“America’s $7 Trillion Retirement Crisis is Only Getting Worse.”

This is the ominous-sounding headline from a recent Bloomberg article. The sub-headline continues, “Economic turmoil took a toll on savings in the first half of 2022 and that’s just the tip of the iceberg as many in the US lack employer sponsored plans.”

As more companies eliminate pension plans, many people are beginning to face the harsh reality that the responsibility for their retirement is on their own shoulders. Congress has done very little in the face of years of warnings that Social Security may be running into trouble. Many Americans are just like Congress when it comes to saving for retirement. They ignore the problem even when many signs indicate that the situation is only going to get worse. What caught my eye in this article is the multi-trillion-dollar shortfall even when everything was going right.

Inflation was nonexistent. Interest rates were low. Stocks were in an extended bull market. Since then, we’ve had war in Europe, decades of high inflation, the fastest rate hike cycle since the 80s, and the beginnings of a recession. The director of Boston College’s Center for Retirement Research, Alicia Manal says, “The resulting market turmoil erased some $3.4 trillion from 401(k)s and IRAs in the first half of 2022. And that’s just for the people who have retirement accounts.”

Richard Johnson, a retirement expert at the Urban Institute discusses concerns that living standards will go down for those of retirement age. Many Americans are not saving enough and even if you’re not in that group you may still be in trouble. What do we do for people? We guide them in making the most use of their assets. We help them take the money they’ve saved, plus the money they’re currently saving, and position their money in a way that will create a rock-solid retirement plan. We want our clients to be in a place where their money lasts a lifetime, their
income increases with inflation, and market turmoil doesn’t affect them. We answer questions about how to get the most money in retirement for your resources. The key to having the most money in retirement is having spendable money instead of giving a bunch to the IRS.

Let me give you a real-life example. A couple in their early 50s comes in. They’re saving for retirement and the gentleman in this case was saving 15% of his money in his 401(k) plan. He was told that was as much as he could save, and he’d been maxing it out. Meanwhile, his company only matches up to 5% of his 401(k). The other 10% is all on him. His wife, who was a teacher, was doing something similar. We ran an analysis for them and if they kept doing what they were doing they would be able to replace about 65% of their income when they hit their projected retirement age. They didn’t feel great about that, and they wanted to know how much more they would have to save.
Your retirement planning is kind of like planting fruit trees in an orchard. The amount of money you save on a monthly or yearly basis, represents the trees you’re planting. There are 3 questions you want to ask yourself. First, how many trees are you planting? This represents how much money you’re saving. Next, consider how long you are going to let these trees grow before you must start harvesting the fruit. That is the number of years before retirement. In the case of this couple, they were aiming to work for about 15 more years.

Lastly, you need to think about which field you plant your orchard in. If you’re investing your money for your retirement, you can put it in your 401(k). That’s typically pretax, meaning you save tax today, but pay tax down the road when you take the money out. There are also tax-free accounts like Roth IRAs and properly designed life insurance plans. Are you planting a tree in those fields? In the case of this couple, I advised that instead of putting 15% of their money in the 401(k), they only put 5% in to get the match to match. The extra 10% would go into a tax-free field. They’d pay a little tax now, but everything after would be tax-free. It’s different for everyone, but this couple went from replacing 65% of their income to 82% of their income all without saving any more money than they were now. They made a significant change just by using different fields for some of their money. We also consider the projected taxes in retirement.

I asked this couple whether they thought taxes were going to be higher or lower in 15 years. I think we all came to the same unfortunate conclusion that taxes will probably be higher. If they included a tax-free field in their retirement orchard, even at current taxation, their projected tax liability was cut in half at retirement. If taxes go up, this liability would be cut even more. A lot of Americans are suffering unnecessarily from not saving enough money. More specifically, they’re not putting their money in the right place. The fields you put your trees in are a huge component of planning for retirement. I encourage you to ask yourself if you are like this couple. Are you between 40-60 years old and maxing out your 401(k)? If you are, I commend you for the first step, which is saving money. However, you might benefit to a greater extent by redirecting some of that money to a tax-free field. We put together a free Retire Right report so that you can know if you’re putting your money in the right fields in your retirement orchard. Give us a call and let us introduce ourselves. We’d love to answer your questions.

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