Most people planning for retirement probably would prefer some predictability as they plot out their post-work futures, but financial professionals say the reality they face is that uncertainty surrounds the stock market, tax rates and the future of Social Security.
And even one of the most popular retirement-savings tools – the Individual Retirement Accounts (IRA) – can get more complicated than many people realize, limiting a retiree’s control of their money, retirement planners say.
“We’re supposed to believe we’ll pay lower taxes on our future IRA distributions,” says Jeff Brummett (www.greenlinefinancialservices.com), a financial talk show host, public speaker, and the author of The Worthless IRA: How To Keep Wall Street and Uncle Sam From Getting Their Greedy Little Fingers On Your Hard-Earned Money.
“An IRA gives Wall Street the use of our money with no promise it will be there when we need it. Even if it is, one must remember we have a partner in our traditional IRA/401k account. When one considers our astronomical national debt combined with the fact that only one-third of baby boomers are drawing social security (or medicare) benefits today, does anyone really believe tax rates are not likely to go through the stratosphere in order to support these programs in the future?
“Fifty million baby boomers have yet to turn 65. All will have done so by 2030. Math says Uncle Sam will likely increase his percent of ownership on our tax-deferred IRA account values by raising taxes on withdrawals. How else will he pay for these two retirement entitlement programs? Both are broke today with a third of baby boomers drawing benefits. The math is the math!”
Brummett breaks down three ways strings are attached to IRAs and provides two retirement-money alternatives he says are safer:
Most IRA holders must invest in a securities-based financial product. “This is a product of risk, and retirement is a critical and certain need,” Brummett says. “Wouldn’t it be more logical and responsible for everyone to be able to invest a portion of their cumulative life savings into an investment offering certainty? Why not allow these retirement IRA savings instruments to include a variety of safe-money financial products?”
You can’t withdraw until age 59½. If you take money out of an IRA before 59½, the IRS imposes a 10% penalty. There’s also the possibility of a marginal tax rate increase that the withdrawal might cause. “Studies by Fidelity and Vanguard have indicated that over 40% of people with IRAs and 401(k)s withdraw from those accounts before they’re 59½,” Brummett says. “And long-term, whether stock values rise or fall, the only guaranteed beneficiary is Uncle Sam and the financial elite of Wall Street.”
You must begin withdrawing at age 70½. “IRA rules restrict your activity not only on the front end, but also the back end,” Brummett says. “The key back-end requirement is that at age 70½ you must start withdrawing a minimum amount each year, which is subject to income tax. We give up far more control of our money than one might think, and it can severely hurt our financial future if taxes are increased in the future.”
Tax favored cash-value life insurance. Cash-value life insurance can offer its owner a source of non-taxable income if properly designed and executed. “Most people have been purposely – and incorrectly – taught to believe that the only benefit of owning a life insurance policy is the death benefit,” Brummett says. “Permanent cash-value life insurance policies often have great living benefits, allowing the owner to leverage multiple non-taxable cash benefits contained within the policy while still living.”
Fixed-index annuity. “Protecting principal and providing income are the two most important objectives for anyone approaching retirement,” Brummett says. “In a variable annuity, there is no principal protection, and the owner must sometimes pay an additional fee to include a spouse in the living benefit. Fixed-index annuities offer lifetime income protection with zero to 1% fees, and they have 100% protection of principal from market risk.”
“What most retirees need today is not more of Wall Street’s version of diversification – diversification of market risk,” Brummett says. “What they need is diversification from market risk and a healthy dose of guaranteed income.”