YOU are hard at work saving for your retirement – putting money diligently away into a 401(k) and your IRAs.
And the best bit is Uncle Sam is not taking his cut from you – all your saving is being done before you pay your taxes, giving you all the more for your future.
But is this the best solution? Conventional wisdom is yes, but things are not so clear cut any more.
Back in the early 1980s the best advice was clear cut – pay your taxes later and save tax free now. It was good advice.
Let’s be clear on one thing – those taxes are not going to go away. Uncle Sam will collect one way or another, sooner or later.
But we do get to pick when we pay which affects how much we pay – and we can use that to our advantage.
So why was save now pay later such a sensible idea? Most of us anticipate retiring on a lower income than when we are earning – hopefully not too much lower if we plan well, but lower for sure.
And if that holds true, it makes sense to pay the tax in retirement when we are on a lower income rather than now when we are at the peak of our earning potential. It should put us in a lower tax bracket so we will be paying a smaller proportion of our income to the government.
It was good advice – and still is, but with a couple of important caveats to consider.
In the early 1980s there were many, many more tax bands than there are today – so it was a pretty sure bet your retirement income would be at least a band or even more below the level you were paying when you were earning.
That is not nearly so much of a given today – the fewer tax bands are consequentially much wider meaning you may potentially not even drop a band if you have done a thorough job of retirement planning.
And tax rates themselves have generally fallen over the decades – the US is in a generally low tax rate environment historically speaking. It may not feel it but it is true.
So we have to make an educated guess about the future – what will a future government do about tax levels? Will they continue to fall? Or will they even rise? We do not have time machines, so no advisor nor economist nor politician can tell you with certainty what will happen to tax rates 10 or 20 years down the road.
We do know that some big questions will have to be addressed with regards to the country’s budgeting for social security though. If tax rates actually were increased, the whole concept will have backfired on you.
So what does this mean for you and your retirement savings? Noble Davis can help your company figure this out. Contactus today to learn about our services for retirement planning and company plan management.