Debt Free

If you’re one of the thousands of workers that decided it would be so much more fun to head out to the clubs, go skiing, or buy a boat to pick up chicks, I hope you had a blast. That’s especially true if you had your fun at the expense of your 401(k) or IRA contributions. If that does describe you, take heart, because you’re definitely not alone. Many companies no longer offer such benefits, either because they can’t afford to, or because employees would prefer increased monetary compensation instead. This is especially true for younger employees, many of whom see their retirement years as hopelessly far in the future. They’d rather enjoy some extra money now.

As many of you reading this will readily agree, that’s completely insane! Your little diversions now can cost you plenty. Even if you manage to avoid getting in trouble with the law, getting a girl pregnant / getting pregnant yourself, or wrecking your car, you’ll be losing out on the power of compounded savings and tax benefits of an employer sponsored savings plans with matching. If you had your fun and emerged relatively unscathed, nice work! Now, however you’ll need to look at some strategies to help you play retirement catch up.

Due to the aforementioned benefits of compounding and tax savings, the length of time you participate in an IRA, 401(k), SEP or other retirement savings vehicle will really boost the value of your retirement near the end of its term. What can you do if that term has been a bit abbreviated due to starting late? Here are some ideas to chew on.

Retirement Plan Boosting Strategy #1
Stay late. It’s probably not exactly what you want to hear, but it’s very powerful. With 50 being the new 30, and many Americans beginning their retirement plan contributions as if that were the case, you can work for just a few more years and reap dramatic increases in your retirement plan totals. For example if you move your retirement age back from 65 to 68, you can benefit big time.

If you’d managed to amass $500,000 in your accounts, that additional 3 years of contributions and compounded interest will provide the difference between just getting by and living a pretty comfortable life. Not only will you have 3 fewer years to withdraw money from your plan(s), there will be a much larger dollar amount in them. For example, if you use my standard 8% return calculation, that $500k will grow to about $800 in those 3 years.

That obviously brings up the thought “That’s huge! Why not just stay until 70?” You’d benefit there too by having almost $1,000,000 to retire on. If you’re in your 50’s now, there’s a great possibility the feds will have moved back your social security retirement age until 70 anyway, in an effort to salvage the whole Social Security idea.

Retirement Plan Boosting Strategy #2
Have an expert look at your retirement plan. Some things are extremely complex. For example, don’t let your tax free 401(k) contributions reduce your taxable income to a point where it could take you down a tax bracket, causing the value of other tax exempt vehicles and deductions, such as your mortgage interest, to lose some value. Some experts argue that you’d be better served in that case to invest in a Roth IRA and blue chip stocks, then pay the capital gains on these vehicles when you sell them. That’s contradicted by others, who feel that is a recipe for disaster, and you should max out your 401(k) or 403(b) at all times. In fact, there is no one best retirement strategy. It depends on your individual situation.

Many factors come into play here; your age, the value of your retirement plan(s) now, the age you’d like to retire, your income, your tax bracket, the value of your home and your plans for it upon retirement, etc. For example, you may have $500,000 equity in your home. That’s a pretty realistic assumption in many areas of the country. In fact, many of you may have a significantly higher amount that that, if you’re in California, Seattle, Las Vegas, or the North East and have owned your home for a while. In that case you can take up to $500,000 if you’re married without paying any capital gains tax at all. Since 1997, you’re eligible to pocket the entire amount you profit on the sale of your primary residence without owing Uncle Sam a dime, up to the $250,000 for singles and $500,000 for married couples. If that describes you, and you are planning on selling, buying a Prevost, and touring the country in your golden years, that obviously changes your retirement planning some.

The point is that you’re looking at a whole array of retirement options, each with their own set of tax and income consequences. The unique combination of factors combines to render no one option the best for everyone. Look carefully to make sure you’re maximizing your tax and income benefits now, before it has a chance to cost you more later.