Super Savers and Too Big IRAs

Can you save too much in your tax deferred retirement accounts?  The short answer is, yes.  The longer answer is perhaps, but most Boomers will never have to worry about it.  The press is full of stories detailing the sad state of retirement funding for the Boomer generation and how they are woefully unprepared for what once was a distant retirement and is now upon them.  Only recently have I started picking up on articles dealing with the equally serious problem of families who have saved too much, or at least too much in tax deferred accounts.

Just to set the stage a bit, I am a licensed CPA and retired Certified Financial Planner but I need to stress this post is neither investment or tax advice, which you should get from a trusted advisor.  This post is intended to get you thinking about the future, nothing more and nothing less.

Tax deferral seemed like a great idea to those of us who began saving in the 80s and 90s with a booming stock market.  Save money, it grows and no taxes until retirement; seemed like a triple win.  What many of us didn’t recognize at the time was we were betting our personal tax rates would be lower in retirement than they were while working and squirreling away money into our 401k accounts.  If rates are lower in retirement, then indeed, it’s a triple win.  However if rates increase, you will pay back more in taxes than was deferred, and it begins to feel like less of a win.

As I approach the magic age of 59 ½, which is when you can pull money out of tax deferred accounts without any penalty (just the state and federal income taxes) the gravity of the tax law is setting in.  My retirement accounts have grown over time to the point where I will be able to pretty much replace my pre-retirement earnings with IRA withdrawals during retirement.  With the kids now grown and most of my tax deductions gone, I don’t see any opportunity to lower my income tax rate in retirement.  On top of that, the IRS requires that the owner of an IRA begin taking significant minimum withdrawals commencing at age 70 ½ based on your life expectancy – as determined by the IRS.  When you begin dividing your IRA balance by 15 years or so, the required withdrawals may be large.  And large withdrawals may easily push you into a higher tax bracket.

Whenever you make a withdrawal for living expenses or a major purchase, you must pull out extra money to pay the taxes too.  I never thought about this while I was busy building a sound retirement fund, but now that I’m approaching retirement age it has my full attention.  My current daily vehicle is fifteen years old with many good miles and I would like to replace her (see post on Molly).  The vehicle I want and can put to good use is a Tundra pickup.  If I find one for say around $40 thousand, just for grins, I will need to pull out just under $58 thousand to pay the dealer, the IRS at 25% and my state at 6%.  The dollars are not perfect, but close enough that you should understand the impact.  I don’t know about you, but for me, it’s painful enough to part with the $40 thousand I have to withdraw just to pay the dealer.  The $18 thousand in income taxes makes the thought nearly unbearable.  It’s a good thing Molly is still in good health!

We have all heard of people who are house poor.  Those who stretched into the most house payment they could qualify for and now have little money for doing anything else.  Well we super savers have a similar problem.  Our accounts make us seem wealthy to most of the population yet we can’t live the life style our money might permit because we can’t bear the thought of withdrawing our savings – and paying the taxes.  I am approaching the penalty free withdrawal age and will soon be facing my demons.  In one ear I hear, “Buy the truck, you’ve earned it.”  In the other, “Don’t be foolish and spend all that money on taxes.”

Given my background it may seem odd that I have an investment advisor, but I do, and even he tells me enough is enough with the savings program.  He advises, “Take some money out and see how it feels to spend it for a change, you’ll be fine.”

I must find a balance.  I must find a way to spend my retirement savings without feeling guilty.  Who knows, if I get the courage to buy the truck, maybe a sports car will be next.  I might actually become a consumer!

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