The #1 Mistake 9 Out of 10 People Make When Planning for Retirement

I have the chance to meet with people from all walks of life on a daily basis to discuss retirement plans. Having worked with people that are just starting out all the way to those already enjoying their golden years has given me a very clear picture of all the different problems that can occur when trying to build a nest egg.

There is one glaring oversight that 90% of everyone I meet makes – failure to factor in the ramifications of taxes on their retirement money!

A story to illustrate what I mean:

I met with a couple of clients over the weekend. They are both about 30, each of them makes about $45,000 per year. The wife is putting 10% of her income into her company’s 401K plan with no matching contribution from her employer. The husband is putting 6% of his income into a 401K that is fully matched by his employer.

If she stays the course and keeps contributing 10% of her income for the rest of the time she works AND averages a 5% interest rate on her money she will have $452,827 in her 401K when she retires at 65. She will have put in $162,000 of her own money.

If he stays the course he’s on and get the same rate of return he will have $543,392 at 65 and will have put in $97,200 of his own money.

Between the two of them, they will have $996,219 at retirement. Not bad!

Here’s the problem. Because this money is part of a 401K, all of that money is going to be taxed when they start making withdrawals from the accounts.

So what? They got a tax break on the contributions they made! Plus they are going to be at a lower tax bracket when they retire!

Let’s do the math. Currently they are in the 25% tax bracket. Between the two of them, they will put a total of $259,200 into these accounts during their working years. If they were not getting a tax break, they would pay $64,800 in taxes on that money.

Assuming they are at the lowest tax bracket during retirement, (which is 15%) they are going to pay $149,432 (15% of $996,219) in taxes in retirement! That’s more than twice the amount of taxes! And remember that is also assuming they remain in the current lowest tax bracket.

As you can see, that’s a significant difference!

What is the remedy to this situation?

Instead of relying on your 401K as your only retirement account, open a Roth IRA. With a Roth, you do NOT get a tax break for your contributions, but you also do NOT pay taxes when you make withdrawals from the accounts.

For these particular clients, we took and redirected the money she was placing in her 401K and used that to fund her Roth. We did this because she is not getting a matching contribution. This will allow them to have nearly half of their retirement income be tax free during retirement. It will save them tens of thousands of dollars in taxes.

There are many strategies available to reposition assets to avoid taxes during retirement.

If you want to avoid this costly mistake, give me a call to set up a free, no-obligation consultation.

Jason Hornung-The Net Worth Doctor
5760 E Broadway Blvd
Tucson, AZ 85711
Toll Free: 1-866-514-8884
Southern Arizona Local: 520-514-8884
Jason@thenetworthdoctor.com