A Story About Bill
Bill is age 36 and has reached upper management with his company. He has 14 years in with a $150,000 Annual Salary He has been married for 9 years with 3 young children. He loves his kids and like many fathers, wished he had more family time but he wants his kids to go to college. He contributes to 401(k) which has accumulated to $145,000 and at the current rate, and continued funding, his benefit statement shows a projected value of $2,669,414 by age 62 the year he plans to retire.
The financial advisor told him that the company 401(k) was the best place to invest his money was in the company 401(k) for three reasons:
1. The company would match up to $1,500 per year. This was free money. All he had to do was contribute. That sounded good to Bill. He’d take all the free money he could get.
2. He was told this was the best place to grow tax deferred (avoided paying taxes on the front end); hence the more he contributed the more tax he saved.
3. He was told that when he retired he would be in a lower tax bracket. Since he would be in a lower tax bracket, he would pay less tax. Again, another exciting prospect in Bill’s mind.
Bill also sought the advice of his CPA and other top executives at his company and they all told him that the 401(k) was the best place to save. Avoid taxes today and pay them later. What a great idea and everyone was in agreement. Bill is 36 and feels good about his financial future that will come to greet him all too quickly.
Fast forward, Bill is now 50 and his oldest daughter Lori is a junior in a small private college. He maxed his 401(k) last 11 years and he has accumulated $848,819. His income now $259,751 (4% raises over past 14 years) and he is almost a millionaire. The cost of his daughter school escalated to $77,356 for 1 year of tuition* (he had planned for $30,000) so he is paying tuition with his income and looking into loans.
Bill went to his 401(k) to see if he could get money to help fund his daughter’s $77,356 tuition bill instead of paying for the shortfall with loans since no financial aid was available due to Bill’s high income bracket.
His federal rate was 40%
His state rate was 10%
Penalty was 10%
That totals 60% in taxes of his retirement going to Uncle Sam! Bill realized that in order to fund 1 year of tuition he would need to take out $193,390 from his 401(k) just to be able to pay the $77,356 tuition bill. Ludicrous! That equaled 22.8% of his entire 401(k) for just one year of Lori’s tuition. Bill and his wife spent the last two years significantly cutting back on all the luxuries they have come to enjoy. But they believe their mission is worth the cause. They stopped going out for fancy dinners, canceled plans for family vacations, and they were advised to take out a second mortgage at 11%; and Bill came to the conclusion that he would not be able to fund his 401(k), at least until the kids were done with college and all their debts were paid off, a decision he really dislikes.
Bill wonders to himself how he could almost be a millionaire on paper and feel flat broke. He has no access to his money without severe penalties. He feels like his own money is being held hostage by the tax system. He did not work so hard only to find that 60% of it would be gobbled by taxes. A little thought runs through Bob’s mind and wonders for the first time if his 401(k) really had been the best place to save money. Bill’s problems don’t end there. His son Billy will be a freshman in college and the third child is not far behind. At age 50, Bill is no longer feeling so good about his financial future.
Fast forward, Bill is now 65 and his kids have all completed college and each have good jobs. Both he and his wife Marcy are glad they gave their children the gift of an education. Retiring 3 years later than planned was a small price to pay. Bill is now the poster child of conventional wisdom having attained a debt free life style, a paid off mortgage, and $3,091,808 in his 401(k). Before Bill started to take distributions from his 401(k) he sat back and thought to himself that despite the struggle to fund college putting his money in a 401(k) has turned out to be very good advice.
Current state of affairs at Bill’s retirement:
His taxes had continued to climb over the years in order to pay down the national debt. Bill now finds himself at a 55% tax bracket. He wonders, what happened to being taxed at a lower rate? Bill finds himself with zero deductions to reduce his tax burden because his kids are grown up and his house is paid off. All the deductions he had evaporated.
Bill realizes that the few thousand dollars he had postponed in tax when he was young will now likely cost him well over a million dollars. For the first time it dawns on him that he never really avoided taxes to begin with; he had simply delayed them. And by delaying them he was only compounding them, far worse than he could have ever imagined. At age 65, Bill is feeling a little sick to his stomach. Uncle Sam is going to ruin his golden years.
Fast forward, Bill is now deceased at age 80 and is survived by his wife Marcy and three children. Bill had done a great job preserving this retirement because he wanted to make sure Marcy would be taken care of in the long run. They lived frugally. And with the new tax rates, they lived a shadow of the life they were used to. They never shared this part of his retirement with the kids.
Four years later Bill’s wife Marci passed away as well. And the estate was being settled between the three children. The 401(k) proceeds were to be distributed. Of nearly $3,000,000 in their father’s account, only $476,368, or 15% was passed onto them. Instead of each child getting close to $1,000,000, after taxes the three children ended up with just over $150,000 each.
The kids were shocked. The math was verified by a CPA as well. They spoke with several financial advisors to ask if there was a better way and no one they spoke to knew of one. For some of you this story may have some similarities to your life. For others, this may look nothing like your reality. You may be older, or younger, make more money or less money, male or female. You might not have matching 401(k), or you worked for multiple companies- but that’s O.K.! You will face the same potentially devastating tax disasters unless you choose a better way!
The Good News
There is a better way to save money for your family's future. A much more simple way. A way you don’t feel like your money is being held captive until retirement age. A way that you can get your money any time and in any amount without paying taxes… that’s right… zero! A way that does not hold you hostage to the changing tax rates of the future. And a way to live a fully-funded retirement, enjoying all the things you want to do and still leaving behind a potentially huge legacy that will pass to the next generation free from federal and state income tax.
For more information on this concept:
"Tax Free Retirement"
by Patrick Kelly:
"Tax Free Retirement will show you how to avoid 9 common Financial landmines, teach you how to generate tax-free retirement income, explain how to multiply your IRA two or three fold for future generations and help you leave a lasting legacy beyond your wildest imagination."
For your FREE copy contact:
ABN Financial Group
Office (937) 435-7540