This is often a question not only of the client but often a CPA’s response as well.

Certain assumptions made by CPA’s are causing their clients to pay considerably more in unnecessary taxes than absolutely necessary. Frequently CPA’s give verbal instructions which are based on personal opinions rather than on substantive reasoning or factual data. We must assume the CPA advice is well intended, but frankly often their advice just falls short under close scrutiny, and here’s why.

First of all the CPA is making one huge assumption, the client on their own will routinely make sizeable consistent contributions for retirement. Statistics indicate otherwise. Secondly, the most frequent response why successful people don’t make large retirement contributions is because they’re told they can’t. For many the size of the savings doesn’t warrant the effort. Yet the staggering dollar amount of capital or investments needed at retirement allowing us to live for another 20-30 years for practically everyone is shocking. This will be further examined below.

A client is currently living on $200,000 of taxable income and wants to be able to maintain their lifestyle. The client will need $5,537,692 in cash at the onset of retirement to be able to fund only a twenty-year retirement. For thirty years, the need increases to $7,484,728, after which in either scenario all the money is spent. Remember these amounts are needed at the onset of retirement. One major consideration we’ve ignored is health care costs. Assuming you will live the rest of your years without any major medical or health care issues and long term coverage is optional, then the numbers work. If health care as an expense is included then you will need to increase the accumulation goal by at least $500,000 per person.

Regardless of individual desires, most people will have to settle for a more modest retirement and lifestyle, due to the lack of accumulated assets or wealth. With a desired pre-tax retirement income of $100,000 per year and a life expectancy of 20 years the accumulated amount would have to be $2,768,846, and with a life expectancy of thirty-year you’ll need $3,742,364. After actively working with people for two decades, what I see is that regardless of income levels, few individuals are anywhere close to being on track. Where we as a population seem to think the money will come from is a mystery to me.

Working longer is always an option, but certainly most of us want the option not to have to. What is frequently overlooked regardless of how long a person will work is unanticipated health issues. Suddenly the opportunity for continued work isn’t possible. In these circumstances, unless there are already millions tucked aside there will be a liquidation of other assets at some future date.

What’s the fastest way to accumulate the largest amount of cash in the shortest time? The answer is, eliminate or greatly reduce what you are spending in the form of unnecessary tax payments to the federal government. By eliminating or greatly reducing those quarterly or annual payments and depositing them directly into your plan you accelerate your net worth without additional labor by no less than 40%. Add tax deferred growth and compounding and your account balance will in a few short years accelerate to a sizeable amount. The chart below compares after tax investing against pretax accumulation. Note: given the same net income which scenario runs out of money first?

There is the same contribution in both except one is after-tax and the other is a pre-tax contribution. Both charts assume an annual 10% return for each contribution year. The glaring difference is with the after tax chart we continued the 10% assumed rate of return until all the money was paid out. The pretax chart illustrates that once distribution occurred, the rate of return was reduced down to 5%, meaning the after tax chart has a huge advantage.

Both charts reflect a 40% tax rate.

In the after tax chart you will notice the Pre-Return Tax column, we are allowing there will be some tax each year on the accumulation due to dividends, unrealized capital gains, etc.

In the tenth year we pay out the same net distribution for each chart. Notice in the pre-tax chart that in the tenth year there is already $700,000 more in the fund column than with the after tax column. Moving to age 78 the after tax column is out of money, while the pretax chart continues to deliver a constant income for another decade.

Investing After-Tax Dollars

Year	Age	Cash Contribution	Taxes	Fund Value	Before-Tax Yield	Pre-Tax Return	Post-Return Tax	After-Tax Yield	Retirement Income
2004	53	180,000	72,000	108,000	10,800	4,320	-	6,480	-
2005	54	180,000	72,000	222,480	22,248	8,899	-	13,349	-
2006	55	180,000	72,000	334,829	34,383	13,753	-	20,630	-
2007	56	180,000	72,000	472,459	47,246	18,898	-	28,348	-
2008	57	180,000	72,000	608,806	60,881	24,352	-	36,528	-
2009	58	180,000	72,000	753,334	75,333	30,133	-	45,200	-
2010	59	180,000	72,000	906,534	90,653	36,262	-	54,392	-
2011	60	180,000	72,000	1,068,927	106,893	42,757	-	64,136	-
2012	61	180,000	72,000	1,241,062	124,106	49,642	-	74,464	-
2013	62	-	-	1,315,526	119,553	-	47,821	71,732	120,000
2014	63	-	-	1,267,257	114,726	-	45,890	68,835	120,000
2015	64	-	-	1,216,093	109,609	-	43,844	65,766	120,000
2016	65	-	-	1,161,858	104,186	-	41,674	62,512	120,000
2017	66	-	-	1,104,370	98,437	-	39,375	59,062	120,000
2018	67	-	-	1,043,432	92,343	-	36,937	55,406	120,000
2019	68	-	-	978,838	85,884	-	34,354	51,530	120,000
2020	69	-	-	910,368	79,037	-	31,615	47,422	120,000
2021	70	-	-	837,790	71,779	-	28,712	43,067	120,000
2022	71	-	-	760,858	64,086	-	25,634	38,451	120,000
2023	72	-	-	679,309	59,931	-	22,372	33,559	120,000
2024	73	-	-	592,868	47,287	-	18,915	28,372	120,000
2025	74	-	-	501,240	38,124	-	15,250	22,874	120,000
2026	75	-	-	404,114	28,411	-	11,365	17,047	120,000
2027	76	-	-	301,161	18,116	-	7,246	10,870	120,000
2028	77	-	-	192,031	7,203	-	2,881	4,322	120,000
2029	78	-	-	76,353	0	-	0	0	76,353
2030	79	-	-	0	0	-	0	0	0

Investing Pre-Tax Dollars

Year	Age	Cash Contribution	Taxes	Fund Value	Before-Tax Yield	Taxes	After-Tax Yield	Income	Taxes	Retirement Income
2004	53	180,000	0	180,000	9,000	0	9,000	-	-	-
2005	54	180,000	0	369,000	18,450	0	18,450	-	-	-
2006	55	180,000	0	567,450	28,373	0	28,373	-	-	-
2007	56	180,000	0	775,823	38,791	0	38,791	-	-	-
2008	57	180,000	0	994,614	49,731	0	49,731	-	-	-
2009	58	180,000	0	1,224,344	61,217	0	61,217	-	-	-
2010	59	180,000	0	1,465,562	73,278	0	73,278	-	-	-
2011	60	180,000	0	1,718,840	85,942	0	85,942	-	-	-
2012	61	180,000	0	1,984,782	99,239	0	99,239	-	-	-
2013	62	-	-	2,084,021	94,201	0	94,201	200,000	80,000	120,000
2014	63	-	-	1,984,782	177,822	0	177,822	200,000	80,000	120,000
2015	64	-	-	1,956,044	175,604	0	175,604	200,000	80,000	120,000
2016	65	-	-	1,932,648	173,165	0	173,165	200,000	80,000	120,000
2017	66	-	-	1,904,813	170,481	0	170,481	200,000	80,000	120,000
2018	67	-	-	1,875,294	167,529	0	167,529	200,000	80,000	120,000
2019	68	-	-	1,842,824	164,282	0	164,282	200,000	80,000	120,000
2020	69	-	-	1,807,806	160,711	0	160,711	200,000	80,000	120,000
2021	70	-	-	1,767,817	156,782	0	156,782	200,000	80,000	120,000
2022	71	-	-	1,724,598	152,460	0	152,460	200,000	80,000	120,000
2023	72	-	-	1,677,058	147,706	0	147,706	200,000	80,000	120,000
2024	72	-	-	1,624,764	142,476	0	142,476	200,000	80,000	120,000
2025	74	-	-	1,567,241	136,724	0	136,724	200,000	80,000	120,000
2026	75	-	-	1,503,965	130,396	0	130,396	200,000	80,000	120,000
2027	76	-	-	1,434,361	123,436	0	123,436	200,000	80,000	120,000
2028	77	-	-	1,357,797	115,780	0	115,780	200,000	80,000	120,000
2029	78	-	-	1,273,577	107,358	0	107,358	200,000	80,000	120,000
2030	79	-	-	1,180,935	98,093	0	98,093	200,000	80,000	120,000
2031	80	-	-	1,079,028	87,903	0	87,903	200,000	80,000	120,000
2032	81	-	-	966,931	76,693	0	76,693	200,000	80,000	120,000
2033	82	-	-	843,624	64,362	0	64,362	200,000	80,000	120,000
2034	83	-	-	707,986	50,799	0	50,799	200,000	80,000	120,000
2035	84	-	-	558,785	35,879	0	35,879	200,000	80,000	120,000
2036	85	-	-	394,664	19,466	0	19,466	200,000	80,000	120,000
2037	86	-	-	214,130	1,413	0	1,413	200,000	80,000	120,000
2038	87	-	-	15,543	0	0	0	15,543	6,217	9,326
2039	88	-	-	0	0	0	0	0		0

The conclusion: the numbers accurately reflect without bias what someone might actually expect to accumulate over a few years. It correctly shows what has widely been known for decades. Any time you have the use of not only your money but Uncle’s portion as well, and you include tax deferred compounding there really is no way but to out-perform pre-tax investing. To come close with after tax investing you would have to have had in excess of a 20% return each and every year without any market fluctuations. Remember we also gave the advantage of excess returns during the distribution phase to the after-tax column as opposed to the lower 5% return in the pre-tax column during the distribution period. Even then the after-tax lags far behind.

It’s safe to assume not all situations lend themselves to this form of accumulation for a variety of reason. Knowing this, there are strategies which will work to help accelerate and secure the amounts you wish to invest. Knowing what drives and motivates you to work and live, to support whatever lifestyle you have is at the core of all planning opportunities. There are other options.