I remember recent posts by Plan Invest Escape and Slowly Sipping Coffee about bad advice from the experts, the so-called financial planners. The post itself and the comments from others about bad experiences with advisers can really raise your blood pressure. But you don’t even have to hire them. Sometimes just reading their posts online is enough to expose the empty suits. One of those nuggets was on Kiplinger (via Yahoo! Finance) today on why, ostensibly, the 401(k) is not a good option to save for retirement, see here.
This financial planner actually makes a half-way decent point that if (and that’s a big “if”!) your projected marginal tax rate is higher in retirement you want to max out the Roth options today (Roth IRA, back-door Roth, Roth 401k). Nothing wrong with that. But for most folks the marginal tax will be lower in retirement because their adjusted gross income (AGI) will be significantly lower:
- Only up to 85% of Social Security income counts towards AGI
- You no longer save for retirement and pay no more payroll tax, so you can achieve the same disposable net income with much less gross income putting you automatically into a lower tax bracket
- You might move to a lower (or zero) income tax state
- You now live off your capital gains and (long-term) dividends which are taxed at a zero (federal) rate in the first two brackets and withdrawals of principal from taxable accounts are not income
Another reason for maxing out your 401k: during your early retirement you can keep your ordinary income low and live off your dividends and then keep rolling your 401k to an IRA and then to a Roth IRA for the ultimate Roth conversion ladder, see Go Curry Cracker and Mad Fientist. You get the best of both worlds: a tax advantage while working and then a zero cost (or at least very low-cost) Roth conversion while retired. I’m sure our so-called financial planner hasn’t thought about that.
And it gets worse. Inexplicably the so-called financial planner also makes this jaw-dropping claim:
“Do you really want to be in a lower tax bracket when you retire? Think about it. Do you want to retire with a lower standard of living? You save for 30 years, and if you do a good job, you get to retire into the SAME standard of living. This means you will have about the same amount of income, which means the same tax rate. But now your home is paid for, your children are gone, and your tax deductions have vanished.”
If your house is paid off you can sustain the same level of after-tax-after-house-payment consumption with much lower income. True, you lose the deduction, but the cash-flow impact of having no more mortgage and no more mortgage deduction is a net positive, last time I checked. Same if the kids left the household. The guy disproves his own point. In the same paragraph. Do they teach this stuff in the CFP curriculum?
And then this quote:
“Reason #3: You are now a target[.] You might agree that the good folks in Washington, D.C., have a spending problem. But how are they going to pay for it all? You can bet your last dollar that they all know that there are trillions of dollars sitting in 401(k) and 403(b) plans that have never been taxed. This is like candy to a baby, and they want it. Do you really want the bulk of your retirement dollars sitting in the crosshairs of a government with a spending habit?”
True. But 401k distributions are already taxed at ordinary income tax rates upon withdrawal. The rates might rise somewhat and that’s definitely a concern. When projecting tax rates during retirement, maybe add 2-5 percentage points. But I doubt that would make the 401k suddenly unattractive because you could have a significantly lower AGI to sustain the same level of consumption. But if the guy is so concerned about politicians targeting retirement savings, what keeps those same greedy politicians from targeting Roth IRAs? What if populist politicians see all those rich lawyers and doctors (Sorry, Physician On FIRE) who tucked away large sums in their Roth IRAs? Could there be a temptation to double-dip? You betcha! Or what if the tax increase comes in the form of a consumption/value-added tax? Capture the Roth withdrawals that ways!
But the biggest whopper is saved until the end with this recommendation:
“Look into “maximum-funded life insurance” as a 401(k) option. Be careful on this one, but if you have a really good financial person on your side, they can help you set it up in the proper way.”
There is always an angle. I mean, there is always an angle when dealing with pathological, uhm, professional salespeople. Out of nowhere comes the recommendation for some product that they like to sell at their financial planner office; no doubt a high-fee product with lots of commissions for the financial planner. They got their foot in the door at Yahoo! Finance, fifth post from the top with a link to the Kiplinger page. That alone should bring lots of traffic to their site. Why put in such a shameless and thinly-veiled sales pitch? Out of nowhere, with no explanation of why life insurance is such a good substitute for a 401(k)! Pretty shoddy analysis finished off with a bad sales pitch. I will keep managing our money in-house. If I still need advice I will consult folks listed on our blog roll. For free.