The conventional wisdom has always been to put as much as you can afford in to your retirement plan so that you would have enough to live on when you retire.
But is that really true?
The logic is that you don’t pay taxes now on that money and the earnings grow tax free. Then when you retire you will be in a lower tax bracket.
Is that really true?
This assumption is based on the notion that the investments will grow over time and that the tax rates will be lower as a 65 year old. However, for the last ten years retirement accounts haven’t grown much and they have experienced some huge losses. And the country is dead broke. What is the likelihood that tax rates will be higher in the next 10-20 years?
Well for those of us that have been around since the 1950’s remember top income tax rates of 75% Federal and 10% State in some places during the late 1970’s. These tax rates strangled the small business person’s ability to grow and innovate and destroyed the will to work. I remember being offered an overtime shift and thinking that after taxes I was going to earn about $20 so I chose to spend the day at the beach.
I can’t predict what is going to happen any better than anybody else but if I had to bet I would bet that tax rates are going up.
Given that scenario the biggest challenge is figuring out what to do. If you were planning on having $100,000 a year of retirement income in a 25% tax bracket you would get hammered under the Jimmy Carter era tax rates of 75%.
So depending upon your age and how much longer you are going to be working it might make a whole lot more sense to pay your taxes on the income this year and then invest in a taxable account so that you would not have to pay higher rates in the future. In addition, there are some very interesting new Life Insurance based products that actually can build a nice retirement estate, guarantee a reasonable return on investment, provide a death benefit, and let you use the money before you die.
The latest industry buzz phrase is called the retirement red zone. If you are within 10-15 years of 65 years old this is something you need to take care of right now. This is one of those areas that you need to get multiple opinions and professional advice on. But it would be a giant pain to bust your tail your whole career and end up without two nickels to rub together.