Following the herd: the biggest mistake you're making for your retirement
By: Don Meyer - President & Co-Founder
When it comes to saving for retirement most people listen to the advice of their parents, the HR director at their company, someone on the radio, and their friends.
These various sources of information will generally say you should do the same thing when it comes to saving for retirement: save in your company 401[k] or in your IRA. These plans fall under Title 26 Section 401[k] of the IRS tax code and so I’ll just refer to these qualified plans as 401[k]s through this article.
So, this is how most Americans have chosen to save, and here’s why.
- Tax deferral – you will lower you taxes while you are working and pay the taxes when you take the money out in retirement.
- It’s what is available at most companies.
- It’s what most other people have used to save for retirement.
- They don’t know the compromises they are making and don’t know all their options.
Tax deferral could be a good reason to save in a 401[k] plan but the other reasons people chose to save in these are not good reasons.
Just because everyone else is doing it does not mean you should too. The whole “if everyone was jumping off the bridge” example comes to mind. First, you should ask why everyone is jumping off the bridge. They may have a good reason. The bridge may be on fire. It may be collapsing. The point is, you should ask questions when you see the masses doing the same thing. You need to do that with your retirement.
By not following the retirement herd you could have 60% to 100% more income in retirement.
Here’s what you should know about 401[k] plans.
Tax deferral only makes sense if taxes are going to be lower when you retire. We already know taxes are set to increase in 2026 and with all the stimulus packages going around there is only one way to pay for that. Higher taxes.
Also, most people aim to make more money the longer they work so age-old lie about being in a lower tax bracket when you retire because you will be making less money is foolish. Also, most people want to maintain their current standard of living into retirement. So, if you are going to maintain your current lifestyle that means your income will need to be very similar. So, at best you can hope for your taxes to remain the same.
There is one aspect that people seem to overlook when it comes to 401[k]s and deferring your taxes. Sure, you are saving money now, but the government is not going to tell you what your taxes will be in the future when you need your money.
Does that sound like a good deal?
If you were getting a mortgage and the bank said, “Sure, we’ll lend you the money, but we aren’t going to tell you the rate from month to month.” You would keep looking for a lender that will tell you exactly what your rates are going to be.
Your taxes should be no different. Most people put majority of their retirement into 401[k]s plans so that means their income in retirement is at risk from unknown tax rates. Did you know the average tax rate in our nation’s history is over 60%?
I am not going to touch on points two and three that I discussed previously because even though those are reasons people do choose 401[k]s plans, they should not be. By asking questions and doing some research you can find out other options and since most people rarely say how pleased they are with their 401[k] that gives you reason to look at other options.
So, let us move on to the compromises with 401[k] plans. We already discussed a big compromise and that is taxes.
Another compromise people make by following the 401[k] herd is risk. Most 401[k] options are invested in the stock market which means that you can lose money. American has been fed this same story for so long that most people think it is true: you have to risk your money in order to grow it.
Or people believe that you have to “just ride it out and it will rebound.” What goes up must come down and vice versa is not financial advice. Financial advice shows you how to grow your money without risking it.
So, if you do not have to risk your money for it to grow, why would you?
People also make compromises with 401[k] plans because there are contribution limitations, income limitations, and access limitations.
If you have a certain standard of living you want in retirement a 401[k] may not allow you to save enough to secure that standard of living.
Also, it’s your money, you should use it how you see fit.
So, these issues can all be resolved by flipping a few pages from Section 401[k] to Section 7702 of Title 26.
This specific tax code gives you more options for your retirement and eliminates any compromising. How?
The income from these plans are tax-free.
They grow your money without risk.
They are self-completing in the event you are not around to save.
By using Section 7702 you can expect three things to happen…
- Reduce your taxes in retirement by hundreds of thousands of dollars.
- Increase your retirement income by 50% to 70% a year.
- Take market risk off the table.
If you are not the kind of person to follow the retirement herd, you should consider this option.
You may be asking yourself, “Why doesn’t everyone do this if it is so great?” Good question. You have to qualify for it and not everyone does.
One of the clients we recently helped utilize a Section 7702 plan is going to save $205,000 in taxes in retirement and instead of getting $41,000 in retirement from his 401[k] he will be getting $97,000 from a Section 7702 plan.
401[k]s are not bad. They just don’t need to be the only thing you are using for retirement. Section 7702 may help you get the standard of living you are looking for in retirement.
ABOUT THE AUTHOR: Don Meyer co-founded Both Hands Financial Group with the sole purpose to serve the community by guiding people to a better financial future. In addition to helping people with their investments and insurance Don enjoys traveling with his wife, Jenna, and staying active. Those activities currently are woodworking, hot yoga, traveling, and spending time with their 10 children and three grandchildren.