Most Americans prepare for retirement by opening an IRA or 401(k) account decades before they stop working. That these accounts are the best way to save for your golden years has been the go-to thinking for decades. But there are wealth experts that don’t agree with the soundness of these accounts.
3 Dimensional Wealth Founder and CEO Doug Andrew is one of the finance pros that believes these accounts have outlived their usefulness for Americans looking to amass a monetary cushion for retirement.
Andrew has been a financial strategist for 45 years. He’s achieved major success as a trusted advisor and public-facing finance educator focused on long-term wealth and abundance. He has written bestsellers that have appeared on both the New York Times and Wall Street Journal lists, as well as appearing on TV, radio, and his own YouTube channel.
His approach to money is holistic and long-term, with instincts honed over nearly five decades in the field. He’s never had an IRA or 401(k) account.
“There are many ways to save for retirement without going the traditional route,” he said.
He sat down with Business News Ledger to share the top three reasons he refuses to open one of these retirement accounts.
About IRAs and 401(k)s
To delve deeply into the shortcomings of these traditional retirement vehicles, it’s important to understand them.
401(k)s were created by the American government in the 1970s, introducing a new kind of account that let employees contribute pre-tax wages toward their retirement.
In many cases, employers match the percentage an employee contributes to their account, up to a certain amount, as part of a benefits package. There are also annual limits on how much you can contribute to these accounts.
The money is invested on your behalf, and your balance rises and falls in tune with the stock market. When you withdraw the funds at retirement age, you pay tax on the growth of the contributions. If you choose to withdraw before retirement age, you’ll also pay stiff penalties and fees.
IRAs are similar to 401(k)s. They were both introduced in the 1970s, and both hold your contributions in the stock market. 401(k)s let you invest pre-tax, while IRA contributions are tax deductible. However, those that choose IRAs go solo — employers are not involved or contributors to these accounts.
One of the other important differences is that the annual contribution level for an IRA maxes out at about 30% of what you can contribute yearly to a 401(k).
Too Much Tax
The main problem with these retirement accounts is paying too much tax. ‘But how?’ you might be asking yourself, ‘My contributions are pre-tax or deductible.’
That’s true, but you do pay taxes on your money’s growth when you withdraw it. If you’ve used these accounts in the way they were intended — started contributing young, let your funds grow, and begun withdrawing at an advanced age — you’ll have very significant growth in those accounts. Growth that you now have to pay tax on.
Many contributors to these accounts bank on the idea that they are deferring taxes and will be in a lower tax bracket at retirement. However, the truth is, many Americans end up in a higher tax bracket in their 60s due to what Andrew dubs ‘the Reduction Deduction,’ when people can no longer claim deductions for children, businesses, and retirement contributions.
You might find yourself asking at retirement age, ‘Have I made a huge mistake? This seems to be a lot of tax to pay. Should I have just taken my wages and invested them in another way?’
“The answer,” Andrew says, “is yes. These accounts can end up costing you significantly more money if your growth is substantial and your deductions at withdrawal time are few.”
Lower Returns
Andrew shared that these traditional retirement accounts, which many Americans contribute to without doing much research, provide very low returns.
One of the top financial research firms in the country, Dalbar, recently released data that cast more doubt onto retirement accounts.
“Dalbar says the average person who has money invested in the market in IRAs and 401(k)s is only earning 3.49%,” said Andrew. It’s a paltry amount when you consider that some basic savings accounts in the US pay 4% interest and the market itself returns around 9% annually,” he said.
Other Options
Many people don’t realize that there are other options for retirement savings — and you don’t have to be an investment guru to take advantage of them.
Andrew’s favorite investment vehicle for retirement is an Indexed Universal Life Insurance Policy (IUL). These accounts only let users contribute money post-tax, but it grows without worry that you will be taxed on the growth when you finally cash out.
Since these IULs are indexed, contributors can benefit more from a strong stock market. They also have a 0% guaranteed floor, meaning you are protected if the market freefalls.
Andrew also shared that the IUL allows for penalty-free withdrawals at any time and contains a death benefit, allowing the opportunity to transfer wealth from your IUL to your heirs without tax liability.
Bearing these points from Andrew in mind, perhaps it’s time to revise the standard thinking on retirement savings.
About Doug Andrew
Doug Andrew, Founder & CEO of 3 Dimensional Wealth, provides a holistic program that helps individuals and families create financial, foundational, and intellectual abundance. He has more than five decades of experience in the financial sector and is a New York Times and Wall Street Journal bestselling author. The radio and television personality also has a high-performing YouTube channel. For more information please visit www.3dimensionalwealth.com
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