Published August 27, 2012
It probably is, and you do not even know it yet. By the time you realize that your retirement plan is not going to work out exactly like you hoped it would, it will be too late to do anything about it.
Let’s go through a story that is lived out daily by many people. It is all too real, and many who read this article will say, “Yep, this is exactly what happened to us.” The numbers might be different, but the results are the same. You can wind up outliving your money and/or die leaving little or none of your estate for your heirs.
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Bill is now 36 years old in upper management with a major corporation. His annual salary is $150,000, and he has worked for same company for 14 years—since college. Bill has always sought sound financial advice, so everyone expects Bill to do well in retirement.
Marcy is Bill’s wife of 9 years. They have three kids: Lori age 6, Billy age 4, and Scott age 1. Bill loves his kids and wants to help them any way he can. He plans to pay for their college educations, as his Dad did for him.
Bill’s company has a great 401k program. When he started with company, he heard a helpful presentation by a financial professional who told him the 401k was the best place to put his retirement money for 3 reasons:
1. The company matched up to $1,500 which was like “free money”
2. The account was tax-deferred.
3. Bill could retire in a lower tax bracket.
His CPA even told him the 401k was a wonderful idea, and it would indeed allow him to pay less in taxes.
At age 36, Bill has $145,000 in his account. He’s contributing the maximum amount now so he should have $2,669,414 at age 62 when he hopes to retire.
Bill puts away all the family’s savings in the 401k, figuring college can be paid as they go.
Now, Bill is 50 and has been with his company for 28 years. His 401k now has $848,820. Finances have been tight, and his income is now at $259,751 with a 4% cost of living (COL) increase. The college tuition that they planned at $30,000 now is $77,000, and they did not qualify for financial aid. Now to fund his daughter’s college tuition of almost $77,000 year (30% of his salary), he is up against a wall. He would have to withdraw $193,000 form his retirement accounts just to net $77,000 after taxes and penalties.
Bill was almost a millionaire, but felt flat broke. Now he wonders if the 401k was the best choice for his retirement.
His son Billy will be a freshman next year, and Bill is 65. He’s been with his company for 43 years.
By the time college is over for all three kids and he is debt free, his 401k is now at $3,091,808. Unfortunately, 2 months before retirement, a new president is elected and tax laws are changed. Bill is now in a new top tax bracket: 55%. What about retiring at a lower tax rate?
At age 80 Bill passes away, then his wife Marcy dies 4 years later. Of the $3,000,000+ in the estate, there’s only $476,000 left after taxes. The three kids get $150,000 each. Scott, the youngest, calls his CPA and asks, “Can this really happen?”
“You bet it can and does every day.”
AND THEY DIDN’T EVEN SEE IT COMING.
Learn how to protect yourself from Bill’s situation by calling Mack Hales at (770) 533-4141.