Don't Learn this Lesson the Way Sally Did - the HARD Way!

Don't learn this lesson the way Sally did - the HARD way!

Most reasonable people would agree that when it comes to saving and investing for your

retirement, the decisions you make regarding your choice of investment vehicles should be driven by your overall final expected output. No one is likely to invest their hard-earned money into anything unless they are convinced, one way or the other, that it will bring them the highest benefit. Only a complete idiot would settle for even the second best in this situation, right?

In most of the cases I have seen and continue to witness every day in my practice, most well-meaning folks still end up, for lack of a better term, getting burned by ideas that sounded great in theory but turned out to be their worst nightmares in reality. And that, my friend, is exactly the genesis of many of today’s retirement horror stories, as far as I’m concerned.

Take the story of a lady I consulted with couple weeks ago. Like millions of Americans, the tax guy/financial advisor with whom she’s been affiliated with for more than 20 years told Sally that the absolute best way to cut her tax bill both during her working years and also during retirement was to fund a traditional IRA. The so-called strategy here was that her contributions were tax-deductible, and all of her investment gains would also be tax-deferred until she began taking withdrawals in retirement, so this would cut her taxes. Obviously Sally’s advisor, and so many others just like him, was under the assumption that since her retirement income would be lower, compared to her working years, her taxes will fall, too.

Here’s the thing to keep in mind about retirement theories: they may sound terrific – and may even have worked just fine for someone you know – but following the same approach may end up costing you dearly. In Sally’s case, after just her very first full year of retirement, her tax bill is, in her own words, “going through the roof.”  In fact that was the very reason that she was taking with us: she was trying to figure out what was happening and how she could keep more of her money.

Long story short, although overall her income had decreased by about 20 percent in retirement, her taxable income – which is the key word when it comes to paying taxes – has actually gone up! How’s that possible? It’s very simple, and it happens more often than you can imagine. Sally’s tax deductions are much lower today because she’s no longer putting money into her traditional IRA, and she paid off her mortgage a couple years back. The other thing you may find interesting is that even with a 20 percent drop in her income, Sally is still in the exact same marginal tax bracket. The worst part is that her effective tax rate has rather gone up!   

This is not an isolated incident with Sally. As I discuss extensively in two of my books, 5 Mistakes Your Financial Advisor Is Making and Is Your 401K a Trap?, millions of folks find themselves in this exact predicament every day. But it doesn’t have to be so, because although we cannot predict future tax rates, a truly savvy financial advisor should be able to look at your tax profile and decipher how a given investment vehicle will impact you, which clearly wasn’t done or was done incorrectly in Sally’s case.

The great ending is that we were able to craft a plan to help Sally strategically rearrange her income and significantly cut her tax bill going forward so that she can keep more of her money, just like she intended all along.

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Want to talk with an experienced financial professional with dozens of real-world clients who are experiencing successful retirements? Want to learn how you can KEEP more of your retirement money, even if the market crashes? Call 877.656.9111 or visit LaserFG.com to talk with a retirement professional with a proven track record TODAY!