In our 2nd part, we will cover two more misconceptions: 1) Life Expectancy Averages Matter, and 2) Taxes Won’t Have a Major Effect on My Retirement.
#2 Misconception: Life Expectancy Averages Matter
When it comes to retirement income planning, life expectancy figures can be severely misleading. Many people will outlive their own life expectancies. Therefore, people ought to think long and hard about longevity risk—the very real possibility of living 20, 30, or 40 years (or more) past retirement age.
While a healthy 65-year-old man has a life expectancy of age 81, he has a 50 percent probability of reaching age 85 and a 25 percent probability of reaching age 92. For a woman age 65, the odds rise to a 50 percent chance of reaching 88 and a one-in-four chance of living past her 94th birthday. The odds of at least one member of a 65-year-old couple reaching 92 are 50 percent, and there is at least a 25 percent chance of one of them reaching 97. (Source: Society of Actuaries, Annuity 2000 Mortality Table.)
There has never been a generation in history that has been faced with a challenge of the magnitude and scope that faces you today. Your retirement may last as long as your working life. What happens if you do live to be 95, 100, or beyond? If you retire at 60, you may need income for another 35, 40, or possibly even 50 years. Will your income last as long as you do?
We all know the averages don’t matter. None of us knows anyone with 2.3 kids. Let’s make sure we don’t use average life expectancy rates to make a mistake in our planning.
#3 Misconception: Taxes Won’t Have a Major Effect on My Retirement
If you take one dollar and double it 20 times the total is more than one million dollars ($1×2=$2; $2×2=$4; $4×2=$8; and so on.) But here’s the really interesting part: If you tax the gain at 31 percent each time you double that dollar, you won’t end up with $1 million. In fact, you won’t end up with even $600,000. Surely it’s at least $100,000, right? Nope, when the return is eroded by taxes, you end up with just over $36,000! The power of compounding is that powerful, and the cost of taxes is that harmful to wealth creation.
Albert Einstein is quoted as having said that compound interest is one of the wonders of the modern world. Taxation erodes the compounding effect on money.
We should all pay taxes. Everyone. It’s part of living in this wonderful country. Taxes do some great things for us: provide interstates, protection, police forces and national parks. I believe we should each pay our fair share but not a penny more.
Look at the balance in your IRA 401(k) rollover, 403(b) or 412(i). Now deduct 35 percent from that. That number doesn’t feel as good. But reality is that not all of that money in the account is yours; Uncle Sam has a mortgage on your retirement account—he will get his cut.
Little differences can have a tremendous impact. Tiger Woods had the lowest scoring average on the PGA Tour in 2005, earning $10.6 million in prize money. Pat Perez’s scoring averaged exactly two strokes higher (71.11 verses 69.11) and he earned $1.3 million, 88 percent less money than the game’s number one ranked player. (Source: The Golf Channel)
It’s like that with your money. Small differences in the way you structure your financial life may have a big impact on the results you get and on the amount of taxes you pay—or don’t have to pay!
We must remember, it’s not what you make before taxes, it’s what you keep that counts. That’s why we each need to make sure we’re planning from a net, after-tax perspective.
Secure Money Advisors can help you appropriately use life expectancy when planning for your future and can coordinate with your tax advisor to help ensure the impact of taxes on your savings is incorporated into your retirement plan. If you have questions about this or other matters relating to your retirement, give us a call at 724-382-1298 or attend one of our educational seminars.