Many of us bought into the idea that when we retired our “tax bracket” would go down. Unfortunately I don’t believe this anymore. As you are reading this, the politicians in Washington are running the Federal Deficit ever higher, currently approaching $20 TRILLION dollars. Even though there may be some short term reduction of interest rates, the only way to pay for the deficit in the future is to RAISE taxes. So what does this mean for your retirement and what if anything can you do about it? Imagine a set of triplets who we’ll call, Moe, Larry and Curly. At college graduation they made a pact, they agreed that by age 65, they would each accumulate $1 million for retirement. Moe during his working years, diligently stashed money in his company’s 401K plan, Larry went a different way and put money in a “non-qualified” diversified portfolio of mutual funds and Curly stashed his money in something we’ll call his “sleep at night account.” They retired and have decided that they will pull 6% or $60,000 from their accounts each year to live on. Let’s see what happens next. Moe, since his 401K used pre-tax” dollars withdraws his $60,000 at current income tax rates, both State and Federal. Let’s assume the combine rate is 40% (in the early 1980s this rate was over 80%!). Larry, is using an account that he can withdraw from at more favorable “long Term Capital Gains“ rates which we’ll assume is 25% between State and Federal. Curly invested after tax dollars in his “sleep at night account”, which like Moe’s 401K grew tax deferred. But at withdrawal, he can withdraw his $60,000 tax free. So let’s see how they did.
Moe Larry Curly
Withdrawal $60,000 $60,000 $60,000
Tax Consequence -$24,000 -$15,000 -$0.000
Net Income $36,000 $45,000 $60,000
I think that we would agree that Curly comes out with the most after tax dollars because he is the only one of the brothers with tax free retirement income!
Does this mean that you should stop putting money in your 401K, IRA 403B, SEP or SIMPLE Plan? No. But no one should ever put all their eggs in one basket. But if your company is doing a match up to the first 5 or 6% of your salary deferral of your contribution, maybe it makes sense to put anything else above that 5 or 6% match into something like Curly’s “sleep at night” account, just as a tax diversification strategy.
But what else does Curly’s account do and why do I call it the “sleep at night account”? Well we know so far that Curly’s account: 1) Grows Tax deferred 2) And It allows (with IRS approval) Tax Free Retirement Income. Here’s some more of the icing on the cake. 3) It has reasonable growth potential because your interest earned is linked to one or more equity indexes that you get to select (like the S&P 500). If the index is up at the end of each year, your account gets credited all or a portion of that gain (depending on the exact plan design, the company that we use and the actual performance of the index) in the form of interest, interest that is Locked in. 4) Here is why Curly sleeps at night. If the equity index goes DOWN in any year, his account is credited $0 in interest. There is no stock market risk to your principal due to a stock market correction. Compare that to your 401K, which as we have seen over the last 20 years can drop 20% or more in value (the 2008-2009 crash dropped values 40+%). Here is another way to look at this. Let’s assume you had $100,000 in your 401K and the market dropped 20% and your account was now worth $80,000. The market has to go up 25% just to break even! With Curly’s account, the next year the equity markets go up, his account picks up right where it left off. I call this “the power of the Zero“. 5) Curly has liquidity. Unlike with an IRA, 401K, SEP or SIMPLE plan, curly doesn't have to wait until he is 59 1/2 to access his money.
Why do I call this the “Sleep At night Account” instead of something else? Because to me it doesn’t matter what it is called, just look at the three brothers. At retirement time, who do you want to be, Moe, Larry or Curly? Me, I want to have what Curly has, Safety of Principal, potential for double digit gains Locked In Yearly, Tax Deferred Growth and Tax Free Withdrawals, no mandated Required Minimum Distributions (RMDs) to deal with in retirement and no 10% early withdrawal penalties if you need to pull out some of your account prior to age 59 ½. Here is a great Video with more details, and if you want even more information, there is a link on the next page to request a free copy of the book. Please enjoy my friend Dean in this entertaining and informative VIDEO
The earlier you start the better, just like any long term savings plan. If you are in your 20s, you should try to put in at least $100/month. But here's the best thing, unlike with an IRA or 401K, there is no maximum contribution. $6,000-$12,000 a year is very typical. There are people who put in a million dollars a year or more and if you are highly compensated or have a 401K or other retirement plan at work, you are still able to contribute to the "sleep at night plan", unlike with a Roth IRA or Traditional IRA. Call us today at (804) 234-8534 for more information or to setup an appointment, or you can request your personalized illustration on our "Get an Illustration" page.