If I could tell you the exact day that your qualified retirement account will suffer its greatest loss, would you want to know that date? And in knowing that day, if we could do something now to prevent these losses would you do it?
Taxes are the largest transfer of your wealth. The day that you start taking money out of your 401k, IRA, SEP, Simple IRA or Defined Benefit plan is the day the suffering will start due to taxation. This is not because of losses in the stock market (that is another conversation altogether), this is because 100% of your qualified retirement account becomes taxable at ordinary income tax rates.
Let’s take a look at an example to help solidify my point. If you were to invest $10,000 per year for 30 years at a 7% rate in your 401k, you would end up with roughly $1,000,000. During that time frame at a 25% tax bracket you would have deferred $84,000 in taxes. You will pay these taxes back at some point. Let’s assume you drop to a 15% tax bracket during retirement. How long does it take for the government to fully recapture all of the tax deferral you had during your 30 years of contributing to your 401k. If you begin taking $70,000 out of your IRA per year, it will take 8 years. Think about that, you deferred taxes for 30 years to only have it take 8 years for the government to reclaim it all. (If your tax bracket stays the same, it takes just 5.2 years to fully pay back 30 years worth of tax deferral.)
It doesn’t stop there, will you stop taking money out of your IRA after you pay the $84,000 of tax deferral that you enjoyed? No! If your retirement lasts for 25 years (age 65 to 90), you will have paid $258,750. That is a 3 to 1 ratio in favor of the government. This is all assuming that taxes do not increase due to a bankrupt Social Security, Medicare, Medicaid, or any of the other federal programs that are on a downward spiral.
Congratulations, you’ve become the perfect tax payer.
This does not have to be your reality, seek answers and become educated from someone other than they guy selling you how great the companies 401k is.