As my colleagues and I inform people about a pathway to personal wealth and retirement income that blows the socks off of “Wall Street” plans – we find more people coming to the defense of their 401k (or it’s close cousins – the IRA, 403b, 457, SIMPLE, and SEP).
It’s perfectly logical to think that a plan that is funded with pre-tax contributions, grows tax-deferred, and may come with company matching funds – must far outperform a plan that is funded with after-tax- dollars, has no matching funds – and be withdrawn tax-free – for life.
But it’s not true – at least not in about 90% of the cases. The reason is the compound impact of taxes and fees. In fact, while there are few guarantees in this world – 401k’s and their equivalent plans come with precisely three.
1. Taxes will be as high as they possibly can be. This is a result of the compounded tax liability. Roughly 30% of the money in your plan is not yours from the minute it goes in. To the extent that 30% grows – you are compounding your tax liability to the maximum level possible.
2. Fees/Commissions will be as high as they possibly can be. Even though roughly 30% of the money in your plan isn’t yours, you’re paying the cost of investing fees, commissions, and other plan costs on 100% of the account value. In other words – you’re paying fees and commissions on money that’s not even yours!
3. Your Tax Rate risk is as high as it can possibly be. Since none of the money in your plan is taxed until withdrawn, 100% of it is exposed to any changes (increases) in tax rates in the future. That’s a financial risk that 1) will hit you in retirement, and 2) cannot be mitigated in any way. It may be the largest financial vulnerability of seniors.
I’ve been trumpeting for years – to all who will listen – that you need to take drastic measures to opt out of the tax system, and do what you can to minimize the fee/commission load on your retirement account.
If this gives you new motivation to do so – reach out and let us tell you exactly how you can do both – without giving up return.
