How We Save Makes All the Difference
When it comes to safely arriving at the brighter future you’ve envisioned, the smallest things can make the biggest differences.
This is because there are a number of factors working against you that can greatly affect your retirement nest egg. Taxes, inflation, market volatility and economic unrest are some of the biggest obstacles.
Just think of the acronym TIME and you’ll remember them.
In order to protect ourselves and the brighter future we’re moving toward, we first must take an honest assessment of where we are today. This can seem overwhelming at first.
Each of the above mentioned obstacles carries its own negative impact. At the same time, each of them can be countered by learning and applying the principles that allow us to enjoy liquidity, safety, a predictable rate of return, and tax benefits.
Of all these principles, it’s that last one that is absolutely crucial.
The reason tax benefits are so essential stems from the reality that most people will not be in lower tax brackets when they finally retire. Taxes are continuing to rise and folks who do not understand the difference between taxed-as-earned, tax-deferred, and tax-free savings may be in for a painful lesson.
For many of them, it could mean losing 50% or more of their retirement nest egg in the form of taxes that they end up paying back to Uncle Sam.
Those taxes have the potential to eat up and deplete a person’s retirement nest egg quickly enough that they face the unsavory prospect of outliving their savings. If that scenario doesn’t square with the brighter future you’re picturing, some evaluation is in order.
Doug has developed an Abundant Living scorecard to help you figure out exactly where you stand. All it requires is that you be as honest as possible in how you score yourself.
Scoring Your Retirement Savings Plan
We begin by scoring ourselves on a scale of 1 to 12, with a 1 being poor and a 12 being the best. Your score may be somewhat good at 3,4, or 5, or it might be better at 7,8, or 9.
If your retirement money is accumulating in taxed-as-earned CDs, savings accounts, credit union accounts, mutual funds that are not IRAs or 401(k)s, your after-tax dollars are still subject to more taxes.
This means that you’re getting taxed once again on interest, dividends or any other gains you may realize.
When money is taxed as you earn it, it’s the worst possible way to save. It’s astonishing how many Americans are saving the bulk of their serious money in this fashion.
If this is how you’re currently saving, you should score yourself as a 1, 2 or 3 out of a possible 12. When savings are taxed as earned, we’re in a poor situation for our future retirement from a tax standpoint.
If you’re saving for the future in a traditional IRA or 401(k), your money is accumulating tax-deferred. This means that you’re putting in pre-tax dollars into a tax-deferred account because you’re planning on being in a lower tax bracket at retirement.
But a lower tax bracket at retirement hasn’t been axiomatic for nearly 25 years.
If you’re in this category, score yourself a 4, 5, or 6 on a scale of 1-12. While you’re in good territory, you’re still barely halfway to where you could be.
If you are saving for retirement in a Roth IRA, you’re moving in the right direction. Less than 10% of Americans utilize this method of saving.
You’ll end up about 33% better off by saving in a tax-free Roth IRA than you would be in a tax-deferred account like a traditional IRA or 401(k).
If this is how you’re saving the biggest portion of your nest egg, you can score yourself at an 8 or 9 which puts you solidly into the better category.
The next type of savings is completely tax-free accumulation with tax-free access at retirement and money that transfers tax-free to your heirs at the end of your life. There are also indirect ways that you can realize deductions so your using tax-advantaged dollars in all four phases of retirement planning.
This would include the contribution, accumulation, distribution and transfer phases. It’s the best possible situation to be in and can net you 50 to 100 percent more in your retirement nest egg than the categories that scored poor, good, or better.
The vehicle of choice for this kind of retirement savings is maximum-funded, tax-advantaged life insurance contracts.
This is where you’re solidly in best territory. This is where you can score a 12 out of 12.
Now you understand that there are clear differences in how to best save for retirement, you may have some decisions to make.
Start by visiting with a wealth architect today.