High Heels and Finance: Lifestyle

As summer sets in, we all yearn for the outdoors, wide open spaces – places to run and swim without being forced to turn around. Even those of us with shoe obsessions, look for opportunities to ditch the heels for a pair of beach worthy sandals or trail worthy boots.

While I love my high heeled gifts from heaven, I wouldn’t dream of risking them or my ankles outside the city limits. We dress for the circumstances we might encounter, right? You wouldn’t wear an evening gown to a back yard bonfire. Would you? Much like our circumstances dictate our fashion choices, they should also determine our decisions around saving/investing money.

During the 1970s, income tax rates were at an incredible high. So, the 401(k) plan was created. This plan allowed individuals to save pre-tax dollars, thus lowering their taxable income. The savings were also allowed to grow tax deferred. The idea was that when the funds were withdrawn during retirement and the taxes paid, the same individual’s income would be lower than during their working years. So, it was win-win for the individual saver.

This was also during a time when many companies offered pension plans. Pension plans provide a specified amount of monthly income for the employee based on the employee’s total time with the company and their level of income and rank at retirement. The main point to remember here is that the employee never contributed a dime to the plan. As you can imagine, most employees contributed very little of their own funds to their retirement savings, not because they were lazy but because it wasn’t necessary. Between pension plans and social security, which could be collected at 65, instead of today’s 67, most people could live comfortably during retirement while saving very little during their working years.

As a side note, this fact should be kept in mind when comparing your parents’ or grandparents’ lifestyle to your own. They were able to provide a much more comfortable lifestyle for their families during their working years because many of them did not have to save same portion of their income for retirement as we do today.

Obviously, circumstances have changed. For the majority of older companies, pension plans are being phased out or no longer exist, and they were never put into place for new companies. Individuals are expected to provide any additional retirement income, above Social Security, they may require.

The good news is that, like shoes, there are different savings tools you can use for the changing circumstances. Other savings vehicles to consider are Standard IRA’s, Roth IRAs, Roth 401(k)s, mutual funds, annuities, or a permanent life insurance policy. Each of these has different tax implications before and during retirement and different rules around current maximum income levels, maximum contributions, when and how the funds can be withdrawn, among others.

Before jumping into anything, a complete understanding of your current circumstance and future goals should be developed in order to optimize the performance of your total portfolio. However, I can say with great confidence, that no one should ever put all of their eggs in one basket.

With the uncertainty around future income tax levels and the Social Security policies, we must be prepared for any circumstance that might arise.