by: Cory Carlton
You will be in big debt in retirement if you saved in 401Ks and IRAs. Do you know how much debt you’re in?
Many Americans have the goal of being debt-free by the time they get to retirement. That’s a great goal. Having fewer expenses in retirement will allow you to be able to enjoy retirement a bit more.
But there is one source of debt most people have not considered that they can’t escape in retirement. That’s taxes.
If you saved in a qualified plan, like a 401K or IRA or 403b, you have debt in retirement due to the IRS.
Money due to another entity in the future is a debt. In this case, it comes in the form of taxes.
With other debt, we know exactly how much we will be on the hook for. When we buy a house, a car, or anything we borrow money for. We know what we are going to pay.
But what is your debt going to be in retirement? What will your taxes be?
You don’t know. Most people bought into the paradigm that they “will be in a lower tax bracket when you retire” and that is not true.
You make more money, generally, as the years go on, and nowadays people don’t want to lower their standard of living in retirement. This means that people want their income to be at the very least the same in retirement as when they are working.
Deferring taxes, which is what qualified plans do, is only a good deal if you are making less money in retirement. So, if you plan to lower your standard of living in retirement, your debt may not be as large as some others, but I bet it will still be larger than you expect.
So, what will your retirement tax bill be? That’s the question. And that’s the question we help lots of our clients answer and it is always shocking.
Here’s an example of someone we recently showed their retirement tax burden analysis…
He is 54 years old, his income puts him in the 24% tax bracket and he has approximately $500,000 saved for retirement between an IRA and a 401K.
For this purpose, we assumed his account would grow by 6% annually until he retires at age 72. He likes what he does and wants to work if he can. We also assumed that his tax bracket would remain the same as it is now. We did it this way for several reasons, but I just wanted to give you the important details.
So, a 54-year-old fella with $500,000 in qualified accounts starts an income at age 72.
What do you think this amount of savings will cost him in taxes in retirement?
$448,276 is what his tax bill will be in retirement. Shocking, isn’t it?
His half million dollars today will cost him nearly the same amount in retirement if he does not make any changes.
With this, there is good news and bad news. The bad news is that this guy and everyone like him who saved most of their retirement savings in qualified plans must pay taxes.
The good news is that the tax amount he owes can be reduced. This guy could get his tax bill down to $120,000.
That means there are over $328,000 of optional taxes that he could choose to pay or not.
If you had this kind of optional tax that you could choose to pay or not, what would you do?
What would you do with $328,000 more income in retirement?
Don’t let anyone tell you differently. Taxes in retirement are debt. Be aware of “financial professionals” that tell you to save in 401Ks and IRAs but then to also do all you can to get out of debt. Those two pieces of advice are conflicting because saving all your money in 401Ks and IRAs is just compounding your debt/taxes.
Want to see your tax burden analysis? Email me at firstname.lastname@example.org to get your free report.
No matter your age or how much you have saved, the amount you will owe in taxes will make you angry. The good news is there is something you can do about it and we can help.
ABOUT THE AUTHOR: Cory Carlton is the CEO and Co-Founder of Both Hands Financial Group. Cory and the rest of the team at Both Hands FG challenge the retirement savings paradigm that is plaguing Americans by taking more money out of their pocket and sending it to the IRS. Cory specializes in helping people reduce their retirement income tax burden and avoiding paying optional taxes. Just because something has always been done a certain way does not mean that it should still be done that way. Planning for retirement is unique to each person and it requires creative thinking.