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Tuesday, February 16, 2016

Your Retirement Savings is at Risk: Now What?

You worked diligently during your working years. The propinquity of retirement enters your mind, and you are ready to dip into your retirement savings, specifically, your 401k plan. However, there are some things you need to consider while jettisoning funds out this plan.


Health Changes

If you accumulated a sizable "savings" in your qualified plan(401k, 403B, and the like), these funds are used for your retirement years. The dreams of knocking of the items from your bucket list becomes the objective. However, as we age, our needs change. For example, our health begins to slowly decline. If you have health issues, how will these costs get handled? Magic? More than likely, they will be handled by your insurance. Great option, if you were able to get COBRA from your prior job. Of course, the premiums will be extremely high, due to your age. This will eat into your retirement savings.

Lack of Leverage

With traditional retirement programs, one dollar works for one dollar of benefit. However, when someone retires, those dollars need to do more! As mentioned in the previous section, retirees must concern themselves with health challenges. Those dollars must be used for living and those health related expenses. Also, there is that small concern about taxes. Taxes must be paid from the same pool of dollars, if the primary retirement funding is from a 401k type plan. Also, with qualified plans, they still do not address, in many cases, the issue of passing to beneficiaries without tax consequences.

Out living the Money

Many individuals utilize their 401k type plans to accumulate monies for retirement. While prima facie, this is a prudent strategy, however, it is quite risky. Specifically, it is risky based on the notion that many individuals are living longer. This means that those same retirement dollars must last longer. With the aforementioned concerns, macro economic issues, taxes, and etc, this will force retirees to live a very penurious lifestyle at retirement. Who wants to live this sort of life style? This is a major concern because the large amount of retirement savings because fugacious, and the retiree must start working soon after retirement age.

Taxes

This is a major concern. The average financial planner, stock broker, insurance agent, economist, and the like, advise that the average person max out their qualified retirement plan. This means to contribute the most to their 401k plan, so they will get the current year deduction. This advice is not prudent for several reasons. First of all, while one may save taxes during their working years, and the monies grow tax free, once the monies are withdrawn at retirement, those monies are tax based on the marginal income tax rate on the amount withdrawn annually. For example: If one takes out $60,000 per year from their 401k plan, while at retirement, the IRS will tax those monies at the current marginal income tax rate of $60,000. Most retirees have been told to get out of debt, so more than likely their homes are emancipated from any sort of mortgage. Simply put, they have almost no tax deductions. Secondly, the monies grow tax deferred, yet, as previously mentioned, those monies are tax upon withdrawal. Here is the rub: They are taxed not using the Capital gains tax schedule. Since the Capital gains tax schedule is considerably lower than the marginal income tax rate schedule, the retiree is paying more in taxes for holding investments inside the qualified plan, as compared to simply holding those monies outside of the qualified plan, and not cashing those assets out.

Conclusion

With all of these issues, the question is presented: With your current retirement plan, are you really in control? Who controls your retirement dollars?  Start taking control of your retirement dollars. Act now. Currently, there is a confluence of economic events that will impact your retirement savings immensely. Do not procrastinate on making those appropriate changes.




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