Fortify your retirement nest egg and save money on interest, fees, and taxes by using different types of investments and accounts and balancing debt reduction with retirement savings.

The Three-Legged Stool of Retirement Income

Plan your retirement savings now to maximize the three basic sources of income in retirement: social security or pension benefits, retirement accounts, and taxable accounts. Chapter 5 looked at how social security works. In addition to that income stream, investing now in both retirement accounts and nonretirement — or taxable — accounts will help you manage your taxes, cash flow, and interest costs once you're retired.

With a few exceptions, income or earnings in retirement accounts are not taxed until they're withdrawn. When withdrawals are made, the amount is taxed as income. Penalties are assessed on withdrawals made before reaching age 59½. Withdrawals, which are taxable, are required to start after you turn 70½.

The same transactions that are sheltered from current tax when in retirement plans are taxable immediately when in taxable accounts. Taxable accounts — for example, an individual investment account or a joint investment account — don't have the tax shelter that delays taxes until withdrawal that retirement accounts enjoy. The deposited funds have already been taxed as income, but their advantage is that some of their earnings — the increased value of the investment, called capital gains — are taxed at a capital gains rate that is lower than the income rate, and withdrawals can be made at any age.

Make it your goal to retire with a regular income stream that you don't have to manage — such as social security or pension benefits — and a combination of retirement and taxable accounts from which you can make withdrawals based on the best tax strategy.

Saving While Paying Down Debt

Don't delay saving for retirement because you're focused on paying down your debt. If you do, you'll miss the tax advantages of retirement plans and the compound interest advantages of long-term investing. Instead, if you're buried in high-interest debt, put 80 percent of your available monthly investment toward debt principal, 10 percent toward emergency savings, and 10 percent toward retirement savings. As your debt is paid down increase the amount you invest toward savings and retirement.

Plan Safety

Many, but not all, retirement plans are protected from the failure of the employer or the vendor providing the plan. Protected plans, such as 401(k)s or 403(b)s, are not considered assets of the employer and are not at risk if the employer goes out of business. Other plans, such as pensions and deferred-compensation accounts, don't have the same guarantees. With some restrictions, pensions can be modified at the discretion of the employer. For example, employers can cut promised benefits if they run into financial difficulty. Deferred-compensation plans are susceptible to the financial health of the employer as well.

Many companies match employee retirement plan contributions using company stock. This increases your risk, because both your job and part of your retirement account are tied to the fortunes of one company. Recently enacted rules have increased employees' ability to diversify out of their company's stock in their retirement plan. This is an important option to take advantage of; never hold more than 10 percent of your investments in one company's stock.