In this article, A Better Financial Plan founder and CEO, Dean J.Vagnozzi talks about the common myths of retirement planning and the lessons we learned along the way.
When you start thinking about retirement planning, your first thought is often the traditional 401(k) or IRA. These retirement savings plans have long been hailed as ideal for the masses: the perfect retirement savings solution.
I’m about to toss all of those ideas on their heads.
Many investors claim that 401(k) plans and IRAs are the perfect retirement investment plan. Unfortunately, the truth is, they just don’t work for many people. Actually, the truth is, they aren’t really working for many people at all.
It’s a hard truth to swallow, especially if you’ve gone the traditional financial planning route most of your life. In fact, many people, when they first start working with me, want to argue about why those methods are working so successfully for them.
They aren’t—and there’s a good reason why.
What Does Your Perfect Retirement Look Like?
Most people, whether they’re still working and contributing to retirement accounts or they’ve already retired, probably have a pretty good idea of what they want retirement to look like—but have you really thought it through? What does that retirement vision look like to you?
Do you live in a home that you paid off a long time ago—one that has a lot of great memories of raising your now-grown children?
Do you have a source of income: your 401(k), your Social Security, income producing real estate or another source of funds you can draw from on a regular basis?
Many people’s dream of retirement includes a lot of other attributes: traveling when they want, spending plenty of time with the grandchildren, and spoiling their loved ones every once in a while doing plenty of exploring and checking out all those things that they always wanted to do.
Sounds like a dream, doesn’t it?
But What If There are Unforeseen Roadblocks in the Way?
You’ve been on one financial road all your life—probably the one that people around you have told you is the best possible financial plan for you.
What if, however, I told you that it has a few unforeseen problems ahead? You’d want to know as soon as possible, right? The sooner you find out, the sooner you can turn things around, take an alternative route, and get the outcome you’re after. If you were on a road trip, you would even be willing to add a few extra miles along the way to avoid big problems that could ultimately prevent you from reaching your destination. The same is likely true of your desire to meet your financial planning goals.
Here’s the bad news: the most popular retirement program in the United States have those roadblocks standing in your way. It’s no longer designed to help you reach that perfect retirement—and in fact, it could cause more problems than it prevents.
401(k): A Little History
The 401(k) was never intended to be the main savings vehicle for retirement.
Look at that again. Really think about what it means. Historically speaking, the 401(k) was not intended to be the primary method people used for retirement savings. Section 401(k) of the IRS code was originally intended as a compromise between the federal government’s desire to tax high-income earners and high-income earners’ desire to decrease income tax rate as much as possible. It was intended to decrease profits in a manner that would ultimately defer tax burden.
Originally, the 401(k) was intended for employers. In 1980, an employee benefits consultant named Ted Benna noticed that it could provide some of the same advantages for employees. The code was modified to encourage employees, as well as employers, to create those funds.
As of 2014, more than $4.4 trillion dollars across the United States was tied up in 401(k) plans—a quarter of the retirement assets saved across the United States. It’s a great way to save for retirement—but it was never intended to be the only way.
In the 1970s and 1980s, around 80% of workers across the United States had a pension plan included in their compensation packages. The Social Security program was expected to last indefinitely. Workers had retirement plans already in place that they could take advantage of, and the 401(k) was intended primarily to add to that.
Changing Times, Changing Needs
Today’s financial environment is drastically different than the one in which workers found themselves in the ‘70s and ‘80s. Consider:
Many major political leaders believe that Social Security will be insolvent by the 2030s. That means that most of today’s workers will never be able to take advantage of Social Security earnings, unless something is done to ease the strain on the current infrastructure.
Fewer than 10% of employees have a pension plan to provide for them in their retirement years.
In short, a program that was always intended to be the third leg of a retirement stool is now, for many people, the only leg—and, therefore, the only retirement savings they will have. Unfortunately, for many people, that means that they simply aren’t set up for financial success. Consider what a 401(k) could look like by the time you retire.
Changing Tax Rates
Taxes in the future could well be markedly higher. In order to address the health of many government programs and the government’s overall fiscal health, the government is going to need a source of income from somewhere—and most often, that comes from taxing citizens.
Your 401(k) and traditional IRA rely on deferring taxes until you withdraw those amounts—which means that they may well be taxed at a significantly higher rate.
If you have the opportunity, seek out some of the 70-somethings in your life and ask them how they feel about those taxes coming out of their retirement accounts every time they make a withdrawal. While you’re at it, ask them how well-prepared they were for those changes in their retirement accounts.
Now, consider the fact that you could face a much higher rate of taxation when you pull out your retirement savings.
Take a Look
Let’s take an imaginary young woman who has diligently put $4,000 each year into her IRA. Her annual tax deferment will be about $1,320. To make it easy, even though a 10% return on investment is unlikely, we’ll assume that 10% annual return on investment.
Her annual savings: $4,000
Duration: 30 years
Tax bracket: 33%
Annual taxes deferred: $1,320
Total saved at 10%: $723,744
Total taxes deferred: $39,600
She’s planning to withdraw approximately 10% from her IRA each year, while continuing to earn 10% on the balance as each year passes.
Annual withdrawal: $72,000
Tax bracket: 33%
Annual taxes paid: $23,760
Net income: $48,240
Between the ages of 65 and 85, this woman will have paid over $450,000 in taxes for the right to have saved $39,600. It’s highly inefficient—and it can sabotage her retirement.
When I present this argument to my audience, I often hear, “But my accountant told me that when I retire, I’ll be in a lower tax bracket.”
Let’s think this through for a minute. Your retirement plan is such that when you retire, you plan to be in a lower tax bracket than the one that you’re in now—which means that you’re going to have less money at your disposal than you do now.
How is that financial success?
If you’re in a lower tax bracket, it can mean only two things: either 1) that you failed to save enough money; or 2) that the method you used didn’t perform as well as anticipated. You don’t want either scenario! Instead, you want to put together a financial plan that assumes you will be in a higher tax bracket: one that spells overall financial success.
Back to Your Perfect Retirement Scenario
The house, in your perfect retirement scenario, is paid off. The kids are grown. Sure, it sounds like perfection—but it also means that you’re going to lose two of your biggest tax deductions right at the moment when you need them most, leaving you with a substantial tax burden as you withdraw your taxes from your retirement accounts.
Is this really the scenario you want for your retirement? Your money completely tied up, impossible to touch for 20 to 30 years and your tax penalties higher than they would have been if you’d just paid your taxes each year in the first place? Of course not!
There’s a better way to do it—and I can’t wait to tell you how. In order to be open to that new method, however, you need to start with an understanding of how traditional 401(k) accounts and IRAs are set up for failure—and why you need to take a vitally different approach to allow you to transform your retirement and, ultimately, live that dream you’ve always hoped for.
It’s different. In fact, it’s downright radical.
It’s also well worth the investment.
Meet The Author Dean Vagnozzi
Dean Vagnozzi is not your average financial planner. While most financial advisors focus on paying down the mortgage and building up a 401(k) for retirement, Vagnozzi does not believe in tying up the funds needed for today’s finances. Instead, he encourages his clients to take advantage of his unique strategies to build capital, live the life they intend to live, and meet their financial goals while still preparing for a dream retirement.
Dean Vagnozzi is a 15-year veteran of the financial industry, Dean has worked hard to forge his own path by identifying several proven asset classes that have been around for decades and are traditionally utilized as investments by the ultra-rich and well connected due to the fact that they are very cash-intensive to get involved in and such opportunities are not readily available for the masses, Dean’s proven strategy of pooling money with like-minded investors to leverage partnerships managed by Vagnozzi and his team helps them, as a collective, achieve the same returns typically reserved for those with much more capital to spend.
After attending Albright College and graduating in 1990, Vagnozzi quickly discovered that life as a traditional, number-crunching accountant just didn’t work for him. Worse, after watching the stock market crash, he saw his own 401(k) virtually disappear, taking his retirement plans along with it.
At the time, Vagnozzi had a $70,000 life insurance policy that, while it offered substantial protection to his loved ones, was doing nothing for his current financial status. He made the radical decision to cash out that plan and make his first real estate investment—and the rest is history. That year alone, Vagnozzi made $70,000 in profits from his real estate ventures. Over the next seven years, he continued to purchase more than 15 additional investment properties, ultimately increasing his monthly income to close to $8,000 through real estate ventures alone.
His friends and family members recognized his success and wanted in—and thus, Dean Vagnozzi’s new investment ideas were born. Through the contributions of friends and family members, he discovered the potential to crowdsource real estate investment opportunities, opening the door to real estate investing for individuals who previously lacked the capital to accomplish those goals on their own. From there, he began to grow his business, providing others with the potential to accomplish their financial goals and prepare for retirement in ways they never previously dreamed possible.
Now, Vagnozzi, who lives in Pennsylvania with his wife, continues to invest in and provide other interested parties with the ability to do the same utilizing a series of “funds” together that comply with state and federal securities laws that offers the middle class to pool their investment dollars with other like-minded investors to invest like the big boys all while utilizing a fraction of the capital typically required for similar investments.
To his clients, he offers a new look at financial planning and opportunities that make it possible for them to approach retirement with increased confidence.