Do You Know What's Going On?
How well do you know your retirement strategy?
The major benefit when pitched on your qualified retirement plans, most notably the 401(k) and 403(b), is that you get to defer your taxes and lower your taxable income for that year. Most people when given this information are ecstatic because you are told how you lower your taxes in this year and how you will be in a lower tax bracket when you retire. This strategy may save you taxes in this year but may cost you hundreds of thousands of dollars through out your lifetime. When does it make sense to put off paying 20 cents in taxes, so you can pay 40 cents later?
When told you will be in a lower tax bracket you need to know what must happen for you to be in one. Simply put, you must earn less income. That means in the time when everyday is the weekend and it’s time to have fun while you’re still healthy enough to do so you must earn less income. Less income to spend and enjoy with your friends and family. Weren’t you told, “Sacrifice now to celebrate later”? That sounds like I’ll be sacrificing more when it’s time to celebrate. Not to mention you can’t even touch the money without a penalty until 59 1/2 years of age.
You need to ask yourself the question, “Do I want to pay taxes on the seed or harvest?” When we go back to the first benefit of deferring taxes, you need to understand the tax brackets and where we’re at today. As of 1987 the US has been in one of the lowest tax environments in history. That is incredible! But with the national debt nearing $25 trillion and having an unbalanced budget, where do you think the taxes will go from here? Congress will either have to raise taxes or cut spending.
If today you’re in the 20% tax bracket would it make sense to defer paying the 20% today when you might be paying 40% when it’s time to take the money out? If you had any success with your investments in your retirement plan you will be in a higher tax bracket, because of the size of the account at retirement. What if you’re already in the highest tax bracket? Now you’re locking yourself out of the use and enjoyment of your own money that you worked so hard to earn.
When you start putting money into your qualified retirement plans you begin investing in the stock market. This brings the risk of market volatility and timing. What happens if the day you retire, we have another December of 2018, September of 2008, or October of 1987? You now will have to put retirement off another couple of years. With this also comes unconscious investing or better known as gambling. Do you know the funds your invested in? Do you know what companies you are supporting? Their philosophies, their history, their values? What do you really know about your retirement plan?
My firm, StoneCentury Financial, analyzes the strategies our clients participate in so that they may optimize their returns while mitigating their risks and costs as low as possible. It is our objective to create more flexibility and control for our clients than to forfeit that control to the government or other financial institutions. Please contact me for a free holistic evaluation of your personal economy at [email protected].