Planting the seeds of success
Planting the seeds of success
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One of the things I know I’m like a broken record on (guess I just dated myself there) is the need to take your attention off your inputs and put them on the desired outcomes.

For example, take one of those little packets of seeds you can purchase at the nursery or hardware store. I have looked and looked at these things, and I have never yet seen one that features a picture of the seeds on the envelope.

Why is that? Are you not purchasing the seeds? Why wouldn’t the package show them? Don’t you care about the size and weight of the seeds? Wouldn’t you prefer to find seeds in your favorite color or shape? And if the seeds aren’t shown on the packets, what is?

In every case, the picture on the envelope is of the plant, flower or vegetable the seeds will grow into. That’s because what you are really buying is the plant that grows from the seed. You really don’t care what the seed looks like. You care about the outcome it produces.

The same thing is true for your retirement plan. When you think about it, you really don’t care about the vessel or account you put your money into. What you really care about, or should care about, are the retirement assets that will be produced. So just as when you want to grow carrots, you need to purchase carrot seeds, to produce the type of retirement you want, you must purchase and plant the seeds that will grow into the retirement you desire.

Let’s unpack that a bit. Think about the things that are important to you in retirement. Is it important for you to choose between a growth account or a value account, or is it more important to choose between having a taxable or tax-free income stream? Do you seek a specific mutual fund in retirement, or do you focus on generating enough income to last the rest of your life? Are you more concerned about stocks or bonds, or are you looking for income protection for your spouse should you die first?

As I look at it, my focus is on whether I want to have a large tax burden in retirement, or if I would prefer tax-free income. I’m interested in enough safe, permanent income that will last as long as my spouse and/or I are alive. I don’t really care if I have stocks or bonds; I care if I have enough income to cover my bills and take care of emergencies and lifestyle choices.

So why, when I ask people to describe their retirement plans, do most of them tell me they have a target fund or a growth account? Why do they focus on the company match or the size of their contribution? Why do they focus almost entirely on their investments rather than the desired outcomes? I believe it’s because that’s all they think they have.

Here’s an example of a different approach. I recently had a client who wanted to increase her contributions to her retirement plan and wanted me to tell her which funds she should increase. So I began the conversation by asking her what was important to her about her retirement. That shifted her focus off the inputs and put it on the outcomes, where I believe it belongs.

In doing so, we were able to determine that what she was really looking for was the maximum amount of spendable income that would last her the rest of her, and her husband’s, lifetimes.

By shifting the conversation, we were able to shift our focus off what she was putting away, and onto how to best maximize her chances of success. One of the surest bets you can make to put more money in your pocket during retirement is to reduce taxes. Every other approach has drawbacks and challenges not present in a good tax strategy.

For example, if she puts more money away, she must determine where best to put it and how to manage the attendant risk that accompanies it. Further, all of the dollars produced by saving on taxes are tax-free, so it’s money she owns outright instead of having to share it with Uncle Sam.

This raises one of the key aspects of tax-deferred accounts and how they really work: When you put your money into an account that’s tax-deferred, you get a deferral on your taxes. It’s not a discount or a deduction, or anything else that ultimately eliminates your taxes. It’s a tax delay that will ultimately increase your taxes in retirement. And that increase will plague you for life.

The reason is simple. Like the seeds at the beginning of this column, the accounts you fund will produce retirement income when you retire. If you take a tax deferral when you initially deposit your money, you get a tax deduction one time for every dollar you deposit. However, every dollar of income produced by that dollar will forever be taxed. So you save taxes when you deposit it, but when you’re retired and use that money, you will pay taxes on it for the rest of your life.

Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, N.H., he services Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die and I’ll Tell You How Well You Can Live,” which deals with the problem that unknown lifespans create for retirement planning. It and his other books are available on Amazon.com. His radio program, “The Free Money Guys,” can be heard every Sunday at noon on WCAP. He also conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at www.FreeToRetireRadio.com.