Sunday, July 11, 2010

Your Retirement Plan..IS it Safe from theirs??

Are your Current retirement plans(401k,IRA,403b, etc)safe from "theirs"? First of all, who is "theirs"? Well lets look at several things before we answer the "theirs" question. Most people love these plans since they provide an easy way to "invest" for retirement. Many popular Financial experts love to recommend these plans. Most retirement plans use Mutual funds to help grow the client's retirement nest egg. This has provided some interesting events in the years to come. Let's look and see if this is a smart strategy.
In 2011, the Bush Tax cuts are set to reverse back to the original tax brackets prior to 2001. (For the specific tax rates and changes, see July 7, 2010 Yahoo finance article "How the Expiring Bush Tax Cuts Effect You") The qualified plans such as the 401k, IRA,457 and 403b have a very important role in these tax changes. Baby Boomers at 59 1/2 and older will be taxed at the NEW TAX BRACKETS upon withdrawal. For example, if your goal is to accumulate $1,000,000(interest gained plus principal) at retirement,if the entire principle and interest was withdrawn, you would pay 39.6% in income taxes. This would leave you with about $600,000 to live on for retirement. Most people are living longer, life insurance companies have stretched out the calculation of life insurance rates to be calculated to age 121 instead of age 100. This is is proof that people are living longer.
So the question is this; how long can you live off of $600,000? If you listen to Experts like Ric Edleman,Dave Ramsey or Suze Orman, at around age 59 1/2 your term Life Insurance has run its course. They recommend purchasing Term insurance, approximately 20 years, and investing heavily in a mutual funds viz a viz a 401k plan. According to these experts, you will be self insured because you are debt free and have $600k(our earlier example) to live on for retirement. Keep in mind, you will need to eat, live, medical needs, grand kids, travel,etc. At age 59 1/2 +, it is very expensive to cover the needs for Life Insurance, Health insurance, Long Term Care, Disability, etc. with only $600k. Keep in mind, one may live for another 30-40+ years.
With Congress' recent changes in the Health Care system, Social Security, Medicare, Medicaid, not to mention The Wars overseas; these enterprises must be funded. Let us not forget there is a TRILLION DOLLAR DEFICIT, and MULTI TRILLION DOLLAR debt service. How will these things be paid for? The Answer:Taxes from your 401k plans.
Many Baby Boomers and most Americans are sold on the fact that the 401k plan is the end-all-to-be all for retirement. The result:most Americans are placing money into these plans for retirement. This plans are big winners in the long haul for two other groups: Wall Street and IRS. Wall Street is managing trillions of dollars in Mutual Funds thanks to 401k plans. Wall Street makes money from these investment regardless if the market goes up or down. It is estimated that over $40 Trillion dollars in Generational wealth will move from the Baby Boomers to Generation X. The IRS knows this fact, and is willing to wait until the largest generation sets to retire. They also know that most of the Average American's wealth lies in two places: The equity of their homes, and 401k type plans. The IRS has a plan for both! Many Boomers would have contributed to their 401k plan at a lower tax bracket during their working years, but will be withdrawing monies at a higher tax bracket at retirement! All these years, the "experts" were telling them they would be in a lower tax bracket! What they fail to realize is that THE IRS or "theirs" is waiting their "cut" once the participant reaches age 59 1/2. In closing, here are two short video clips below that discusses the issues surrounding 401k type plans and taxes.

Here is the second clip:

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