Our client, Paul Rasor*, is 40 years old, married and files taxes jointly with his wife. Paul earns $60,000 per year and wishes to save 10% of his earnings for retirement. Using the combined effective tax rate for Federal and State of 19.4%, Paul and Michelle’s net cost of saving is: $6,000 x 19.4% = $1,164, or rounding up, $1,170.
It costs Paul and Michelle $4,830 to save $6,000 before taxes, and over Paul’s remaining 25 working years, Paul and Michelle will see a tax savings of $29,250 ($1,170 x 25 years).
[As a side note: $6,000 invested annually at a rate of 7.2% per year - the historical return for the S&P 500 since 1929 – would generate $403,457.26 in your account after 25 years.]
Fast-forward 25 years: When Paul retires, he decides to draw a $40,000 income annually from his retirement savings. At the current combined effective Federal and State withholding tax rate of 23.5%, Paul and Michelle will pay $40,000 x 23.5% = $9400 on their annual distribution. At this rate, Paul and Michelle will negate their so-called tax savings in just a few years.
Can you see how the current low-tax scenario is flawed?
The tax advantage myth is to defer working years’ taxes to retirement, anticipating being in a lower tax bracket, therefore paying less net taxes. Do you see tax rates going down in the future?
So let’s see how much Paul and Michelle will pay in taxes if they decided to draw $20,000, $30,000 or $40,000 each year and what the total would be at the five-year retirement mark:
Duration/ Paul’s Age $20,000 $30,000 $40,000
1 year/ age 66 $4,700 $7,050 $9,400
5 years/ age 70 $23,500 $35,250 $47,000
Paul plans hopes to live past 82, and he has essentially paid back to the government his “tax savings” by age 70 with 12 more potential years left of distribution. Paul and Michelle will be paying more in taxes during his retirement than they did during working years. That’s money they will need to live on!
Now the Employee Benefits Network Method:
Invested EBN’s way, Paul’s tax obligation would have been satisfied, allowing him to live off his contribution and its growth tax free! Paul and Michele are able to control their own destiny; they don’t have to wish for a favorable tax climate before Paul can retire.
Update your 401k plan today! It’s simple. Just contact Employee Benefit Network. 401K Help
You may be asking yourself, “If this simple update was missed, what other land mines are out there? Why wasn’t this explained years ago? Where was our broker on this?”
Your broker should be providing you with regular education, timely updates and due diligence of your 401k plan. You deserve that after all your years of saving.
Education can also reduce potential liability of plan sponsors if retiring employees financial conditions don’t meet expectations.
Contact Employee Benefit Network now! 401K Help (248) 362-8108
Get retirement ready!
*Not the client’s real name
It costs Paul and Michelle $4,830 to save $6,000 before taxes, and over Paul’s remaining 25 working years, Paul and Michelle will see a tax savings of $29,250 ($1,170 x 25 years).
[As a side note: $6,000 invested annually at a rate of 7.2% per year - the historical return for the S&P 500 since 1929 – would generate $403,457.26 in your account after 25 years.]
Fast-forward 25 years: When Paul retires, he decides to draw a $40,000 income annually from his retirement savings. At the current combined effective Federal and State withholding tax rate of 23.5%, Paul and Michelle will pay $40,000 x 23.5% = $9400 on their annual distribution. At this rate, Paul and Michelle will negate their so-called tax savings in just a few years.
Can you see how the current low-tax scenario is flawed?
The tax advantage myth is to defer working years’ taxes to retirement, anticipating being in a lower tax bracket, therefore paying less net taxes. Do you see tax rates going down in the future?
So let’s see how much Paul and Michelle will pay in taxes if they decided to draw $20,000, $30,000 or $40,000 each year and what the total would be at the five-year retirement mark:
Duration/ Paul’s Age $20,000 $30,000 $40,000
1 year/ age 66 $4,700 $7,050 $9,400
5 years/ age 70 $23,500 $35,250 $47,000
Paul plans hopes to live past 82, and he has essentially paid back to the government his “tax savings” by age 70 with 12 more potential years left of distribution. Paul and Michelle will be paying more in taxes during his retirement than they did during working years. That’s money they will need to live on!
Now the Employee Benefits Network Method:
Invested EBN’s way, Paul’s tax obligation would have been satisfied, allowing him to live off his contribution and its growth tax free! Paul and Michele are able to control their own destiny; they don’t have to wish for a favorable tax climate before Paul can retire.
Update your 401k plan today! It’s simple. Just contact Employee Benefit Network. 401K Help
You may be asking yourself, “If this simple update was missed, what other land mines are out there? Why wasn’t this explained years ago? Where was our broker on this?”
Your broker should be providing you with regular education, timely updates and due diligence of your 401k plan. You deserve that after all your years of saving.
Education can also reduce potential liability of plan sponsors if retiring employees financial conditions don’t meet expectations.
Contact Employee Benefit Network now! 401K Help (248) 362-8108
Get retirement ready!
*Not the client’s real name
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