I have prioritized funding a Roth IRA over a traditional IRA, but I have some traditional IRAs that have been converted from my 401 (k) accounts with former employers
• SEP IRA: Because I have a small business, I also contribute to an IRA SEP account, which is another type of tax-deferred account
• Whole life insurance: While there are arguments for term life insurance versus whole life insurance, I have some of both. The cash value of whole life insurance is also tax deferred

All four types of accounts are tax deferred. That means you can receive a tax deduction for contributions to traditional 401 (k) or IRAs. But when you withdraw from those accounts at retirement, then you will pay taxes.

Taxable accounts

Another cube for retirement savings is taxable investment accounts. With a taxable account, you pay taxes on the go. For example, if your taxable account is invested in the stock market, you would pay capital gains tax on any profit you make when you sell a stock. These could be short or long-term capital gains, depending on whether you have held the stock for more than a year.

In general, you should maximize tax-exempt and deferred accounts before worrying about taxable accounts. This is because for most people it will be more advantageous to get a tax deduction now or to be tax exempt when you retire.

However, most tax-exempt or tax-deferred accounts have income or contribution limits. So depending on your financial situation, you may have more money than you want to save than you can contribute to one of those accounts.

A type of taxable account would be liquid savings accounts, such as where you could have your emergency fund. While you want to keep your emergency fund separate from your other taxable investment accounts, you do pay taxes on any earnings or interest you earn on your savings.

Investment Property

The last stretch where I have some of my retirement savings is in real estate. I have three single-family rental homes, as well as three small commercial buildings. Each of these has a positive monthly cash flow. And even though I don’t make a lot of money each month, they are helping to pay off the mortgages on these properties while providing a positive net monthly income.

In addition to the monthly cash flow, these properties are expected to appreciate in value. Most importantly, the income and appreciation that comes from these properties are not tied to the stock market. So if I need cash for retirement during a stock market recession, I have the ability to sell or do a cash withdrawal refinance on one of these buildings.