The title of this blog was spoken by Artemus Ward, a humorist writer from the mid-1800s and a favorite of Abraham Lincoln.
Take a moment and think about what that means.
Think of what the ‘average’ family deals with today – making ends meet, paying off the mortgage and/or credit cards, finding time to do things personally and professionally, saving for retirement and college.
Lots of decisions. Lots of choices. And lots of places to get information about these choices – from professionals to ‘some guy I work with told me’.
One thing people ‘know’ is that saving for retirement in a 401(k) is a great way to save for retirement. You hear this all of the time and read it in magazines and the like. And one of the reasons given is to get tax savings now.
But let’s take a closer look. If you are in the 25% federal income tax bracket, then every dollar you put in from your paycheck really only costs $0.75. Why? Because that dollar reduced your taxable income so you paid less in taxes.
Not bad right? Get $1.00 of ‘value’ but it only cost me $0.75, thanks to the IRS.
When you take out your money at retirement time, any earnings will be taxed at the then-current rate.
But what about that original dollar of principal?
Well, we’ve discussed in this space that I think tax rates are going up. So let’s say that taxes go up to a hypothetical 50%.
Now when you take out that dollar, you only get $0.50 after tax – or $0.25 less than what it originally cost you.
If you are contributing to a 401(k) and believe that tax rates will go up in the future, then you are essentially guaranteeing yourself a loss.
So back to ol’ Mr. Ward. You know about saving for retirement. But do you really? And how much is that ‘knowledge’ going to cost you in the long run?
Answer to last week’s trivia question: C – 52.6. Think about it. That’s a really young age to have to collect disability checks which could mean a limited lifestyle for the next 30+ years based on life expectancy.
This week’s trivia question: One of the biggest concerns in retirement is the cost of healthcare. In recent memory, inflation has averaged two to three percent. According to the Kaiser Family Foundation, how much, on average, has the cost for employer sponsored health insurance gone up per year?
A – 0%
B – 3.25%
C – 5.9%
D – 8.7%
