Taxes, Inflation, and Retirement

As we live life, many of us are aware of the day to day cost of things; the gas price, your favorite latte, a gallon of milk. The instinct is to then compare to last month or last year. For the more senior of us, we start to say, “Back in my day… gas was only $0.79/gal.

Inflation, in concept, make sense to most of us when we compare to the past to now because it is based on a tangible experience. It is imperative however, that when we plan retirement, we understand that the cost of our daily expenses double every 25 year or so. Any of our goals of retirement income need to take that into account lest you get to your retirement jump off point and you are short of where you need to be.

Since money management isn’t taught in school, the issues of taxation are not front of mind either when planning retirement. Most understand that 401(k) is the best approach because that is what the masses are doing through their various employers. It is a brilliant approach in order to maximize the compensation from your employer, however, it isn’t without tax implications.

It is critical to understand how taxes will skim from your wealth accumulation depending on which of the 4 categories your assets are tied:

• Free (Inheritance, Lottery)

• Tax-Free (Roth IRA, Life Insurance)

• Tax-Deferred (401(k), IRA, Annuity)

• Taxed Annually (Income, Bank Interest, Capital Gains)

The higher up the ladder, the better.

Any long term wealth planning needs to take into account these key headwinds: Taxes and Inflation. Without proper prior preparation… you may fall short of your desired performance.