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  • Writer's pictureDave Gillespie

Don’t let your retirement plan die “the death of a thousand cuts”

Updated: Sep 17, 2019

These thoughts were given to me by an experienced financial expert in the Fort Worth area.

My thanks for these thoughts.

I’m so old that all the advice I really needed to be successful was: “work hard, learn everything you can and save your money”.

Now I would add one more thing; focus on the existing and potential tax implications of your retirement plan.

Are you letting the pre-tax balances and projections in your 401k plan lure you into a false sense of security?  (2)

According to some industry experts your savings, your paid for government benefits and any potential wealth transfers from your parents or grandparents will probably be under attack between now and when you retire. (3)

What if I told you that I could help you protect both a significant part of your “unearned income” and make it much more likely that you would be able to collect all or a significant portion of the Social Security income that you are paying for?  (4)

“The death from a thousand cuts”

There are three basic structures that may be used against you and your family:

1) Direct taxation

a. Income tax

b. Property tax

c. Medicare tax (not the deduction but the 3.8% on capital gains)

d. Capital gains tax

e. Estate taxes (there has been talk about eliminating the exemption

AND eliminating the basis step up at death.) (5)

f. Generation skipping tax

g. Sales taxes

h. 401k and IRA distribution requirements and withdrawal penalties

2) Inflation; many people think the government will use inflation to reduce the cost of making payments on the staggering debt load. (6) (Inflation may also push people into higher tax brackets.) Inflation can also be caused by shifting costs from government programs to private payers. (Think of healthcare.) (7)

3) Thresholds for paid for benefits (Social Security, Medicare, unemployment etc.) I believe that paying more for, or having benefits reduced or eliminated, because “you don’t need them” is almost the same as paying a tax directly.  Thresholds can also be used to push other “untaxed” income into taxation such as some municipal bonds under the “Alternative minimum tax”.

Debt, legacy costs and demographics;

It is my belief that some of the national debt, legacy costs and exploding medical costs (8) make future tax increases almost a certainty, and these increases can be dramatic.  In my life time, the marginal income tax rate has been over 70% and it was 92% in World War II.

(Dave: and with personal holding company taxes the rate around 1979 for some exceeded 100%)

Beyond all this, there was a recent study of the Millennial generation that showed it was comprised of over achievers and underachievers, with almost nothing in the middle. (9)

That means that much of these exploding expenses will have to be met by a shrinking population of wealth creators. You.

We can help.

Most people are not aware that there are retirement plan structures that have the possibility of saving today’s younger workers all or part of their SS benefits if/when these “need thresholds” become more onerous.   

At a high enough marginal tax rate “collecting” your Social Security becomes almost meaningless.

One key to managing: direct taxes, SS distributions and Medicare benefits in retirement years, may very well be how you manage your retirement “reported income”. 

Today’s workers need to think of retirement income in three different categories:

1) Normal income which is reportable and taxable. (Capital gains, IRA and 401k income.)

2) Protected income such as MUNI bonds which are reported as income but are mostly untaxed.  (There some exceptions.)

3) Income that is not taxable (10) and is not reportable.

Needless to say, the last category is the best.  You not only don’t pay taxes on the income but because it is not reported as income, it can’t push other income into a higher taxable bracket or your entire income into alternative minimum tax treatment.

Beyond that it can help you manage reportable retirement income so that you can stay below income thresholds that could determine how much or even if, you get Medicare or SS benefits.  

Contact me on ways to improve your financial survival with your own customized Personal Financing Solution.

Dave Gillespie

817-881-5631 (text or phone)


(2) For many high earning young, it is not possible to replace pre-retirement income, to the 80% recommended level, using ERISA regulated plans because of contribution limits.  Wall Street Journal, March 26, 2018, print edition.  “How Much You Will Spend in Retirement.”

(3)  “Congress Is Coming for Your IRA. The Secure Act would upend 20 years of retirement planning and stick it to the middle class.”  “Like grave robbers opening King Tut’s tomb, Congress can’t wait to get its hands on America’s retirement-account assets.”  From lead editorial in July 17, 2019 Wall Street Journal Also see: “IRAs in Political Sights”, Wall Street Journal July 16, 2019

(4) Many of the people that I talk to, say that they have reconciled themselves to not being able to collect their Social Security in retirement.  They feel this way even though they may be paying as high as $16,000 per year in combined (employee/employer) SS contributions with Medicare deductions easily adding another $6000 per year.  That should entitle them to approximately $5000 per month social security at full retirement ($3500 for the worker and ½ that as a spousal benefit.) and “hospitalization” insurance.  Hypothetically to replace that income stream with an immediate annuity would cost over $1 million!  To save up that $1 million in after tax cash, would take a savings rate of about $10,000 to $12,000 per year for 35 years at a reasonable rate of return.  (Some of you might notice that you can replace your social security benefit for about 2/3rds of what the government charges.)

(5)  “Repeal and Replace’ the Trump Tax Cuts”  Wall Street Journal Jan 26, 2018;  also A recent Wall Street Journal Opinion piece, August 2, 2019 “The Left vs the Crazy Left” listed the following new taxes or tax increases compiled from statements during the recent debates: “Financial transactions, carbon, bank liabilities, sales, wealth, income, families…and raise taxes on: the middle class, capital, estates, businesses, payrolls and higher income”.

(6) “Inflation and Debt”, National Affairs magazine, Fall 2011

(7) “MGMA: Majority of practices say cost of care outweighs Medicare reimbursements”  Healthcare Finance magazine Jan 26, 2018

(8) American Diabetes Association, on their statistics web page. July 15, 2019

(9)   “We need to talk about Millennial Income Inequality” ZeroDay Finance April 8, 2017

(10) Currently, there are only two types of “income” that isn’t reportable as income.  Return of “basis” which isn’t really income because you already had it, and loans from cash value life insurance.  These loans must be structured correctly and the policy must not be allowed to lapse or under certain circumstances the loans become taxable income.

Contact me by this webpage or email me at or text or call me at 817-881-5631.

Let us help you customize your own Personal Financing Solution.

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