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Missed Fortune – The Two Forces Intent On Eating Your Retirement

Posted on | May 20, 2012

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How to Lose a Third or More of Your Retirement Without Even Trying

When it comes to creating a predictable retirement and future, it’s essential to stop clinging to the strategies that are failing to produce satisfactory results for so many.

These strategies include the widely accepted practice of socking away your serious money in an IRA or 401(k). It’s not that these methods can never work; it’s the fact that there are far better ways to acquire money for your future.

One of the areas where these strategies consistently fall short is how they approach taxes. Too many people who’ve saved their money in an IRA or 401(k) find at retirement that taxes gobble up nearly a third of their nest egg due to the tax-deferred nature of these accounts. They also run the risk of finding themselves in a higher tax bracket than they’ve ever been in because they no longer have the deductions they once enjoyed.

There’s a world of difference in what happens when a person accumulates their retirement in a tax-deferred vehicle vs. a tax-free vehicle.

To illustrate this, let’s suppose that you were able to sock away $10,000 per year for 30 years in a tax-deferred IRA or 401(k). With an average of 7.2% yearly compound interest, you’d have a nest egg of over $1 million at the end of that period. That sounds like a sizable sum of money, but it’s simply not enough to last most people through their retirement.

Here’s why: If you’re pulling out just the interest of $72,000 a year or $6,000 month from that account, you’re going to be paying roughly a third of that income in taxes. That leaves you with only $4,000 a month to purchase your gas, groceries, medicines, and everything else you need. This is purely from the effect of taxes. With the Bush tax cuts set to expire and the looming threat of Congress raising taxes, your monthly income could take another hit.

And we haven’t yet even touched on how inflation further degrades the purchasing power of your nest egg by increasing the cost of living. The possibility of depleting one’s retirement nest egg with eleven years may be a painful reality to many.

Those who wish to avoid these pitfalls would be wise to consider a change in strategies.

The Solutions That Are Hiding In Plain Sight

The solution of many financial advisors is to tell people to sock away six times the amount of money and they’ll be just fine. But who can afford to put away $60,000 a year when they’ve been putting $10,000 a year up to this point?

Then answer can be found in redirecting otherwise payable taxes to a retirement vehicle where your money can accumulate tax-free. Not only will the money grow tax-free, but also it will remain tax-free as you start to withdraw it and will eventually transfer tax-free to your survivors. Best of all, this is done fully within IRS Code guidelines that have been on the books for many generations.

By redirecting those otherwise payable taxes into your tax-free retirement account, even an extra $500-$600 per month will grow your nest egg in a big way as the power of compound interest goes to work for you.

Another part of your strategy is to link your returns to those things that go up when there is inflation. This way, when inflation goes up to 5%, you’ll be enjoying predictable returns of 10% allowing you to outpace the rate of inflation. By taking simple, effective steps to counter the effects of taxes and inflation, you’ll have a retirement nest egg that you’ll never have to worry about outliving.

If you don’t yet know how to do this, it’s time you learned.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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