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Missed Fortune – Where Is Your Retirement Money Going?

Posted on | March 27, 2011

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There’s a powerful article in the Wall Street Journal titled: “Retiring Boomers find 401(k) Plans Fall Short.”   It spells out how the 401(k) generation is beginning to retire and it isn’t pretty.

The retirement savings plan of many Baby Boomers and others who thought their plan would see them through retirement age are falling short in many cases.


The median household headed by a person aged 62 has less than 25 percent of what they’ll need to maintain their standard of living in retirement.  This information was compiled by the Fed and analyzed by Boston College for the WSJ.

Even when factoring in Social Security and pensions or other savings, most 401(k) participants simply have too little savings in accumulation. The financial crisis has made things worse.

For example, Mr. Rutchman’s 401(k) is well into 6 figures, his wife has a 401(k) and a small pension from her nursing job.  After consulting a financial planner at Ernst and Young, Mr. Rutchman learned that his savings could run out before he turns 85.

Now he can expect to work for several more years.

By the third quarter of 2008, the average American had lost as much as 31 percent of the value of their IRAs and 401 (k)s. Many lost as much as 50 percent by the end of 2008 and they’re not even back to break even. On the other hand, there are people who didn’t lose a penny in 2008.

Most people who follow the Missed Fortune strategies have 50 percent more than they did just 4-5 years ago.  They did it safely in the worst 4 year period since the Great Depression.

401(k)s used to be a gold mine for money management firms.  Tax deferred income will not save you if taxes are going up and they most certainly are rising. Some advisors still say to stay the course and to keep putting off taxes for the future but if you keep doing what you’ve always done, you’re going to keep getting what you’ve always gotten.

You need to take ownership of your future.  In 30 years the 401(k) went from a small program to a multi trillion dollar industry supporting money managers.

The current median amount most people contribute to their 401(k)s is a measly 9% counting the employer contribution.  Vanguard is now urging people to contribute 12- 15 % over concerns about the stock market’s weak returns and uncertainty about Social Security and medicare.

But is the answer to sock away twice as much?

The Effects of Taxes & Inflation

You must consider the effect of taxes and inflation.  Sometimes people tell our wealth strategists that they have half a million or a million dollars in a 401(k) or an IRA portfolio.  They think they’re in good shape.

If you had a million dollar nest egg you’d have it made, right? Think again.

A million dollars earning 7.2 percent interest a year should allow you to pull out $72,000 annually without depleting the principal. That’s about 6,000 a month.  An average couple that earns over 68,000 a year are are in a 33% marginal tax bracket.

The Congressional Budget Office estimates that because of our tremendous national debt, by mid century most Americans will be paying at least 50-60% of their income in taxes.

If you paid a third of your income in tax on 6000 a month, that leaves you $4,000 of net spendable income per month. If you’re thinking, “I could probably squeeze by on that” don’t forget to factor in inflation.

Say that inflation stays around 5 percent.  At that rate the cost of living will double every 15 years and the purchasing power of the dollar will be cut in half.

This means that 30 years down the road you’ll only be able to buy the same gallons of gas, loaves of bread, prescriptions, golf greens fees, etc. for $4,000 a month that you can currently buy for $1,000 a month. Can you live on a $1,000 a month?

That million dollar nest egg generating $6,000 a month of taxable income is only going to have the same purchasing power as $1,000 a month today.

You need to have a hedge against the tax and inflation power curve by linking your return to those things that inflate.

You need a strategy where your money accumulates tax free not tax deferred.  At tomorrow’s tax rates, a $3 million nest egg can perform as well as a $6 million nest egg if it’s tax free.

If you lost money in the last 10 years and you’re worried about outliving your money, stop following the herd.

You need to learn how to reposition yourself and get something better in place.  You must learn how to safely regain what you’ve lost and have it be tax free.

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

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