If you are like most Americans, you have been working hard, saving diligently,  and are looking forward to the day when you can retire and begin living off your hard earned savings.  You have done everything that the gurus and planners have told you to do, using the vehicles they suggested, invested in the products they recommended and have even taken advantage of every tax saving idea you read about.  You are going to be just fine, right?

Maybe not!  Regardless if you are doing this or you have been planning to save for retirement as soon as you get that last bill paid off, it is high time you wake up to the tax problem that nobody seems to talk about.

Let's take a look at the problem.  There are around 80 million Baby Boomers getting ready to retire.  According to the Congressional Budget Office, about 50% of them are on track to save enough money, but are unlikely to experience the kinds of returns their parents saw.  Additionally, there are no guarantees  that public benefits will be there in the future.  Add to the problem the fact that these Boomers will likely live at least 2 years longer than their parents meaning they will need either more assets or better growth of their assets if they would like to maintain their lifestyles.

If you noticed there were only 50% that have saved enough to retire, then you can get a better picture that taxes may well be going up just when we need more money to fund our retirement.  Compounding that fact is that as more and more Boomers retire, that need will only increase.  This is the tax issue that no one is willing to talk about, yet this is the problem you need to address now regardless of how close to retirement you are.

Going back a little, we must look at some simple logic.  How many times have you been hearing how you will be in a lower tax bracket when you retire?  Do you still believe that to be true?  If you do, then depositing all of your available money into tax-deferred vehicles may still be a good idea.  If not, then what?

You need to look at what sort of income you would like to live on in retirement.  More than likely, you will want to at least maintain the same standard of living.  Next, look at what tax bracket you are in and the amount of deductions you have.  Most people have at least a mortgage deduction and possibly some deductions for kids still at home.  You may even have started your own home based business to get even more deductions. 

What have you been planning on happening before retirement?  By then, more than likely your kids have moved out, the house has been paid off, and your income has been replaced by your investments.  Great planning, right?  But what happens to your taxes when your dreams have all come true?  Every dollar coming in gets fully taxed and you have lost every deduction you ever had.  Does that sound like you are going to be in a lower tax bracket?  We just talked about how taxes will likely go up as it were.

Does it make sense for you to be shoveling extra money into those tax-deferred savings accounts if you are going to be taxed more in the future?  The fact is that if you live a normal retirement (about 20 years) and tax rates simply stay the same, you will be paying 10% more in taxes on the money coming out of the plans compared to the money you are putting in.  Is that good retirement planning?

Part II will go over your options...