Playing Retirement Catch Up
Maxed out on your retirement plans and looking for other ways to catch up and make your retirement dreams reality? Most advisors will tell you that the best thing to do is look into such alternative tax-deferred vehicles as annuities, but to my mind, buying an annuity is failing to see the forest for the trees. One reason advisors like to recommend this kind of investment is because most tax-deferred savings vehicles pay a 5-percent commission on the amount of money invested. But think about this: Most growth vehicles, whether or not they are called tax-deferred, carry with them at least some of the benefits of deferral. Let’s say you buy a good no-load mutual fund geared toward growth, being careful to choose a fund that traditionally doesn’t make big, taxable capital gains distributions at the end of every year. And let’s say you let your money grow in this fund for the next ten years. For the most part, you won’t pay taxes on this money while it’s still sitting in the fund. And when you do eventually sell the fund, you’ll pay the lower capital gains tax rate on the gains you’ve made, which ends up amounting to far less than the ordinary income tax you pay on withdrawals from a tax-deferred vehicle such as a variable annuity. In the long run, you’ll be much better off deferring your taxes in good long-term growth funds or stocks than you would be with a typical tax-deferred investment.
An added incentive: Your family will benefit, too, because when you leave money in a good growth mutual fund or in individual stocks, heirs are only liable for capital gains tax rates on profits when they liquidate the holdings. With a typical tax-deferred investment like an annuity, they have to pay ordinary income tax on any gains.
In short, though my advice may seem unorthodox, this planner urges the following: 1) Invest the absolute maximum in your 401K or other retirement plan, starting now. 2) If you are 50 or older and playing catch-up, also try to pay off your home mortgage as quickly as possible; that way, you won’t have your mortgage payment as an expense when you turn eligible to collect Social Security. 3) If you have at least ten years or more until retirement, start dollar cost averaging into a good no load mutual fund or individual stocks geared toward growth. I promise you: You’ll catch up.