Most everyone is aware of the drastic effect that stock market declines have had on the balances in their retirement accounts. To add insult to injury, a majority of workers with 401(k)’s, 403(b)’s, traditional IRA’s, etc. are not fully aware of the impact that fees have on their accounts and have not calculated the impact of taxes when the money is withdrawn. For many people in today’s economy, having a job at all is a blessing.
Secret #1 – Retirement Plan Fees. In all the years that 401(k)s and similar plans have been around, it was not until 2012 that a major effort was made by the Department of Labor to have administrators fully disclose the actual amount of fees that account holders were paying on their retirement and investment accounts. Fees can be hidden in as many as a dozen different subcategories and even financially savvy investors have a very difficult time calculating the total amount of fees in any given plan. The differences in fees between different plans may seem small but their impact is huge speed bump.
The smallest fees are generally found in government retirement plans such as the Thrift Savings Program for military and federal employees. Small businesses can have fees as high as 3% in their retirement accounts. If a worker invested $5000 a year for 40 years and averaged a 7% return they could end up with around an $875,000 balance if their 401(k) only charged.5% in fees. If that same worker invested the same amount for the same number of years in a 401(k) that charged 3% in fees his or her ultimate balance would be only $475,000. Don’t wait another day to find out what fees you are actually paying on your mutual funds and retirement accounts. Disclosures were supposed to be provided to all employees by the second half of 2012. If you are still not sure what fees you are paying, ask your employer.
Secret #2 – Taxes. Everyone has been told that one of the big advantages of tax-deferred retirement plans is that you pay no taxes in your younger years on your contributions, but when you withdraw the funds after age 59½, you will be in a lower tax bracket. Did you ever stop to analyze whether this will actually be true in your case? When you reach retirement age many of your biggest tax deductions will probably be gone. For instance:
Your home may be paid off by then or in its final years of the mortgage, which drastically reduces or eliminates the impact of a home mortgage deduction.
Your children will be grown and hopefully moved out of the house!
You may have other sources of income after retirement that can place you in a higher tax bracket.
If your income is too high your Social Security benefits will even be taxed in the early years.
Most people are familiar with the importance of diversification but usually only associate it with investing in different types of asset classes, such as stocks, bonds, real estate, or even perhaps precious metals. An equally important consideration is tax diversification.
It is a sad fact that many Americans are simply not aware of this type information. You need to understand what you own, what fees you are paying, and what your future tax bills may be. Equally as important you need to know what alternatives are available so you can make smart financial decisions. Learn about Roth IRA’s and even certain forms of life insurance that can offer tax-free sources of income at retirement time.