When discussing retirement plans with my clients, I always discuss taxes. Taxes can make a huge difference in your income during your retirement years. I believe my clients need to develop retirement strategies that address taxation while providing sources of supplemental retirement income. Here are some of the specific topics I discuss with my clients.
Current 401k and IRA laws allow you to put a portion of your income into a retirement account pre-tax. That means you pay no income tax on your contribution going into the account. Many people choose to put the maximum allowable amount into their account; the tax savings for the current year can be significant. However, here’s my question: Do you know what the tax rate will be when you retire? Could it be that you save 20 percent or more on your current taxes, only to have to pay a significantly higher tax rate when you retire and can least afford a reduction in your income? Are you aware that those pre-tax dollars accessed after you begin to draw your Social Security benefit can make a portion of those benefits taxable?
My general advice to those whose employers offer matching contributions to their retirement plan is to take full advantage of the match, but don’t exceed the contribution percentage of the match. Here are two reasons why.
First, depending on the terms of your company’s plan, your contributions may or may not be accessible to you in the event you need your money. If your plan allows you to borrow money from your account, you must remain employed with the same employer or pay it back in full before you quit. If not, you could be subject to a 10 percent IRS penalty in addition to full taxation if you are younger than 59-and-a-half.
Secondly, I believe that based on our national debt and the tax history, income taxes will increase, and you could find yourself paying a significantly higher percentage in taxes.
Warren Buffett’s number one rule for investing is “never lose money,” and rule number two is “never forget rule number one.” We have experienced several years of great growth (bull market) with minor corrections. According to Inves Tech Research, the average bull market is 3.8 years; we are well past that mark.
The historical average loss in a bear market is 39.6 percent. Diversifying your strategy by using products outside your retirement plan that offer market protections like stop loss or floors can insulate you from market loss.
Studies tell us the average American has saved only $5,500 for retirement while 45 percent of Americans have never saved a penny, 75 percent of small businesses don’t offer any type of savings benefit, and nearly 50 percent of people report being anxious about their financial situation.
America is in a savings crisis. Are you? Where do you find yourself in those statistics? If you have prepared well, I congratulate you and encourage you to review and adjust your plan on a regular basis. If you have failed to prepare properly, I encourage you to start today. The longer you delay, the more money it takes to achieve your goal, because your money has less time to grow. Delaying or failing to plan ahead for your retirement increases the chance that your financial situation will result in a reduction in your standard of living during your retirement years.