Beware the Trojan Horse — 401(k)’s & IRA’s — Learn Now or Pay Later

This won’t take too long, but it’s of paramount importance to most of us.

Ask yourself why the concept of the Trojan Horse has lasted so long?

It works nearly every time, that’s why. When two sides are in direct conflict, using a proven winning strategy is, if applicable to the circumstances, very attractive. (Captain Obvious lurking in the shadows.)

One side thinks it has the ultimate advantage — only to find out, always way too late — their advantage was a mirage, and they’d been fooled badly. Usually it ends up being an almost total victory for the horse’s designers.

Take the relatively new (late ’70′s) qualified plans, known as 401(k)’s. A genius plan applying the Trojan Horse strategy.

Where’s the war or at least the two opposing sides?

Baby Boomers vs. Government.

Sure, it involves the younger generations too, but not nearly to the extent it does Boomers. We (I’m a proud card carrying Boomer myself.) have been shaping the country’s economy and culture since the very first Baby Boomer was born in the first second of 1946.

And there’s the rub.

It’s nearly been all good too. We drove the economy in so many ways. First as toddlers, then as young students, then college students. Of course that’s when we started to make ourselves heard — the ’60′s.

You see, we’re about to retire and the government can hear us coming.

We grew out of that to marry and raise families. We listened to our parents and/or grandparents, the Greatest Generation, and took their living example of courage and wisdom to heart, mostly. Life went on.

However, things changed radically right before our eyes. The problem was, we didn’t know what we were seeing.

It was the installation of the government’s own version of the Trojan Horse. Only they called it the 401(k), and later the IRA.

It was brilliant in its conception, and elegantly simple in its execution. Boomers never had a chance. We were like the Trojans, drunk from celebrating our non-existent victory.

Here’s how it works from their viewpoint.

First, you must accept the premise that Social Security has been robbed, plundered, and generally bent over the bar by politicians of every persuasion. Few have offered a better imitation of Bonnie and Clyde than they have. Next, you must be able to discern how badly it’s been managed, and the embarrassingly low return on investment the government has produced on our behalf. A drunken high school sophomore could do better. Slowly but surely over time, we’ve arrive at the current dilemma — there are only three workers per Social Security recipient. In the next decade or two, it’s predicted that could easily have dropped to — just two workers.

In other words, 2/3 of the country is working so the other 1/3 can collect. How d’ya think that’s gonna play in Peoria?

A small detour here to explain how it began as at least a little bit of a sham in the first place.

FDR was nobody’s fool. He made a huge deal out this new program. He also did one thing to make it, at least for the first few decades, worthless to the average American. He set the age of retirement at 65. Sounds reasonable, right? Sure it does — until you know one itsy-bitsy little fact: Life expectancy back then hadn’t reached 65. Oops.

Oh. Oh indeed. It was a sham, meant, in my opinion, to appear to be solving a problem, while doing nothing but handing a placebo to the country’s aging population.

Some might call that cynical.

End of detour.

So back at Baby Boomer Ranch, it’s become evident to congress and various occupants of the White House, that we be gettin’ older — and all at once, kinda like a conspiracy. Something had to be done. What was the big problem scaring the spirit right out of them?

Social Security was about to be exposed as a farce — a building constructed upon a foundation of sand. Their secret (well they think it’s a secret) funding source was about to explode in their faces. Tick tock.

Enter 401(k)’s.

It killed two birds with one very stealthy stone.

It took the responsibility of retirement planning from employers, and switched it to employees. The brilliance of it all, was how they so smoothly and elegantly made it appear to be for our own good.

The Greeks would’ve been proud.

They (gov’t) said — we’re gonna allow you to save a limited amount of money each year, and we’ll give you a tax break for doing it.

That was the bait, just like the Greeks pretending to surrender to the Trojans. Troy took the bait of a Greek surrender, then invited the Greeks to bring their symbolic gesture — the wooden horse full of soldiers, inside their city walls.

So now everyone’s deliriously happy about being allowed to keep more of their own hard earned money each year, (via tax savings) if they just put it into this new qualified plan — to save for their retirement. This was too good to be true! For once, we said, the government is getting something right.

Not so fast Boomer-Breath.

Let’s construct a married couple, who, beginning at the age of 25, both working, combine to contribute $10,000 yearly for 40 years. If they average about 8.5% annual return, they’d end up with roughly $3 Million. Pretty cool, right?

Maybe — maybe not.

Each year they happily fork over their 10 grand, and smile, happy in the knowledge this contribution has saved them around $3,000 or so. Why, that means over the 40 years they will have saved around $120,000!! A gift nobody would turn away.

Now let’s fast forward to their retirement. They’re 65 with about $3 Million in their bulging 401(k). If we continue to use the 8.5% annual yield, here’s what happens.

Their annual retirement income is roughly $255,000.

They paid off their mortgage (40 years, remember?). Their kids are of course, long gone. They are almost totally devoid of any tax write-offs. It’s called being Tax-Naked — a phrase I just made up. Works though, doesn’t it?

If we combine their state and federal tax rates, conservatively speaking, they’d probably easily owe 30% a year. In this case, that means, in round numbers, about $75,000.

Let that sink in.

In just two short years of retirement, they will have paid more taxes than they saved in the 40 years.

As that realization hits you, go back to our Trojan Horse analogy. The population of Troy is celebrating wildly, drinking freely, only to be shocked as the soldiers crash through their homes’ doors to enslave them.

If you read this blog somewhat regularly, you’ll know what is meant by Purposeful Planning. If you don’t — click on the link and listen to the podcast. It’s really not hard to figure out — but it’s a powerful concept.

Back to our now retired couple. We’ll grant them 20 blissful years in retirement before they pass away at 85.

Due to the Baby Boomers reaching retirement age, Uncle Sam’s Purposeful Planning is about to trade $120,000 in tax savings over 40 years for $1.5 MILLION over the 20 years our folks were retired. Pretty slick isn’t it?

Ask yourself — would you trade $120,000 for $1.5 Million — millions of times? Uh, duh, yeah.

So every time an unsuspecting taxpayer puffs up a little on April 15th because they saved a few grand in taxes, remember how much he’s gonna pay the government upon retirement. Then ask yourself one more question.

Given 40 years, or 30, or 20, or whenever you can start — whatever your 401(k) ends up with, will be peanuts compared to what you could’ve done through prudent, intelligent Purposefully Planned real estate investments.

After all, if you’re gonna get taxed into oblivion anyway, why not make the net a whole bunch more?

You might also wanna stop getting so excited about trading a dollar in tax savings each year for the privilege of paying 10-30 bucks a year –every year of your retirement — until your gone.

My generation, our generation, needs to wake up and see the Trojan Horse for what it is, before it’s too late.

The plain and simple truth is — your retirement can be so much more abundant.

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