You’ve probably all heard the old adage about boiling a frog. As a southerner, I love a good colorful metaphor. The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, the frog will not perceive the danger and will be cooked to death. Okay, so that’s not a pretty picture, but it could be an apt representation of what is happening with your current retirement plan. I’m amazed how many people don’t do the math to make certain their financial path gets them to where they want to be. Wouldn’t it be a shame to work all your life saving for retirement and then when retirement time rolls around not have enough money to live the lifestyle you desire?
Since the 1980s, you have been told to put money in 401k plans or IRAs to defer the “terrible” tax we have to pay. Most people have blindly followed this plan without regard to the income tax that they will be required to pay at a later date and at a rate required by the IRS (that could potentially change at any time). You look around and “everyone is doing it.” You check your balances from time to time, but the changes are gradual and like the frog as the water heats, you don’t notice the end result on the value of your savings. I’ve seen individuals blindly follow a financial adviser’s advice that, “you have enough money to retire.” Are you aware that the safe withdrawal rate from your 401k is 3% annually? Let’s say you have a million dollars in your 401k. The safe withdrawal rate of 3% would only produce $30,000 a year, and that’s before taxes. Is $30,000 minus income taxes enough to maintain your current lifestyle?