Saving for retirement is a challenging job. Unfortunately, millions of people overlook one basic fact in their retirement planning, and it can create a disastrous nightmare scenario from which it's almost impossible to recover.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks more closely at this disaster scenario that results from people overestimating how much in retirement savings they actually have. Dan notes that most people use traditional IRAs and 401(k) accounts to save for retirement, taking advantage of the tax-deferred growth that they offer. But those accounts require you to pay tax on the amounts you withdraw during retirement, and many people fail to take the tax liability into account in evaluating their retirement nest eggs. Dan notes that you can overestimate your actual after-tax retirement savings by anywhere from 10% to 40% or more, depending on how much you pay in taxes. Dan concludes that one benefit of Roth IRAs and Roth 401(k)s is that they already represent after-tax retirement savings, avoiding this mistake.
Have general questions about Social Security? Email them to SocialSecurity@fool.com, and they might be the subject of a future video!