Is Your Retirement Plan Balanced?

{5 minutes to read}  Is your retirement plan balanced? Many times over my 36-year career, I’ve met people who are approaching retirement. One particular case was a 57-year-old couple approaching retirement, and their predominant assets were their retirement plans and their home. The retirement account, which they have been funding for many years by inputting approximately $40,000 per year, has approximately $2 million in it. Their plan is to slow down or retire at around age 65.

As you can see from Exhibit 1, by taking the $2 million and adding $40,000 per year to it for the next eight years until they’re age 65 (assuming they can earn a hypothetical 6% rate of return), their retirement profit sharing 401(k) plan would have about $3.6 million.

Interestingly enough, as you can see from Exhibit 2, if you don’t contribute the $40,000 for the next eight years (which is $320,000 of contributions), your account value would still grow from $2 million to a hypothetical $3.187 million, which is a growth of a little less than $400,000. The interesting part about this is that the $320,000 in contributions ($40,000 times eight years) only increases the retirement account by a little more than $400,000. So the growth of the account is not the new money — it’s from the old money.

Now, a lot of times people who have these unbalanced retirement plans are driven to put the money into 401(k)s, profit sharing plans, etc. because of habit and they are told about the saving of taxes.

So lets review: One of the primary reasons that a lot of people are putting money into these retirement accounts is that there’s this feeling that you’re saving taxes. Exhibit 3 is a piece that I call “Where’s the tax savings?” and it shows an individual contributing money into a pension plan and the fact that they are going to be in a position where they’re not saving taxes — they’re actually deferring the tax. They’re in a position where if they put $40,000 into a retirement account versus someone who doesn’t put it in a retirement account, they will save approximately $9,600 in taxes.

Those tax savings are not in your pocket; they actually reside inside the plan. Let’s say 10 years from now when this couple retires, tax brackets are higher. They may actually pay more in taxes than they saved by putting the $40,000 in the plan. Also, all distributions coming out of the plan are going to be taxed at the ordinary income tax rate, where if we were saving the money with after tax dollars, we’d afford ourselves the opportunity to either have capital gains tax treatment on the investment income or the retirement income, or if we used insurance planning, we could take money out tax-free.

Exhibit 4 shows the history of taxes in our country. The reason that we use this chart is that it illustrates the risk, if your tax bracket goes up in the future. There are no guarantees. What if we deferred our taxes in a 30% or 24% bracket, and in the future, the government changes? A lot of people are worried that if the Democrats get in, taxes will go higher. Well, if that happens, we would have deferred our taxes at 24% but may be taking the taxes out at 30%. So when people have a tremendous amount of money inside a pension plan, it might better serve their interests not to contribute anymore.

This particular client is in a position where he already has $2 million inside his pension. Without any more contributions, it would grow to $3.817 million at a 6% rate of return, giving him the opportunity to take those dollars that would normally be earmarked for the plan and put them into things that are going to be helpful during retirement — capital gains type of investments, stocks, bonds, securities, real estate, life insurance, long-term care insurance — things that are going to be needed to give the client a more balanced retirement.

This information is very important. Too many times we see people with all their retirement savings in 401(k) profit sharing plans and IRAs. If you’d like more information or a personal analysis to see if your plan is out of balance, give us a call, send us your comments, feedback and input. We’re here to help.

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS.  Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

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The cases are hypothetical examples and there is no assurance your experience will be similar, and no assurance of any financial success

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