Happy New Year!
Like a lot of folks who work for a living, even us tax professionals sometimes place too much emphasis on the “automatic’ nature of retirement investments. I can’t tell you the number of busy professionals who should be laying up piles of cash in retirement accounts and then, suddenly, realize they aren’t being vigilant enough.
So let’s dig into that a little bit today. Yes, 2022 was difficult, and riding on the wings of two other “tough” years. The cost of living is through the roof, the cost of money has more than doubled with interest rates, and even the “basics” are pricey. Add the holiday season to that mix and a lot of folks this month are in a sort of “money hangover.” On the other hand, no matter how you’ve been impacted in terms of these issues, I want you to really drill down and think about the challenges you need to face for the future.
As in, your retirement.
For a lot of employees, their primary retirement savings platform is the 401(k) and I see a LOT of folks who aren’t necessarily being as smart as they could with those funds – yes, even those “highly educated” men and women who are on the edges of the Bell Curve of income.
For starters, the 401(k) is a pretty weak savings vessel, and if we actually looked into its origins, it was never designed to provide more than a modest return for its owner. One of the best ways I’ve heard it described was it was designed to replace the annual bonuses that retirees might have gotten when they were still working.
Here’s the biggest problem – employees’ contributions are matched to a certain point by their employer, and anything after that is straight from the employee’s pockets. Now, you’d be silly to not take the “free money” your employer is giving you – say, 15% or so – but since you’ll have to pay taxes on the money you withdraw from that 401(k) when you withdraw it, how much are you actually “getting?”
Traditionally, the United States’ taxes on income have been higher for higher earners, and in today’s economic climate, I think it’s only realistic to expect far higher taxes in the future. As for inflation? Interest rates? Yes, they’ll come down out of the stratosphere, but the short-term impact they’ll have on people’s ability to save is far-reaching.
Missing a few thousand dollars of contributions over the next few years could mean hundreds of thousands of dollars of missed growth, and worse?
More years of work to recapture that growth.
At the same time, since 401(k)’s are generally based in mutual funds, there are no guarantees of what those values will be when you retire. We’ve seen paper losses this year as the markets turned bullish, and with the collapse of crypto and worries about international investment, the “set it and forget it” mindset of most 401(k) investors is a recipe for disaster.
So here’s my message to you for the New Year: you need to educate yourself about the many ways you can lock income and minimize long-term taxes liabilities for retirement.
Not just for when you retire, but right now – because moving hundreds of thousands of dollars from a 401(k) to, say, a Roth structure is going to cost you a fortune anytime you do it.
But planning for it, or leaving that 401(k) active while you begin to contribute to a “smarter” retirement plan can give you far better results that mitigate the taxes you have to pay now and in retirement.
Of course, all this is just the tip of the iceberg, but it HAS to start with you realizing that your taxes and your income impact your earnings now and far into the future.
Let me and the team know how we can help, because we’re happy to do it.
All the best-