By: Cory Carlton
Most people we meet with say they want to have a certain income in retirement. After visiting what we discover is they really want a certain standard of living and need the income to support it.
Often times the standard of living they want in retirement is the same standard of living they are enjoying now.
The challenge is that most people do not believe they can maintain their current lifestyle based on their current savings. They don’t want to have to count every penny in retirement. They want to travel, try new restaurants, enjoy hobbies, and enjoy family.
So, if you have any concerns about having the standard of living you want in retirement, here are three things you need to be doing to get the lifestyle you desire…
First, stop following the herd.
If you are doing the same thing everyone else is your results are not going to be any different. The retirement herd mentality says to save in your company 401[k] or your own IRA. I’m going to refer to these as qualified plans through this post.
Why save in qualified plans?
When someone gets their first job, they ask their parents what they should start doing for retirement. Or the HR person says to save in the company 401[k]. There are people on the radio saying to do the same. Then there are your friends that echo the same thing that you have heard from almost everyone else.
So, if nearly everyone is saying to save in a qualified plan, it must be the best thing out there, right?
Any time you see the masses doing the same thing you should stop and ask yourself, “Why are they doing that?”
The old adage about “if everyone was jumping off a bridge” comes to mind. Why are they jumping? Is there a fire? Is the bridge collapsing? There could be good reason.
The “good reason” people save in qualified plans is because they are tax deferred. That means that you don’t pay taxes on the money you contribute to the plan now, but you will pay taxes when you take the money out in retirement. That means you get to keep more of your money now. Sounds good, right?
Well, what you are doing is compromising your retirement by putting all of your retirement savings into qualified plans and that brings me to the second thing you should be doing…
Second, stop compromising your retirement.
The biggest compromises you make my following the qualified plan herd are taxes and risk.
With taxes you are saving money now, while you are working, to only pay more taxes back later. Think about it, the government gives you a tax break now, but they are not telling you what the tax rate will be when you need your money.
If you were getting a mortgage and the bank said they are not going to tell you what the rate will be from year to year, you would keep shopping. But for some reason most Americans feel that is okay when it comes to their retirement.
This is what accepting the tax compromise looks like in retirement. For one of our clients he was going to defer $185,000 in taxes while he is working. That’s good. That means he saves that while he is working. But when he goes to retire his taxes in retirement will be $390,000.
That is how tax deferral works. You save a little only to pay a lot more back. The only time tax deferral makes sense is if taxes are going to be lower when you retire, and I think we can all agree that is not likely to be the case.
This is not a matter of opinion; it is simple math and we have the tools to show our clients how much in taxes they will save while they work and how much in taxes they will pay back in retirement. When we show people what their tax bill in retirement will be, they are angry to say the least.
The second compromise people are making with qualified plans is risk. Americans have heard for so long that they have to risk their money to grow it and it’s wrong.
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.
If you look at returns from 2000 to 2019 you could choose to have a net return of 4.5% [that took all the risk] or 6.37% with no risk. Which one would you want?
You are saving for your retirement, not playing blackjack. Saving for retirement should not be a gamble. If you don’t have to take risk but still have the ability for growth, why would you risk your standard of living in retirement?
Same thing with taxes. You are risking your retirement by accepting the status quo of paying taxes at an unknown rate when you need your money.
Now for the third thing you need to do to get the standard of living you want in retirement:
Third, be open to a new idea.
The new idea I’m talking about is not really new. It’s just likely new to you. I’m talking about using Title 26 Section 7702 of the IRS tax code. This is just a few pages back from Section 401[k].
So, we are using the same tax code most people already use but we are just turning a few pages and using another section that has better options.
Section 7702 allows you to save as much for retirement as you want which is part of the reason you can achieve the standard of living you want in retirement. Section 7702 gives you better access to your money. The income you receive is tax-free. These plans take zero market risk.
That that means for your retirement: Well, for the client I mentioned earlier he is going to save of $205,000 in taxes because he will pay the $185,000 while he is working and not pay the $390,000 back in retirement.
His income in a 401[k] plan would have been $41,000 a year [which it could be less if taxes go higher than estimated and the market is down on the wrong time] or with a 7702 plan his income would be $76,000 a year [which is not subject to future tax rates or risk].
That is nearly 85% more income per year in addition to saving $205,000 in taxes.
Do you think if you had 85% more income per year and saved this kind of money on taxes in retirement that you could have the standard of living you want?
To be clear, I’m not saying that 401[k]s are bad. They are just not the only place someone should be saving their money.
If you stop following the herd, stop compromising, and are open to seeing what a Section 7702 plan can do for you then you will have more confidence in your retirement plan and will be able to enjoy the lifestyle you desire.
ABOUT THE AUTHOR: Cory Carlton is the CEO and Co-Founder of Both Hands Financial Group. Cory's passion is helping people implement Section 7702 and maximize peoples' income while minimizing taxes and taking as little risk as possible. Aside from being passionate about 7702 plans, Cory spends as much time with his wife, Emily, and their three young daughters. They spend lots of time outside in nature and playing pretend. Right now his daughters are into dragons.