Paul Ferraresi

Popular wisdom tells you the best way to build a nest egg is to maximize your company’s 401(k) plan. Popular wisdom also held that the sun rotated around the earth, the Titanic could not sink, and the Berlin Wall would never crumble. That’s my way of saying that I think you can construct a stronger nest egg if you funnel money into a personal non qualified retirement plan versus a 401(k) program.

Many people feel that by placing the maximum amount into their 401(k) plan and IRAs they will have great benefits, but these qualified plans are also time bombs.

Assume a couple is making contributions of $4,000/year into their IRA or 401(k) for 30 years. Their total 30 year contributions would amount to $120,000. That is, their…

1) Annual IRA/401(k) Contribution = $4,000 x 30 yrs = $120K Total contributions

Assume they are 34% combined marginal tax bracket for state and federal taxes.

2) Tax Bracket (Income > $67,000) = 34% (Fed + State)

Then, their tax savings would be $1,360 per year, or, $40,800 over the 30 years.

3) Tax Savings = $1,360/yr x 30 years = $40,800 Total

Now, assume they invested the $4,000 per year and obtained a hypothetical 10% annual rate of return for 30 years. They would amass a nest egg of $727,773.

4) $4,000 @ 10% for 30 yrs = $727,773

Let’s assume in retirement they could still earn 10% annual return. Then, without touching the principal they could withdraw $72,700 of annual income per year.

$727,773 X 10% = $72,700 per year withdrawal

Since they are retired, the kids have moved on so they have lost those exemptions; they mistakenly paid their home off so they lost those deductions; They will also be receiving Social Security benefits, maybe they have a pension or are working part-time, which will now place them in as high or higher tax bracket as they were in prior to retirement. Let us assume they are in the original combined state and federal rate of 34%. Their tax bill on the $72,700 withdrawal from their IRA/401(k) would be:

$72,700 income from IRA/401(k) X 34% tax bracket = $24,700 Tax bill

So, in the first two (2) years of retirement they will pay $49,400 in taxes. This $49,400 is far in excess of the $40,800 they saved in taxes during the accumulation years (see Section 3 above). Additionally, they will pay the $49,400 in taxes every two years for the rest of their life. Also, they will have to pay income tax on the $727,773 nest egg when it is withdrawn, plus possible estate tax of 45%. Hmmm! Whose retirement were they planning? Theirs or Uncle Sam’s?

In the first 20 months of retirement, every dollar of taxes saved during 30 years of deductions will be paid back. In fact, a person living a normal life expectancy will pay back over 10 times in taxes, on a qualified retirement plan, during the retirement years than the taxes saved during the contribution years.

For an average couple, they will pay over $500,000 in taxes from their IRA/401(k) from age 65 to 85½ for the privilege of saving $40,800 in taxes while they were working.

Why didn’t someone tell me the rest of the story?

With your 401k /IRA and personal account values being down it seems that no one wants to look up.

The sun will shine again. Trust me. Most people do not want to examine the track they are on for retirement. It is too painful to face the reality. They are acting like an ostrich and putting their head in the sand.

Look…if you are retiring in 10 years, then, whether you take active, positive steps now, or, avoid looking at the situation…you will still hit retirement in 10 years. The train does not stop for you.

I suggest looking at the situation in a healthy approach. I have suggested in this blog a site that is simple, yet effective and I feel it is worth another mention. I have worked with National Life Group and they do an excellent job for all my clients. Their retirement site allows you to do many calculations. Visit their site at: http://experienceretirement.com/.

It is easy to navigate and very helpful. As always, if you have questions or need assistance contact me at (713) 871-5919 or paul@fgmci.com

When I work on retirement planning for my clients, they rarely consider their health costs in retirement. Since most employees are covered by an employer plan and are only charged a small percentage of the true costs, well, they think this will continue forever.

As of this writing, Medicare and Medicaid are available to seniors but it is not cheap and the costs to individuals continue to rise.

A recent study by the Employee Benefit Research Institute found that a 65 year old man, who retires this year, will need $68,000 to $173,000 in current savings to have a 50-50 chance of covering health premiums and out of pocket costs in retirement. If he wants a 90% chance, then, the amount of savings needed jumps to $134,000 to $378,000. The variance depends on whether a former employer subsidizes health costs in retirement.

The cost outlook is worse for women because they tend to live longer and need more health care. A 65 year old- woman who retires this year will need between $98,000 to $242,000 in savings for a 50-50 chance and $164,000 to $450,000 in savings for a 90% chance.

The study found that health care costs in retirement rose 9% for men and 16% for women over the past year.

These estimates do not include savings needed for long term care or for basic living. As I have stressed with my clients, you need to begin planning now. Remember these two items (health and long term care) are in addition to normal living expense.

Start today or you know the outcome… discipline or regret.

An associate of ours, Kim Barmann, in New Mexico sent this report. I wanted to share it with you to emphasize the importance of staying vigilant in saving money.

$ People Are Saving Less

• The Commerce Department reports that Americans are saving at the lowest rate since the Great Depression.
• Personal savings stood at a national level of negative $6.2 million in January.
• About 40% of Americans say they are saving nothing for retirement. One reason: Over the past year, inflation rose 4.3% while salaries rose only 3.4%.
• One in four Americans told the Employee Benefit Research Institute that they have no saving at all.

$ Retirement Is Coming Later and Later

• The percentage of Americans 55 or older working full-time increased from 54.2% in 1993 to 64.4% in 2005.
• Nearly one in four people between 65 and 74 was still in the labor force in 2006, compared with just one in five in 2000.
• A recent study indicates that 17% of workers have suffered a reduction of retirement benefits offered by their employers in the last two years. Of these, only one-third say they are saving more for their retirement as a result.

$ Student Debt Is Piling Up

• Tuition cost have climbed 60% since 2000, and the average graduating senior now owes more than $20,000, according to the National Center for Education Statistics-twice as much as graduates owed a decade ago.
• Nearly a quarter of recent grads owe in excess of $25,000.
• While student debt rose 8% from 2005 to 2006, starting salaries rose only 4%.

These are the statistics. Break away from the crowd and do NOT be one of the statistics. Call us if you want to stand out from the crowd.

Retirement is one event that many people are ill prepared. An eye opening reminder is a survey from an online broker.

The latest cold-water reminder of this comes from a survey by online broker Scottrade (www.scottrade.com) and nonprofit investment adviser BetterInvesting (www.betterinvesting.org). More than half of the baby-boomer respondents reported being “very or extremely concerned” about retirement- possibly because a similar percentage said they didn’t have much of a nest egg. About a quarter of the 45-to 64-year old respondents have put away less than $25,000. Ouch!

How much do you need for retirement? Naturally, there are many factors such as lifestyle, health and gender. Many research studies have provided excellent reports on the correct amount and the best withdrawal rate. A “safe” rate of withdrawal we are for all our clients is 4%. Under this scenario there is a high probability your funds will last 30 years. Thus, if you need $100,000 per year. Keep in mind this is an example. All studies show you will need 85-90% of your preretirement income to maintain your lifestyle. You will need to pay your taxes from the $100,000, so, adjust accordingly.

If you need to draw $100,000 per year at a 4% withdrawal rate, then your account size will need to be $2,500,000. At a 4% withdrawal rate we assume someone will be investing, let’s say, in the S&P 500 which has averaged about 10% return since 1926. Subtract about 4-5% for inflation and the 4% withdrawal with allow that your monies can last for 30+ years.

Check out these sites for information and to do the calculations.