Time for those May flowers! (April 2019)
We've all heard that old saying about April showers and May flowers since childhood. Well, deferring taxes in a retirement plan without properly positioning the rest of your model can create a rain storm for you and flowers for Uncle Sam when you decide to tap into your nest-egg in your golden years. We’re talking millions of dollars in taxes and lost opportunity costs over your retirement lifetime. And what if you're in a higher tax bracket then versus now? You’ve exacerbated this situation. The top marginal rate in 1989 was 28%. Now it’s 37%. Were you even in the top bracket 30 years ago? I bet you’re closer to the top rate now. Many people who listened to the ‘experts’, and put all of their retirement savings into pre-tax 401k’s found out after the fact that they’ve been doing reverse tax planning (i.e. they deferred money while in a lower bracket and received it in a higher one). Unfortunately, you can only find this out after the fact because we don’t know what the brackets will be in the future when we’re ready to retire. What if taxes go way up as some predict they will? What if they bring the excise back because you were too successful in building your 401k or IRA? What pieces have you put in place now to succeed in that environment? It’s all about position.
3 Things to Focus on this month:
1) Position is the first step in chess as well as creating a financial plan: Being out of position can lead to your financial garden being trampled before the first flowers can even bloom. How strong is your defense (protection, liquid savings, and debt structure)? If you are following our Rulebook, then you have a solid moat around your garden. If you are not sure or need to review this part of your model, please do not hesitate to reach out.
2) Position is not just about defense, we need to score runs/touchdowns/goals too: In order to build wealth, we need a good offense built on top of that solid defense. If has to be efficient and the risks balanced. Are you in position to increase your withdrawal rate at retirement without fear of running out of money? Do you have a plan to offset some, maybe even all of the taxes on your IRA/401k?
3) Position can help you to make the world a better place: What if you could have more money for your retirement and your heirs by giving money to charity? Being in position can allow you to have a material impact on causes you care about, while still providing for your retirement and your family.
Now get outside and breathe in some of that fresh spring air. Enjoy the flowers when they come. The ones in May and the ones in retirement!