In Need of Financial Coaching? Contact Me For How We Can Help

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In Need of Financial Coaching? Contact Me For How We Can Help

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Expert Financial Consulting

Cedric Holloman:

The Money Doctor

If you want to enjoy your future years with joy and abundance, put your plan together now. Your future self will thank you!

Cedric Holloman - CA. NPN #1193413

MWP - Make a Plan, Work Your Plan, Your Plan Will Work

One of the biggest challenges Americans face today is figuring out how to get income for the rest of their lives once they either retire or begin to slowly work less as they age. This is particularly problematic when you take into account vanishing pension programs, mismanaged 401k plans and the unknown future of social security.

 

Future Financial Concepts specializes in tax-favored strategies that can be utilized to prepare for retirement. This strategy has been used for years by business owners, corporate executives, and many of our politicians. If correctly structured and properly funded, this strategy can produce a life-long, tax-free income stream for retirement. It can also be used as a college fund, emergency fund, and a fund for other investments down the road.

The go-to program for most people today is the 401k/IRA. However, this plan, now that it has been around for a while, has shown itself to be a very unstable and unsure source of retirement income. And the key word there is "income." Put a pin in that, "I will come back to it later."


There are three main "risks" with saving for retirement in a 401k

Stock market risk

Tax rate risk

Depletion risk

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Stock Market Risk

The stock market is where pretty much all the returns in America come from. The challenge is how and who you go through to get there. The investment of choice for most people is the mutual funds that are offered through their employers' 401k accounts. This requires the employee to become a mutual fund expert as they try to pick which fund or group of funds is best for them, sometimes with disastrous results. I have found that most people do not even know what "their" return on investment is or how much they need to accumulate to replace the amount of income they need to live on once they retire.

In addition to that, no matter how great a fund picker you are, everyone loses money when the market declines, everyone, even a seasoned fund manager. The other challenge is the unknown/undisclosed fees that fund management companies and administrators charge to these accounts. Some people think 401ks are free. They are not and it affects the investment returns.

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Tax Rate Risk

Deferred retirement plans like 401ks and IRAs don't eliminate taxes; they just defer them until later. They still have to be paid when monies are withdrawn from the account. Most people are under the mistaken belief that they will be in a lower tax bracket when they retire. That will probably not be the case, here is why. If a person is married, has a family and a home, there are tax deductions for the children and the mortgage.

However, when retirement time rolls around, the tax breaks for the children and the mortgage are gone or severely reduced. So even if tax rates don't go up, the tax bill on the distribution will still be higher than the taxes saved. But do you really believe that taxes, over time, will not rise? Today, we have a huge federal budget deficit; more and more is being budgeted for FEMA, and Social Security needs more funding. So, there is a good chance that taxes will be higher when it is time to withdraw retirement funds.

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Depletion Risk

The biggest fear a lot of people have as they get closer to retirement is running out of money. Life expectancy in the U.S. is well into the 80s and 90s, so this is a real challenge. Sooner or later, 401k & IRA balances have to be converted into income. This means that these accounts need to move from the accumulation phase of retirement to the distribution phase. Consequently, these accounts have to be transitioned from higher-risk investments to lower-risk investments.

The returns will naturally be lower as well. The rule of thumb is that only 3-4% of the balance be used for income per year. Keep in mind that taxes need to be taken out of this distribution, and you can see that obtaining a decent income requires a very substantial beginning balance.

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