The Tweet Heard Round the 401(k) World
The man in our nation’s highest office just saved your retirement. Or did he? And how?
In between trading barbs on Twitter with several Congressmen, President Donald Trump earlier this week took time to tap out a tweet about your workplace retirement plan. He stated, “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”
The 401(k) industry rejoiced. Hallelujahs and high-fives for all!
There had been talk of limiting or completely doing away with pre-tax 401(k) contributions as a part of the tax reform proposals being discussed. The 401(k) industry was trembling with anger at the prospect. In one fell tweet, though, President Trump may have saved retirement planning as we know it. Or so the thinking goes.
But the truth is, 140 characters can’t save or wreck our retirement – nor can Congress, for that matter. Thankfully, our retirement remains securely in our control.
Think of it this way. Even if Congress removed all tax breaks on retirement savings, that wouldn’t mean we were all doomed and destined to work until the day we die. Far from it.
The two most important actions we can take to prepare for a comfortable retirement are saving and investing. While tax laws – and perhaps tweets! – can influence those two actions, they cannot control them.
Here’s some food for thought. Pretend Congress eliminated all tax advantages on all retirement savings. Poof! Gone! If that came to pass, what alterations would you need to make in your retirement planning?
Some simple math can help answer that question.
Let’s say you need $1.5 million to comfortably retire 40 years from now. That’s $1.5 million after all income taxes are paid. If you could utilize a pre-tax 401(k) account, you would need to save roughly $9,000 each year for 40 years to reach your goal.
And what if Congress abolished 401(k) plans altogether? How would that impact the situation? On an equivalent pre-tax basis, you would have to save roughly $10,500 each year for 40 years.
In other words, you would need to save $1,500 more each year if Congress removed all tax advantages on retirement savings. It may take a little more in savings, but you can still get the job done. (Obviously individual tax rates, inflation, and returns all impact the scenario, but you get the idea.)
Now, that’s not trivializing an extra $1,500. It’s real money, and it’s not always easy to save in the first place. Sacrifices would surely be required.
But don’t for a second think that your retirement can be saved or stolen by the President or by Congress. Your retirement, dear reader, rests squarely in your hands.
For some, that’s a humbling prospect. For most, it should be empowering. But for all, it’s far better than the alternative.