Millionaire Planning, Not Retirement Planning

Black Branch in Smoke

One of the big problems I have been pondering lately is that people just don’t understand that “saving for retirement” should start NOW not later, because of the incredible tax advantages of Roth IRAs (which have been around since 1997), et cetera. If you haven’t started, you don’t ever get that chance to have contributed $5500 per year for prior years back. Secondly, people don’t realize these accounts are just wrappers for many types of investments. A Roth IRA in a “safe” money market fund, T-bills, et cetera is a terrible loss. These accounts provide a rare, easily accessible form of lawful tax sheltering by which no capital gains tax are assessed when withdrawals are made at Age 59.5 or older. The way to maximize capital gains over long periods of time (e.g., 15+ years) is to invest your Roth IRA in the stock market (e.g., an S&P 500 index fund). Thirdly, you can start very young, and the additive and compounding benefits are both incredible. Even a 14-year-old working at Publix can lawfully contribute to a Roth IRA, up to his/her total IRS-reported gross income for the year or $5500, whichever is less. How many parents encourage or set something like this up for their children? One broader principle here is that, for tax reasons, years where income is low are missed opportunities (e.g., the college graduate’s “late start” earnings disadvantage).

Additionally, I think financial education has so butchered the topic of “retirement” that people do not understand what they are missing out on. Looking at retirement planning as something nebulous or that something one can “catch up” on later, after their immediate financial challenges are overcome (news flash: never), is common among American young and middle-aged adults. This perception is atrocious and must be eradicated. Perhaps we should call it “millionaire planning” or “the guaranteed path to being rich” to capture people’s attention. Secondly, people are living longer, and many will keep working past 59.5, 65, 70, et cetera. We could reasonably replace the idea that you are planning for retirement with the idea that you are planning to be wealthy, free, and financially independent at a time when you might still have 30–40 good years left.

To facilitate this change in perception, we need to stop calling the Age 50+ IRA contribution limits “catch-up limits.” Unless the U.S. government is going to start letting people contribute for prior missed years (and even then, lost capital gains would be enormous), there is NO catching up, because you could have contributed the maximum in all prior working years PLUS the catch-up maximum each year after Age 50. A simple change wording change to “increased limits” might suffice. Behavioral economics shows us that people, including even experts, cannot reliably assess opportunity cost. We need to get people picturing tax-advantaged retirement contributions visually as buckets for each year where the lid for the 2017 bucket gets permanently sealed on 4/17/2018 and whoops, you just lost $50K+ by not contributing $5500 to your IRA for 2017. Simultaneously, we must convincingly convey that the optimal solution is to contribute the maximum this year and every year going forward—prior missed opportunities should not be an excuse to throw one’s hands up in defeat, nor to say things like “you’ve got to live your life sometime” or “I deserve a new car” rather than contributing to one’s tax-advantaged retirement account. Sadly, the phrase “retirement planning” and even the word “retirement” itself have been poisoned in the minds of many Americans—forever consigned to the status of should-but-won’t-do.

Photo by Richard Thripp, © 2012. Every year you do not contribute to a tax-advantaged retirement account is akin to money going up in flames.

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