401(k)’s IRA’s And Some Food For Thought
Posted @ 2:04 pm - Filed under Financial Planning, Retirement
My audience is pretty dang smart. When I’ve spoken with clients on this subject, the response has been fairly universal. First they are incredulous. Then they ask me how it is the financial world keeps supporting the myth of the so called ‘qualified plans’ — 401’s and IRA’s. The math used to figure out what’s best for taxpayers is around the sixth grade level.
Let’s get started.
Grandma told me to check my assumptions when reassessing any accepted practice or belief. A seemingly global assumption about retirement is that you’ll automatically be paying taxes at a far lower tax rate. That is maybe the most injurious myth used to justify qualified plans as a vehicle for retirement planning. If we look at that belief with an eye for uncovering truth, you’ll find yourself having an ah-ha moment.
Everyone starts out with the goal of saving as much as humanly possible, right? Right. They want to retire with a million bucks in savings so they can live off the interest — and live very comfortably. If we use the S & P’s average annual return over the last half century or so, we’ll earn over 8% annually. So we’ll just use 8% for simplicity. If a married couple sets aside $4K yearly for 40 years at that rate they’ll have a million bucks. And if they just continue that approach they’ll have an $80K annual income for retirement. This doesn’t include whatever they’re receiving from Social Security.
In what world does over $80K a year in income taxed at a lesser rate than when this couple was working? Even if they made the same or more before retirement, they had significantly more deductions to offset that income. They’ve no doubt bought into the ‘free & clear’ home myth too, which eliminates interest deduction. Their kids are long gone as are the child tax deductions. What are they left with?
If they live in an income tax state, they’re getting taxed at a combined rate of 30-35%! Let’s just use 33.3% because it’s easy.
Let’s assume they’re also getting around $15K a year from SS. That means until they’re in their early 70’s they’re paying taxes on $95K a year!! That means after taxes they’re left with only $63K. Don’t get me wrong, I’m not sniffing at that amount. You an live somewhat comfortably on $5k a month, right? What about all the costs of running your home? Travel? Cars? Health insurance and care? Remember when your parents and grandparents thought $20K a year retirement was in the chips?
How’s that been workin’ for them so far?
What’s the alternative to these government sponsored qualified plans?
For once, the solution doesn’t require an advanced degree in quantum physics from M.I.T.
Stop putting deferred tax income into your IRA or 401(k) — qualified plans Invest after tax income into vehicles which will grow at the same rate you’ve been getting Upon retirement receive the same $80K a year with one exception — it’ll be tax free for life
Let’s review our comparison briefly.
You can continue to put tax deferred income into your qualified retirement plan and retire with 30-35% less income. OR You can begin investing after tax income into a non-qualified vehicle and benefit from thousands more in monthly retirement income — all of which is tax free for life.
A couple of final notes.
Non-qualified doesn’t mean risky. On the contrary, these are investment grade insurance policies that are ‘A’ rated and proven very secure for the last several decades.
You can evacuate the money already inside your 401’s and IRA’s and avoid the 10% penalty. By doing that over the next several years a little at a time you can use that money towards your tax free income. It’s proven to be a stellar strategy for my clients.
When this strategy is combined with the tremendous growth potential of long term real estate investing, your retirement can not only be more financially abundant than you ever imagined, but can happen much earlier.
I know I say this all the time, but having a Purposeful Plan means you’re doing things on purpose. It makes a huge difference over time.
Enjoy your weekend.
This entry was posted on Friday, March 9th, 2007 at 2:04 pm and is filed under Financial Planning, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.