Updated: Aug 13, 2021
Questions we always ask ourselves in preparation for retirement: "When will the market correct?" and "How much am I going to lose because of the volatility?"
But before we get too far, let's answer the first two questions. Historically, the market corrects (loses significant value) every seven years. We have been in an upward trend now for nearly 10 years causing many experts to rule the market as over valued, expecting a correction in the near future. How much you stand to lose when that correction does happen depends on your investments but if you look back to 2008, many retirement accounts took a 40% loss virtually overnight.
Supposing you were to retire at 55 years old, the market is going to correct 3 to 5 times in during your retirement years.
Contributing to a 401(k) or IRA isn't necessarily a bad idea, especially if your employer matches those contributions, however, like all investments it should be done with an informed mind and knowledge of all of the possible outcomes. Before investing in these programs, consider this:
Deferring tax actually costs you more money. Let's use round numbers on this one: Would you rather pay taxes on $10, $20, or $30? Logically, most people are going to answer $10, but most people are actually doing the opposite. Most individuals are deferring tax until they start withdrawing their retirement money as monthly income, causing them to pay a higher amount of tax either because the $10 they invested has turned into $20, or the government raised taxes by time they retire.
Roth IRA can save you tax money, but if you make more than $199,000 per year, you can't contribute. Also, the maximum you can contribute to a Roth IRA is $5,500. That likely won't make a huge dent in your retirement taxes.
Diversification is the name of the game. There is no single solution answer, but there are recommended portfolio allocations that provide security, and when planned properly, can save a significant amount in taxes.
Equities that grow
Fixed income like bonds
Cash value life insurance (IUL)
Our preferred tax saving vehicle today is IUL, or Indexed Universal Life. If you have reached your maximum Roth IRA contribution or make too much money to contribute (yay!), this is for you. The IUL can not only protect you from taxes, but also has the ability to guarantee your cash value when the market corrects. An IUL policy works by allowing participation during an up-trend of an equity index to a certain point, but guarantees you won't lose value if the market goes down.
Are you interested in living your life with guaranteed income and saving tax money in retirement? We can build you a plan with no obligations. Contact us for a free evaluation of your current retirement plan.