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(Complete Show Notes Below)
In the 52nd episode of the Financial Procast:
Here we go again, slaughtering sacred cows. Of course, if you followed us for any length of time none of this will come as any great surprise to you.
You don’t have look far and wide to find financial talking heads extolling the virtue of using your 401k to stash away money for your retirement. Frankly, it’s sort of nauseating.
And I suppose I shouldn’t just single out 401ks as being way over-hyped because the same zeal also applies to all other types of qualified retirement accounts. The financial media LOVES these things. They’re always talking about the power of tax-deferral, the “free money” your company gives you…yada, yada, yada.
httpv://youtu.be/e7sR8VX6mnk
This debate sits front and center for us.
On a regular basis we work with people who are at retirement or rapidly approaching that time. And they realize as they stare into the abyss the impending tax liability that faces them.
Please believe us when we tell you, the psychological and emotional impact of this should not be underestimated. Money is emotional and writing big, fat, juicy checks to Uncle Sam brings out the worst of the emotions.
For many folks, the tax refund now turns into a substantial tax bill.
Conventional Wisdom is Bogus
The most common mistake we see other financial planners and individuals make is to assume that after retirement you will be in a lower tax bracket. While it may be true in some instances, more often than not, we just don’t see it.
And I will add, this is in our experience at a practical level…not hypothetical. Unfortunately too many advisers only seem to work in textbook hypothetical scenarios.
Do you really want your plan to be that you will have less income when you retire? Why would you plan to have less?
If conventional wisdom actually works, you won’t have just the money you put in the plan, you’ll have those dollars plus all the dollars that get added to the pile through appreciation, interest etc. along the way. So, that means you’ll be paying taxes on a much bigger pile o’money.
Don’t Discount Risk
Another common tenant of using qualified retirement plans is to project out into the future using a hypothetical rate-of-return—typically we see people using 8-10%(which is ambitious).
Consider this…
To even approach getting those type of returns, you’ll have to take on a substantial amount of market risk. That means over the years you’ll have to get comfortable with some degree of volatility that’s associated with the stock market.
If you survive the wild ride and your balances come out exactly where you projected, why would you want to give a substantial amount of that money to the government?
You took all the risk and now you’re going to give them half of it? Doesn’t seem like such a great deal to me.
As a current trader of the financial markets any projected interest rate is not a guarantee most Americans are unaware of the risk they take in the market and most do not have a strategy that may be suitable for their situation, from my research life insurance is unique in the way of transparency and consistent growth. Life insurance is the key to leveraging your retirement and investment opportunities, it’s better to play defense first than to lose it all in a game of uncertainty.
After 30+ years in the financial services business marketing mostly personal retirement supplement accounts (403b, 457, 401k, IRA and Roth IRAs) to those “eligibles”, I only wish that I had first shown them the value of CVLI (Cash Value Life Insurance) products with all those old-fashioned ‘whistles and bells’.
But, it’s never too late to offer long term guarantees and less “government control” products to people of all ages. Maybe the comedian Will Rogers was right: I’m more worried about the RETURN OF my money than the RETURN ON my money. (He was commenting about the bank failures and market swings/collapses of his time.)
Have a profitable day