As a finance expert, I often get asked about the retirement plans advertised on TV. Companies like Empower, Fidelity, and Charles Schwab flood the airwaves with promises of financial security, but how do these plans really work? In this article, I break down the most common retirement plans featured in commercials, their pros and cons, and the math behind making them work for you.
Table of Contents
The Most Advertised Retirement Plans
The retirement plans I see most often in TV commercials fall into three main categories:
- 401(k) Plans – Employer-sponsored plans with tax advantages.
- IRAs (Traditional & Roth) – Individual retirement accounts with different tax treatments.
- Annuities – Insurance products that promise guaranteed income.
Let’s examine each in detail.
1. 401(k) Plans: The Corporate Retirement Staple
A 401(k) is a workplace retirement plan where employees contribute a portion of their salary, often with employer matching. The money grows tax-deferred until withdrawal.
How It Works:
- Contributions reduce taxable income.
- Investments grow tax-free until retirement.
- Withdrawals in retirement are taxed as ordinary income.
Example Calculation:
Suppose you earn $60,000 a year and contribute 10% ($6,000) to your 401(k). Your taxable income drops to $54,000. If your employer matches 50% of contributions up to 6% of salary, you get an extra $1,800 per year.
The future value of your 401(k) after n years can be estimated using:
FV = P \times \left( \frac{(1 + r)^n - 1}{r} \right) \times (1 + r)Where:
- P = Annual contribution ($6,000 + $1,800 = $7,800)
- r = Annual return (assume 7%)
- n = Years until retirement (e.g., 30 years)
Plugging in the numbers:
FV = 7800 \times \left( \frac{(1 + 0.07)^{30} - 1}{0.07} \right) \times (1 + 0.07) \approx \$819,000Pros & Cons:
| Pros | Cons |
|---|---|
| Tax-deferred growth | Early withdrawal penalties (10%) |
| Employer matching | Limited investment choices |
| High contribution limits ($22,500 in 2023) | Required Minimum Distributions (RMDs) at 73 |
2. IRAs: Flexibility for Individuals
Individual Retirement Accounts (IRAs) come in two flavors: Traditional and Roth.
Traditional IRA
- Contributions may be tax-deductible.
- Taxes are paid upon withdrawal.
Roth IRA
- Contributions are made after-tax.
- Withdrawals are tax-free in retirement.
Example Calculation:
If you contribute $6,000 annually to a Roth IRA for 30 years with a 7% return:
Since Roth IRA withdrawals are tax-free, this entire amount is yours.
Income Limits (2023):
| IRA Type | Single Filers | Married Filing Jointly |
|---|---|---|
| Roth IRA | <$138,000 full contribution | <$218,000 full contribution |
| Traditional IRA | No income limit for contributions (deductibility phases out) | No income limit for contributions (deductibility phases out) |
3. Annuities: The Controversial Retirement Product
Annuities are insurance contracts that promise guaranteed income, often advertised with slogans like “never run out of money.”
Types of Annuities:
- Fixed Annuities – Guaranteed payout.
- Variable Annuities – Returns tied to market performance.
- Indexed Annuities – Returns linked to a market index (e.g., S&P 500).
Example Calculation:
A $100,000 immediate fixed annuity might pay $500/month for life. If you live 20 years, total payout = $500 × 12 × 20 = $120,000.
Pros & Cons:
| Pros | Cons |
|---|---|
| Guaranteed income | High fees (2-3% annually) |
| No market risk | Limited liquidity |
| Tax-deferred growth | Complex contracts |
Comparing the Plans
| Feature | 401(k) | Traditional IRA | Roth IRA | Annuity |
|---|---|---|---|---|
| Tax Treatment | Tax-deferred | Tax-deferred | Tax-free growth | Tax-deferred |
| Contribution Limits | $22,500 (2023) | $6,500 (2023) | $6,500 (2023) | No limit |
| Employer Match | Yes | No | No | No |
| Early Withdrawal Penalty | 10% before 59½ | 10% before 59½ | Contributions anytime, earnings penalized | Surrender charges |
Which Plan Should You Choose?
The best plan depends on your income, tax situation, and retirement goals.
- If your employer matches 401(k) contributions, prioritize that—it’s free money.
- If you expect higher taxes in retirement, a Roth IRA may be better.
- If you want guaranteed income, an annuity might help, but beware of fees.
Final Thoughts
TV commercials simplify retirement planning, but the reality requires deeper analysis. I recommend a mix of 401(k), IRA, and taxable investments for flexibility. Annuities can play a role but should not dominate your portfolio.
The key is to start early, maximize employer matches, and understand the tax implications. With the right strategy, you can build a retirement nest egg that lasts.
