Do Government Sponsored Plans Make It Harder To Retire?
Most people are presented with 2 choices when it comes to retirement planning: a Roth vs. 401k. Now...of course there are more options than this, but mainstream financial professionals are really pushing these two products as the foundation of a sound financial plan.
Think about what you are trying to do when making a choice between various Government plans. Usually, you are attempting to save up enough money so that you can live comfortably in your old age. However, if you plan on accumulating a lot of money, then a 401k will probably have you paying back more in taxes than you saved. Even an employer match may not help.
What are you frequently being told about qualified plans and retirement in general? You're told that you'll be in a lower tax bracket, right? The question is, is that true? If so, then you are going to be making less money than before you retired. You can't expect to do well in your investments and pay less in income tax. If you do poorly, you could end up being poor by the time you retire due to inflation. Does that sound like your ideal retirement?
Your other option, you are told, is the Roth IRA. The Roth is an interesting creature. It gives you the ability to contribute after tax dollars in exchange for tax-free retirement income. Now, there's nothing inherently wrong with that. The problem is not in the tax benefits, but rather the contribution limits. It is typical to find out that you will never be able to save enough money in a Roth.
What it ultimately comes down to is: which qualified retirement plan is the best? But, do you need to use a qualified plan? Most mutual fund investors earn less than the rate of inflation according to DALBARinc.com. In qualified retirement plans, the bulk of your money will probably be invested in - you guessed it - mutual funds. The inherently high fees in some of these plans will further drag down your returns.
What would be an alternative to qualified plans? High cash value life insurance. Many major banks and corporations have been turning to specially designed life insurance policies as a way to build a "perfected savings" for over 100 years. At retirement, you get all of the money back that you put into the contract plus anywhere between 4-6% interest over that time period. If you die unexpectedly, like any insurance policy, the death benefit will will act to accelerate your savings - that you were not able to actually save - to your family.
Think about what you are trying to do when making a choice between various Government plans. Usually, you are attempting to save up enough money so that you can live comfortably in your old age. However, if you plan on accumulating a lot of money, then a 401k will probably have you paying back more in taxes than you saved. Even an employer match may not help.
What are you frequently being told about qualified plans and retirement in general? You're told that you'll be in a lower tax bracket, right? The question is, is that true? If so, then you are going to be making less money than before you retired. You can't expect to do well in your investments and pay less in income tax. If you do poorly, you could end up being poor by the time you retire due to inflation. Does that sound like your ideal retirement?
Your other option, you are told, is the Roth IRA. The Roth is an interesting creature. It gives you the ability to contribute after tax dollars in exchange for tax-free retirement income. Now, there's nothing inherently wrong with that. The problem is not in the tax benefits, but rather the contribution limits. It is typical to find out that you will never be able to save enough money in a Roth.
What it ultimately comes down to is: which qualified retirement plan is the best? But, do you need to use a qualified plan? Most mutual fund investors earn less than the rate of inflation according to DALBARinc.com. In qualified retirement plans, the bulk of your money will probably be invested in - you guessed it - mutual funds. The inherently high fees in some of these plans will further drag down your returns.
What would be an alternative to qualified plans? High cash value life insurance. Many major banks and corporations have been turning to specially designed life insurance policies as a way to build a "perfected savings" for over 100 years. At retirement, you get all of the money back that you put into the contract plus anywhere between 4-6% interest over that time period. If you die unexpectedly, like any insurance policy, the death benefit will will act to accelerate your savings - that you were not able to actually save - to your family.
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Author information: Only so much information can be covered in one article. If you want more information about any aspect of planning your personal finances, please visit David's website.
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