The 401(condo) — an alternative to the 401(k)
Some folks come to resent their retirement plan, especially while they’re young, because their money is tied up in savings and none is left for fun. They don’t have enough money to go on exceptional vacations, and they make too much money to feel so deprived.
This is tax deductible item today, where the 401K is a tax postponement (even though it’s called a deferral). There are no guarantees for this because you don’t know what ‘s going to happen to the tax brackets in the future.
A beach house, a mountain cabin, or a condo in a city you love can give life to your investments dollars, a sacred retreat or a gathering place for friends and family, and perhaps even a way to barter with colleagues—a week in their beach house for a week in your mountain cabin.
With the 401( condo) you can take the deduction today and enjoy it, instead of having to wait – and hope – that the postponement of tax liability turns out in your favor.
Let Howard Silvermintz show you how the math works with your budget and your lifestyle.
I want a million dollars in the bank when I retire.
Most people approach their investment and retirement plans from the wrong angle: they say, for example, that they want to have a million dollars, but they haven’t looked at how much they’ll need per year, and for how many years they’ll need that sum. They pull the figure out of the air because they can’t imagine needing more.
Howard Silvermintz believes that you should have 20 times your annual income, if you want to retire at 62 and expect to live for another 20 years. But he also believes that, at the end of the day, you should have saved as much as you can, rather than being restricted to an arbitrary dollar amount.
Thomas and Sidra are married and both are 44 years old. Thomas makes $125,000 a year and Sidra makes $100,000. Today they have $95,000 in savings and they plan to retire when they are 62. They are proud that they have begun saving 15% of their annual salaries ($30K) every year and feel certain that they’ll be able — 18 years from now — to fund their current lifestyle with their savings.
Here’s the math. With a reasonable return of 6% on their savings and an equally reasonable inflation rate of 3%, Thomas and Sidra will have $1,492,000 in their retirement savings when they are 62. But inflation is working against them, because even as they save money, everything they buy is costing more. So the lifestyle they could maintain comfortably on $225K when they are 44 years old will cost them $383K when they are 62. Divide their savings by their adjusted annual income, and that pile of money — even with the interest their savings continue to earn — is decimated in less than five years.
The reality? To maintain the lifestyle Thomas and Sidra have enjoyed up until retirement, they would need to have $6.5 million in savings at 62. That sum will see them through to age 85 without any reduction in their spending.
Your first thought will be — well, they’ll spend less when they retire, so they won’t need that much. Possibly. They could also live to age 95. Or inflation could rise and it cost them even more to live less comfortably. That’s why saving as much as you can for retirement is the best strategy.
How much life insurance do I need?
Jerome is 45 years old and married with two children. He earns $121,000 per year. His wife Anna stays home to home-school their children. They have $240,000 in savings. They don’t like thinking about life insurance, but they believe they should buy a $500,000 policy, just until the children are out of college. Jerome is in excellent health and has never smoked, so the cost for a 20-year term policy is $610 per year.
If the unthinkable happens and Jerome dies (we assume that they still have the savings but they haven’t added to it), the money will only last Anna seven years.
To provide enough money to let Anna continue to home-school her children and maintain their current lifestyle, they should have approximately $2 million in insurance and savings. That level of protection would fund 22 years of expenses at their current spending level, and will run out sometime during the 23rd year. Assuming no additional savings, the $1.77 million 20-year term policy will cost $1,960 per year.
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