For several years now I’ve been virtually beggin’ folks, especially Boomers, to gut their 401Ks and the like, with rare exceptions. There are several reasons they’re a fail from the get-go, most of ’em don’t need the others to be convincing, either.
1. Over a 25-35 year period, most Americans save about $75-150,000 on income taxes via their annual pre-tax contributions. Yet, if they were successful in building a two comma balance (which 99%+ won’t, of course), their retirement income will be taxed at a time in their lives when deductions will be but a fond memory. They’ll end up payin’ more taxes in just 3-10 years on the income from their 401k in retirement, than they saved in three decades. Who does that on purpose?
2. Do you really wanna give your blood, sweat, ‘n tears to grow your job related plan to seven figures, in order to, as Wall Streeters will tell ya, generate a yield in retirement of roughly 4%? ‘Course, today the 10 year Treasury is barely over 1.5%. Oh, and ‘all’ that income is before taxes. Gotta think there’re a buncha Boomers who’re sorely disappointed about now.
3. Pick a time in the last half century, any 10 year period. You’ll find a relatively severe stock market downturn. Sometimes it’s a downturn of 2008 proportions. How’d you like to be one of the Boomers who retired in 2007? Or worse, were gonna retire in 2009? Wonder how that’s been workin’ out? Sad — that’s how. It’s terrible for those people, just terrible.
4. Even assuming you’re one of the incredibly rare birds who amasses a million or two in your 401K, don’t get too cocky. When you reach a certain age, I believe it’s 70.5 or so, they begin compelling you to take a minimum amount of income — even if you don’t need/want it. This often results in the cannibalization of your principal. As you can imagine, that is the beginning of the end. The only question then becomes — will your money run out before you die?
I won’t list the various viable alternatives to your job’s retirement plan at this time, as I’ve done it numerous times in the past. Instead, let’s talk, at least in generally conceptual terms, about the approach aging Boomers might wish to seriously consider.
Stop worshiping at the altar of paltry annual tax savings.
Boomers reaching retirement age now quickly realize they’ve been had. Worse yet, they fell prey to a pretty subtlety executed bait ‘n switch. They got to save nickels and times in taxes each year, while in retirement earned the privilege of paying dollars in taxes. Then, when the very few of ’em who actually, you know, succeeded, they’re penalized by virtue of having too many of those pesky birthdays. Those yearly tax savings took an entire generation’s eyes off the ball.
The ball, you ask? Yeah — retirement income.
Imagine being able to control risk so as to maintain residence in your own comfort zone, while having paid the heavy price of converting your pre-tax plan to an after tax plan. Many don’t have that option, but many do. The difference between ’em can be found in the rules governing the plans themselves. The idea is to either create or convert to an after tax plan — one you personally control. Although all this sounds somewhat sophisticated, it’s really not.
A caveat to consider.
Your age when mulling your options is more than merely another factor. Captain Obvious, I know. It’s my view, based on experience, that using self-directed plans, even Roths, to buy real estate — GENERALLY SPEAKING — isn’t nearly as beneficial as doing it in your own name. But that’s another post altogether. Just remember that a 46 year old will probably not wanna do the same thing as his 59 year old sister. Treating this stuff as if there’s some cosmic template with an infallible formula is why so many Americans are surfin’ the web while they try their darndest to push down the rising panic.
The scenario being played out by tens of thousands of Boomers today with their 401s and IRAs have created the dilemma of which I speak. If you’re late 50s or older, even with half a million in your 401K, you know it doesn’t bode well for your ultimate retirement. Your dilemma is what to do about it. Do you opt for the status quo, accepting what amounts to a life sentence, instead of the retirement for which you worked so hard? Do you gut it, net the 50% or so you’ll probably get after taxes, and take matters into your own hands? Do you, if the option exists, convert to a self-directed plan? If you’re a business owner, or could be, even on the side, do you start a Solo 401k, making available the options coming with that choice? Or, like so many aging Boomers, do you resign yourself to workin’ ’til ya just can’t any more?
I’m here to tell ya there are workable answers to your dilemma. They won’t work for everyone — there’s still no magic wand out there. But there are some answers for many. What’s virtually never the answer? The plan that got you into this dilemma in the first place.
Photo: Alan Cleaver