According to Fidelity, who holds 16.2 million of the 27.2 million IRA and 401(k) accounts in America, the median 401(k) account balance is a miserable $63,000 as of February 2019 for those ages 60-69. This figure is much less than the average retirement account balance of $112,300 which, by the way, isn’t anything to boast about either. This marked difference in median and average account balances is due to the way higher income contributions affect the average balance while the median balance merely means that 50% have less and 50% have more in their 401(k) and IRA account than $63,000.
This becomes problematic for those who believe they are going to retire in their mid 60’s to mid 70’s as they will run out of money quickly. According to the Bureau of Labor Statistics, those older than 65 have expenses of roughly $3,800 a month or about $45,600 a year. With those expenses and only $63,000 saved for retirement, $17,400 will be left after the first year of retirement, and then it’s up to Social Security to save the day.
The Biden campaign is proposing a 26% tax-credit on any 401(k) contributions to increase 401(k) funding but is this the answer to preventing people from running out of money in retirement? That is a question that needs to be explored.
It currently costs $58,906 annually to raise your family of four in Brownsville, Texas but in San Francisco you will need $148,439. As a median income family who is earning $61,000 you can’t afford to live in areas which will cost you more than you can earn. So, if you earn the median income and live in Brownsville you could possibly end up contributing $2,094 to a 401(k). For this example, let’s say you do and that your employer matches that by 50%.
Earning an average 6% annually on $3,141 ($2,094 plus the employer’s match of $1,047) over 30 years will produce $248,322 in your 401(k). This is why Biden and others really want more money to be contributed to 401(k)s and IRAs.
The larger the 401(k) and IRA balance is the more taxes you will pay in retirement. Biden and others know the taxes from 401(k) and IRA distributions will take more money out of your pocket and deposit into the US Treasury than if you paid your taxes on your 401(k) and IRA contributions at the time you earned the money. U.S. News reports that up to 40% of what seems to belong to you in an IRA or 401(k) actually belongs to Uncle Sam because you haven’t paid the taxes on that money yet.
So that $63,000 median 401(k) IRA balance might end up to only be $46,620 of usable money for you in retirement. A balance of $248,322 could end up being worth only $183,758 after taxes. The difference goes to Uncle Sam!
The good news is: There is a better way. Participating whole life insurance has been used by millions of people as a safe place to keep, multiply and manage money, not only for today, but for your retirement and for creating your legacy. Using that $2,094 of discretionary income to purchase participating whole life insurance when you are young will create usable cash value which is greater, significantly greater, than the 26% tax credit Biden is proposing. On top of that, you will have a tax-free death benefit which initially is more than 70 times your first-year premium. This death benefit will continue to grow over your entire lifetime because of the dividends the insurance company pays you for being a participating policy holder. We’ve written a whole article about Using Life Insurance vs. a 401k that you can read here.
Each year the amount of usable money guaranteed in your cash value becomes greater, providing you the opportunity to use this money to finance, invest or redirect interest payments you would normally have to pay to others, back to yourself. As Americans paid $104 Billion in credit card interest and fees alone in 2019, this would put much more money back in American’s pockets than a mere 26% tax credit on 401(k) contributions.
When cash values are used for self-directed money management systems, while following the IRS rules, the money you get to keep, create or recover will never be taxed again and that is good news.
Dr. Tomas P. McFie
Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of Life Benefits which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, How to Build Sustainable Wealth, can be purchased here.