Most people take a traditional approach and save retirement money in a 401(k), 403(b), or TSP. When they retire and start taking their income, they get so nervous about running out of money that when they die, they have only used 26 cents of every $1 . Statistics show that when you are being careful and only take out enough money to live on, when you die you will still have the majority of that money left in your savings. For example, if you have been able to save $400,000, you will die with about $300,000 left if you withdraw too caustiously. Maybe in your case, you’ve only saved $100,000 or $200,000, but the point is, you will have a large amount of money left in the account when you die if you don’t use money wisely during your entire retirement period. This “left over” money could have helped you enjoy retirement so much more. Why do millions of people play this game, only to receive 26 percent of their hard-earned money? This scene plays out all across the nation and you are the main act.
Ask your grandparents or a CPA or an estate planning attorney, and you will find that every retiree gets nervous about out-living their money, so they spend as little as possible. When you decided to put your savings into a 401(k), you deferred your taxes. We all know this. And by deferring your taxes, you have more money in this retirement account. The number will be bigger, of course because of the taxes you did not have to pay. As you reach retirement with more money, you feel rewarded.
Now comes the rude awakening at retirement: You will prepare monthly withdrawals to pay living expenses and find that if you draw out a certain amount you will run out of money in the 8th year. Perhaps you lower this retirement income withdrawal amount and push that 7 years to 23 years. This is an improvement, but in 23 years you will be 88. What happens when you are still living at age 94, like my mother? So you are forced to adjust this income amount downward once again, and finally get your income to last until age 95.
But this places two huge problem squarely upon your shoulders:
- Now you are hoping to die before you run out of money.
- And now you must figure out how to live on this lower amount.
This lower amount forces you to spend less, be very careful not to travel any more, be careful when buying a new car. You have to change things up and always be thinking in terms of what you can’t do, where you can’t go, and many other things you thought you might be able to do when you were working.
Your story ends here: You saved money your entire life and now you will be careful how you spend and then die before age 95 with three-quarters of all your money going to your loved ones. Beneficiaries are the ones who receive this “left-over” retirement money and will pay up to 50 percent of what they receive in taxes.
Example: If your beneficiaries have an annual income of $60,000 and they add your retirement income of say $100,000 for this example, they will pay tax on $160,000. Therefore, of your 100,000, they only receive $50,000 of it after tax. How do you feel about that? Who just got screwed on this deal? Answer: You! And you are dead. You will have been buried 6 feet into the ground and have no influence on anything. All your hard work and saving money goes unrewarded in this case. You were only able to use 26 cents on each dollar you saved, while passing on the rest. Although your beneficiaries receive this money, it forces them to pay half of it in taxes because of the added tax bracket your money caused them.
No one is left alive who knows your story. No one knows how hard you worked and saved and went without, just so you could save money towards your future but then only get 26 cents on the dollar. You worked hard to save, and now you will scrimp and save at retirement, only to die and pay the government the absolute maximum amount of taxes possible. Because of this extra tax you will only get 26 Cents of every one of your own dollars.
What’s the Solution?
My solution is don’t do a 401(k). If your employer matches your contribution, only deposit enough for the match. When changing employment, you are allowed to roll over this money into an IRA, or convert it to a tax-free Roth IRA. There are other options, but for this short discussion, I implore you not to voluntarily participate in a 401(k) unless all your work is only worth 26 percent of your time.
For more information on what I can do to help you plan for a real retirement, email me today for a no-cost consultation: email@example.com or go to www.moneymastery.com for more info.