When it come to Retirement Plans what is the difference between Good… Better…. and Best? about 300% to 200% more money!
When people ask about IRAs and 401(k)s, I remind them that these may have once been good vehicles at one time for saving for retirement but today they’re far from the best. Some people are perplexed when they learn this until they’re shown the difference between a good retirement savings strategy vs. a better one or the best one.
Let’s say that you worked your entire life and you accumulated a $1 million nest egg.
Many financial advisors hoped to average a 10%-12% return in the market for their clients even though that’s not been a reality for some time.
The problem is, even if you’re earning 12%, that’s not entirely your money. If it’s in a tax-deferred vehicle, at least 25% of that money is going to go to Uncle Sam in the form of taxes.
Another 5-7% of that money is going to go to whatever state you live in thanks to state income taxes. All you’ve done is delay the payment of those taxes until you start accessing that money.
With that million dollar nest egg, even if you were earning 12%, you’d be realizing $120,000 a year. But remember, not all of that money is yours. By the time you’ve paid your taxes, you’ll be lucky to have $80,000 to spend.
This is because most retirees end up paying roughly a third of their nest egg in taxes during their golden years.
This isn’t even counting the asset management fees charged by many advisors.
This means that people who are in retirement who were getting a 12% return that gave them $120,000 in annual income, are only netting $70,000-$75,000 a year to buy gas and groceries.
The sad truth is that the actual rate of return over the last two decades, according to DALBAR, has only been about 3.5-4%. This is why many financial advisors recommend that their clients withdraw no more than four percent yearly from their retirement nest egg.
They worry that their clients may end up outliving their money.
If you don’t believe that you can live on 4%, you may think you’d be better off withdrawing 6% annually. That means $60,000 annually.
Remember, you’re still going to end up paying $20,000 of that money in the form of taxes which leaves you with roughly $40,000 a year to live on.
Better Than a Roth….What’s better?
A Roth is probably better since you’ll be coming out at least 33% further ahead than a traditional IRA or 401(k).
Keep in mind that over 90 percent of Americans still prefer to put their savings into traditional IRAs and 401(k)s. They do this believing that, upon reaching retirement, they’ll be in a lower tax bracket.
If you’re in the same tax bracket when you retire, there’s no difference between a Roth IRA and a traditional IRA or 401(k). But if taxes go up, in the long run, you’ll be 33 percent better off with a Roth.
With a million bucks in a Roth, if you pull out 6% annually that’s $60,000 that’s tax-free on the back end. That’s 50% more than the $40,000 you’d be enjoying with a traditional IRA or 401(k).
The best possible situation is what has been called a LASER plan. This stands for Liquid Assets Safely Earning Returns.
Our favorite LASER fund is 100% tax-free like a Roth but has three big benefits over a Roth IRA.
It accumulates tax-free and you can access it tax-free but on top of that, there’s no strings attached. There are no restrictions on how much you can put in each year and when you’re allowed to touch it.
With the LASER fund, if you had a million dollars in it and were to die in an accident or from a heart attack, it would instantly blossom in value and transfer to your loved ones tax-free.
Roth can NOT do that.
Over the last 45 years, it has averaged 8.2% return. That means that on a million dollars, he could pull out $80,000 tax-free. Even if he was only pulling out 6%, he’d still be netting $60,000 tax-free and with the other three major benefits over a Roth.
Can you see why it might be worth having all the benefits of a Roth and a whole bunch more?
Once you understand the difference between good, better and best, you can make the necessary adjustments in how you approach saving for retirement.