I am about to start teaching retirement planning to a group of 20 somethings. Why? Believe it or not, that is when the first steps should be taken to a successful retirement.
However, there is a stumbling block for this age group; they don’t have a lot of disposable income to put into a plan. The other stumbling block is the old “tried and true” thinking for retirement planning; putting part of your pre-tax money into the company 401k. The thinking that the company will match and you get “free money” towards your retirement.
Problem number one with that thinking is most companies don’t truly match, and you have a vesting period; meaning that you must stay with the company for x number of years to get the matching portion of your employer’s contribution to your 401k. If you leave before, you don’t receive that part of your 401k. Most 20 somethings don’t stay with remain with their companies long enough to reap the benefit. In fact, most American’s between the age of 25 and 34 remain at their jobs 3.2 years, those between the ages of 35 – 39 stay at their jobs five years and the average American changes jobs 10 – 15 times in their lifetime. (1.)
The other problem with the old school thinking of using a 401k as a retirement plan is that you use pre-tax dollars and eventually must pay Uncle Sam the taxes on those dollars, and that includes the growth. So here is a question to ask yourself; would you rather pay the tax on the seed or the harvest?
What I mean by that is if you are putting $100.00 a month in your 401k the tax write off is minimal. Let’s fast forward 40 years and assume the 401k has grown to $1,114,378. The tax you must pay on that is on average 25% at 65 years old or $278,594.00; which would leave you only $835,783.00 to use for expenses in your retirement.
So, what if you thought outside the box and tried a different path; paying tax on the seed instead of the harvest.
You take the same $100.00 but it is after tax and place it into Indexed Universal Life Insurance (IUL) monthly and let it grow for 40 years. The cash value of that contract could be $1,776,538.00; all of which you can take out tax-free. (under certain conditions)
Now if you’re in your 40’s or even early 50’s this outside of the box thinking can be beneficial to you as well; especially if you have money in a 401k from an old company.
So, let me ask you a question. Would you rather be in the box or outside of the box when it comes to your retirement planning?
As with all important decisions, consult a licensed and authorized professional with decisions that can affect tax liability.
The article above is an example of one possible situation, assuming returns over a long term time period are only that: one possible assumption. It is a prudent decision to ask for a second opinion when considering decisions that are based on assumptions.
(1) Bureau of Labor September 2017