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Sunday, February 8, 2009

Qualified Plans Make It Harder To Retire Comfortably

By David C Lewis, RFA

Most people are presented with 2 choices when it comes to retirement planning: a Roth vs. 401k. Now...of course there are more options than this, but mainstream financial professionals are really pushing these two products as the foundation of a sound financial plan.

When making a choice between a qualified plans, think about your main goal. You are trying to save up enough money so that you can live comfortably in your old age. However, if you plan on doing well, then a 401k will have you paying back more in taxes than you saved. Forget about the employer match for a moment.

What are you frequently being told about qualified plans and retirement in general? You're told that you'll be in a lower tax bracket, right? The question is, is that true? If so, then you are going to be making less money than before you retired. You can't expect to do well in your investments and pay less in income tax. If you do poorly, you could end up being poor by the time you retire due to inflation. Does that sound like your ideal retirement?

Another option is the Roth IRA. This plan is pretty interesting. Since you contribute after tax dollars, you get tax-free retirement income. While there's nothing wrong with that, you do have a problem with one particular aspect of this plan: contribution limits. Usually, you'll find out that you're going to need to contribute much more per year than what your Roth will allow you to contribute.

The debate is really about which Government retirement plan is the best? But, the question ought to be: do you need a Government sponsored retirement plan in the first place? According to DALBARinc.com, most investors average less than 6% over their lifetime. In qualified retirement plans, you may be paying an extra fee on top of that (especially for 401(k) plans).

What would be an alternative to using Government sponsored plans? High cash value life insurance would be one example. High cash value insurance can net between 5-6% tax-free over your lifetime, and the cash values are guaranteed. Many major banks and corporations use life insurance as a way to safely conserve money or to build a guaranteed pension. For example, the "king" of cash value insurance, William Ryan of TD BankNorth, has his pension funded by the corporation...his annual premium? $1,260,000.

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