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Avoiding the 'work until you die' retirement plan

Overcome a late start with tax advantaged retirement options

By Alan Klayman

Maturing Loans
Maturing Loans, Alan Klayman
Alan Klayman is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.

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Question for the CreditCards.com expert

Dear Maturing Loans,
OK, maybe I was a fool, and maybe life just happened. I'm 50 and have no retirement savings. My expenses are down and for the first time since the 1970s, I have an empty nest. My income is up -- I make $75,000 a year. My company has a 401(k) plan, but no matching program. Is there any way for me to avoid the "work until you die" retirement plan? -- Robert

Answer for the CreditCards.com expert

Dear Robert,
You are not alone. Many people run into financial circumstances where they have to spend their retirement savings when they least expect. It's too bad the government penalizes people for making ends meet, and touching emergency dollars in an emergency. But as you said, life happens.

Don't worry about whether your employer matches contributions to your 401(k) and maximum contributions right now. Just put away every dime you can afford to anyway. In the next few years, tax laws are scheduled to change. There may or may not be "catch-up" provisions for your 401(k) over the coming years, where you can put away more money after age 50 or 55 than is currently allowed. 

You will want to try to look at investment programs that can offer you the best tax advantages. Here are a few:

Advantages of 401(k) plans
Advantage 1: Tax-deferred. This is where your money gets to grow without paying taxes on contributions today. Don't believe the naysayers who tell you that you will end up paying taxes later so it doesn't pay to contribute. It does pay. Tax-deferral is a powerful tool. It is how banks and mortgage companies make so much money. But this time, you are the bank. Here's what happens: Your money grows and the money you would have paid in taxes to Uncle Sam gets reinvested and that money grows, and the cycle repeats itself over and over again. Now that's powerful.

Advantage 2: Immediate tax deduction. You get to reduce your taxable income by the amount you put away in a 401(k) plan. This is a great immediate benefit. If you put away $10,000 and are paying 20 percent in taxes, then you get to save $2,000 from your tax bill. That is a 20 percent increase in your investment return -- before you invest. Also, if your company did match your contributions that would be even better, but it is more important that you put the money away for yourself.

Other tax-advantaged retirement options
In addition to a 401(k), you can invest in other tax-deferred plans, such as deferred annuities and permanent life insurance. Deferred annuity interest rates can be fixed -- where you get a fixed rate of return on your investment, like a bank CD or a bond. At the end of the investment period, you get your money back plus the compounded interest. The benefit of a fixed deferred annuity is that you get to defer paying taxes until you start using the money (generally after 59 1/2). Deferred annuities can also be variable. These annuities are like your 401(k) plan with investing options in mutual funds and have the tax-deferred advantage similar to a 401(k) plan, but do not have the immediate tax deduction.

A cautionary note on deferred annuities: Annuities can offer great benefits, but are subject to many of the same types of rules as your 401(k) plan (such as early-withdrawal penalties). Also watch out for sneaky fees that some (not all) annuities can have. These can include early withdrawal fees, fees for switching accounts and maintenance fees. Again, not all companies offering annuities have high fees, so you'll need to do some homework.

Life insurance: If you have a need for life insurance (dependents, surviving spouse), then permanent life insurance can offer the protection you need with tax benefits that even a 401(k) plan cannot deliver -- like being able to access the principal tax free prior to being able to access your interest. Don't always believe that term insurance is the best answer. In cases like yours, if the circumstances are favorable, then permanent life insurance can offer both family and retirement benefits.

Finally, in my experience, the people who "retire" and keep working, whether in the same capacity or doing something completely different, such as volunteer work, tend to lead healthier and more fulfilling lives. As the population ages, there will continue to be a need for bright, vibrant, well-schooled and experienced people like yourself.

Thanks for the question, see you here next week.

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Published: June 18, 2008


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