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The Three Biggest Retirement Planning Mistakes I See All the Time
About this Episode
David McKnight discusses the three biggest retirement planning mistakes that show up over and over again.
Avoiding them will dramatically increase the likelihood that your retirement savings will last as long as you do.
Mistake #1 pertains to over-accumulating in tax-deferred accounts like 401(k)s and IRAs – a mistake that surprises many people as they feel they're doing everything right.
The problem here is that you're taking a deduction at historically low tax rates only to postpone the payment of those taxes to a point in the future where tax rates are likely to be much higher than they are today.
The moment you hit age 73 or 75, Required Minimum Distributions (RMDs) kick in. In other words, the IRS is forcing you to take money out, whether you need it or not.
Those RMDs get combined with all your other sources of income: The taxable portion of your social security, your pension(s), and your investment income.
David notes that, before long, you can find yourself in a higher tax bracket in retirement than you were during your working years.
Remember, RMDs count as provisional income, which can cause up to 85% of your social security to become taxable – plus, it can trigger IRMAA surcharges on your Medicare premiums too.
Building a retirement plan that is almost entirely tax-deferred looks good on paper but leaves you entirely exposed to the impact of higher taxes in the future.
The second mistake is waiting too long to execute Roth conversions.
David touches upon the so-called "retirement income valley," the ideal window within which to fully execute your Roth conversion.
Many people ignore it. They're hesitant, reluctant to pay a tax to the IRS before it's absolutely required of them.
Failing to take advantage of the "retirement income valley" puts you at risk of having your social security become taxable, while also paying higher Medicare premiums for the rest of your life.
When it comes to Roth conversions, David recommends having a "rip the band-aid off" approach.
It may hurt a little during the conversion period but once that money is in the Roth bucket, it's tax-free for the rest of your life.
The third big mistake David sees over and over again is underestimating future tax rates and overestimating your control over them.
Most retirement plans today are built on the dangerous assumption that tax rates in the future will look a lot like they do today.
However, David stresses that looking at the fiscal trajectory of our country paints a different picture.
The national debt will grow by $2 trillion per year over the next 10 years, and $3 trillion per year after that.
With the rising interest costs and $200 trillion in unfunded obligations for Social Security, Medicare and Medicaid, there will be a financial day of reckoning where tax rates will be forced higher.
David predicts that to be around 2035 – which gives you around 10 years to plan and execute on your plan.
People spend their entire lives focusing on building as big a retirement nest egg as possible, but they give almost no thought to the type of accounts within which that nest egg is being built.
The lack of consideration for the tax implications upon distributions is a huge oversight, says David.
At the end of the day, the only thing that really matters in retirement is how much money you get to spend after taxes.
David concludes by highlighting that the best way to regain control over your after-tax income retirement is to pay taxes on it preemptively at historically low tax rates and on your terms (rather than on the IRS' terms).
Mentioned in this episode:
David's new book, available now for pre-order: The Secret Order of Millionaires
David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track
Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David's Tax-free Tool Kit at taxfreetoolkit.com
Hosts & Guests
No transcript available for this episode.
