Let’s rap about why retirement plans are the basic b*tch of the financial industry.
The most obvious reason is… everyone has one and nearly EVERY financial planner recommends their clients pile into one.
It almost doesn’t matter what the situation is… bloggers, investment advisors, CPAs… they all recommend the same damned thing: 401(k)s, IRAs, SEPs, SIMPLE, 403(b)s, etc.
And then there’s the not-so-obvious reason which is… the (illusory) tax benefits masquerading as some kind of amazing feat of mathematical wizardry which everyone seems to have a hard on for.
I can hear the peanut gallery now.
“Oh David. You’re just butthurt.”
And to that I say, “Nay, Mortal.”
I thinketh these plans are duping some intelligent clients who are usually capable of much more than their financial advisors.
Enter, the professionals.
The Society of Actuaries (which helps guide the design of pension and retirement plans) tells the general public what most (or maybe at least some) financial planners have known for decades but have never told their clients:
“It doesn’t make any difference whether [the taxes] are taken away from you at the beginning (tax-exempt) or at the end (tax-deferred). It’s the same fraction of your money that is left to you.”
If tax rates are the same, then it don’t matter whether you invest in a retirement plan or not.
But… what does matter is net retirement income adjusted for inflation in the future vs net income now.
People use retirement plans because they get a tax break right now.
Which mean… They see more income now. And… They like that.
I get it.
But… why are you saving for retirement?
If it was just for a tax break right now, there’s an easier way to save more money in taxes: make less money.
But I suspect no one wants to do that.
What people hope is there will be more money for them in the future because they’ll be in a lower tax bracket because their advisor said so.
But this rarely happens.
Deferring the tax usually results in lower retirement income because… remember how your advisor told you that your investments have to beat inflation to grow your savings in real terms?
Well, they was right.
But… what they neglected to add was your retirement income must do the same to allow you to maintain your standard of living.
And inflating your income on a set schedule is problematic in a tax-deferred retirement account because all that does is increase the tax you pay over time.
As you withdraw more money to maintain that standard of living, it pushes your income higher which… causes you to pay more tax which… eventually pushes you into a higher tax bracket.
And… it lowers your net income.
You have two choices: you can stick your head in the sand or… you can figure out how to solve this problem.
If you want to do the latter, then join my email list so I can share the goods with ya.
Do it, now.