Higher Taxes Could Ruin Your Retirement
Beau Henderson, RichLife Advisors and The New Money Mission
There are plenty of reasons to avoid investing in a 401K, especially if your company doesn’t match your investment: management fees, lack of flexibility, for example.
But the reason at the top of the list is future tax increases.
Future Tax Increases Could Devastate Your 401K Plan
Let me ask you a question: Do you think taxes are going to go up or down in the next twenty years?
Before you answer, go to usdebtclock.org and take a quick look at our national debt. As of 2013, our U.S. national debt was $17.1 trillion. If you add in state and local debt and divide per each U.S. citizen, you get about $190,000 per citizen. That’s right. The United States government owes nearly $200,000 for every one of its citizens.
Now, compare that to how much the average family has saved, about $6,500. And that’s per family, not just per person. If you think that’s bad, look at Japan, the U.K., France, Italy, Greece, and even Germany. Those countries have it even worse.
It’s difficult to convey in words just how bad the situation is that our government has put us in.
The Reality Is Taxes Will Go Up
The question, then, is how is the government ever going to pay off that debt? The only thing they can do is reduce spending or increase taxes. If you’re like most of the people I know, you probably don’t see the government reducing spending. No matter which party is in power, each seems bent on outspending the other.
The reality is that a major increase in taxes in the future is almost inevitable.
Raising taxes even makes sense historically. We may complain about how high taxes are, but the truth is that tax rates are historically low. In 1944, the income tax rate on the top bracket (people who made over $200,000) was 94 percent. Can you imagine that? If you made $200,000 that year, the U.S. Government would only allow you to go home with $12,000 of that. However, that’s not the only time taxes were high. In the 1960s, 70s, and 80s, the top paid 70 percent or more.
The truth is, we could soon be moving back to that range.
Higher Taxes Could Ruin Your Retirement
This might not be a problem now, but what if taxes are higher when you retire? Are you okay with Uncle Sam taking 94 percent of your hard earned money? What if you’re currently calculating your retirement plan with a 25 percent tax rate? Not too big of a deal. Compared to the top tax bracket in 1944, you’ve hit the jackpot.
However, when you want to take your money out, what if the tax rate has been raised to over 50 percent. How would that affect your future? How would an extra 25 percent haircut on your savings change your lifestyle?
The Solution: Pay Taxes NOW
If taxes are going to be higher in the future, you should always try to pay taxes on your wealth now, not later. We need a strategy that pays tax now on the seed while taxes are still historically low, so that when you take your money out to finance your future, you won’t have to pay any tax.
What are some investments that allow you to pay taxes now, protecting your investment in the future?
- Roth IRA
- Annuities
- Investment Grade Life Insurance (IULs)
- High-Growth, Low-Income Stocks
If your company has a matching program, it still makes sense to invest the minimum amount into your 401K to get the match. Free money is free money! But to avoid getting your retirement devastated by Uncle Sam, avoid that 401K program!
Now it’s your turn to tell me about the decisions you have made to protect the future of YOUR retirement. Leave your comments and questions in the comment box below!
I’m not sure that I agree. This assumes a flat income. I think getting the tax deferral now by investing in a 401(k), waiting for tax rates to go down (change in administration), and then timing a Roth conversion would be a much smarter move. My company also offers a Roth 401(k), which avoids the issues you mention here, but I need the tax deferral in today’s dollars. It all depends on tax bracket now vs expected income (and taxes) later.
Great comment Heather! Utilizing the ROTH 401(k)that you have access to is a great way to address the future tax issue and I’m a big fan of ROTH Conversions when the numbers and time frames for accessing the money make sense. Most of our clients do participate in their 401(k) up to any matching point. My concern is the national debt which I mentioned was over 17 trillion (The real number is over 60 trillion if calculated like any business or state government). I’m afraid that taxes will go up significantly in our lifetimes regardless of the administration. The idea of paying higher taxes now and being in a lower income tax bracket in retirement is actually the way I was taught to enroll people in participating in their 401(k) when I started in this profession. I have found that theory and how it really functions in life over the last 14 years is that very few people want to decrease their income and lifestyle in retirement. When I consider that real world application with the concern of future debt I really like the idea of paying taxes now for long term savings. Thank You for bringing up very good strategies to address this with the ROTH 401(k) and ROTH Conversion strategies. Thanks so much for your feedback and comments!