Most people know about one, maybe two choices when it comes to retirement planning. The most common is an individual 401k. The other is a Roth IRA. There are more Government sponsored plans, but these are the two most common.
If you are making a choice between a Roth and a 401(k) plan, consider what your goal is in saving money for your future. If you are trying to accumulate enough money to live on, a 401(k) may not be the best choice. That's because the better you do, the more taxes you pay. In fact, you may end up paying back more in taxes than you've saved.
Focus on one of the "truths" you are constantly told about these plans. You are told that you'll be in a lower tax bracket. Do you think that that makes sense? If that were true, then it means that you are making less money than you are now. After you adjust for inflation, you could be living a very different lifestyle than what you had first imagined. What I'm trying to say in plain English is that if you are in a lower tax bracket it's because YOUR BROKE! Do you want to be poor in retirement?
Of course, the other most popular option is the Roth. This plan works a little differently than a traditional qualified plan. You contribute after tax dollars and when you retire you don't have to pay tax on any of the gains. It's a good deal, except for one thing. You can't contribute anywhere near the amount you'll probably need to save. This can be problematic since most people expect unrealistic rates of return on their investments...the result will be a lower than necessary savings rate.
In both cases the question is which Government retirement plan is the best? However, no one ever considers whether they need to use a qualified plan at all. We just assume that the tax breaks make it worth it (usually, it's not enough). According to DALBARinc.com, most investors earn rates of return that are below inflation! If you're not careful, fees could quickly erode even the modest returns you are getting.
What would be an alternative to using Government sponsored plans? High cash value life insurance would be one example. High cash value insurance can net between 5-6% tax-free over your lifetime, and the cash values are guaranteed. Many major banks and corporations use life insurance as a way to safely conserve money or to build a guaranteed pension. For example, the "king" of cash value insurance, William Ryan of TD BankNorth, has his pension funded by the corporation...his annual premium? $1,260,000.
If you are making a choice between a Roth and a 401(k) plan, consider what your goal is in saving money for your future. If you are trying to accumulate enough money to live on, a 401(k) may not be the best choice. That's because the better you do, the more taxes you pay. In fact, you may end up paying back more in taxes than you've saved.
Focus on one of the "truths" you are constantly told about these plans. You are told that you'll be in a lower tax bracket. Do you think that that makes sense? If that were true, then it means that you are making less money than you are now. After you adjust for inflation, you could be living a very different lifestyle than what you had first imagined. What I'm trying to say in plain English is that if you are in a lower tax bracket it's because YOUR BROKE! Do you want to be poor in retirement?
Of course, the other most popular option is the Roth. This plan works a little differently than a traditional qualified plan. You contribute after tax dollars and when you retire you don't have to pay tax on any of the gains. It's a good deal, except for one thing. You can't contribute anywhere near the amount you'll probably need to save. This can be problematic since most people expect unrealistic rates of return on their investments...the result will be a lower than necessary savings rate.
In both cases the question is which Government retirement plan is the best? However, no one ever considers whether they need to use a qualified plan at all. We just assume that the tax breaks make it worth it (usually, it's not enough). According to DALBARinc.com, most investors earn rates of return that are below inflation! If you're not careful, fees could quickly erode even the modest returns you are getting.
What would be an alternative to using Government sponsored plans? High cash value life insurance would be one example. High cash value insurance can net between 5-6% tax-free over your lifetime, and the cash values are guaranteed. Many major banks and corporations use life insurance as a way to safely conserve money or to build a guaranteed pension. For example, the "king" of cash value insurance, William Ryan of TD BankNorth, has his pension funded by the corporation...his annual premium? $1,260,000.
About the Author:
David C Lewis, RFA, specializes in personal finance. If you want more information about any aspect of personal finance, please visit David's website.
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