lowcost401k020215- WCRetire Secure, by CPA/JD James Lange, is the best financial book I have read in the last year. I recommend you buy it and read it. However, it is not the first financial book you should read. But after years and years of reading pretty much everything I can get my hands on, I admit I learned a number of things I did not know while reading this book. If I’m still learning from it, chances are very good there is something in it for you too, no matter how experienced you  may be with personal finance and investing.

The book is titled Retire Secure, with the subtitle, Pay Taxes Later- The Key to Making Your Money Last. I knew from the first pages that it was going to be great. I could tell it was well-written, well-edited, high-yield and most importantly, correct on perhaps the most important tax-related item for most docs- retirement accounts. It is endorsed by Roger Ibbotson, Burton Malkiel, Eileen Gallo, Ed Slott, and Paul Merriman. I read the second edition, published in 2009, which is just slightly out of date. The Third Edition, however, is due this Spring, and may even be out by the time this review is published on the site. Even if it isn’t, the second edition is well-worth your time. Sure, there will be a few updates, but 90% of the lessons the book teaches are timeless anyway.

retire secureThe book is written by a financial professional. And he does, at several points in the book, invite you to contact him if you need help. However, the way he does it is far superior to most. He teaches you everything you need to know to do it yourself, then says basically, “Hey, if you still don’t get it, you can hire me. But I’ve got plenty of business and don’t need yours. I just want to educate as many as possible.” Quite refreshing.

He divides the book into three parts. The first is the accumulation stage. I admit I didn’t learn much here. But he gets everything exactly right and provides the best argument for maxing out your retirement accounts I’ve ever seen. The second part is the distribution stage. I learned quite a bit here. The last part is really its own separate book on estate planning, and very well done. Both at the beginning and at the end he provides a useful summary/outline of his recommended process. I’m going to reproduce it here:

If you are still working, please:

  1. Contribute the maximum amount to your retirement plan that your employer is willing to match or partially match.
  2. Contribute the maximum allowed to Roth IRAs and/or Roth 401(k)s or Roth 403(b)s.
  3. If you can afford it, contribute non-matching funds to your retirement plan.
  4. Deduct retirement plan contributions on your tax return, Form 1040.
  5. Allow these funds to grow income tax-deferred or in the case of the Roth, tax-free.
  6. Continue to make new contributions.
  7. Continue deferring taxes by deferring distributions.
  8. If your income is too high for Roth IRAs, consider nondeductible IRAs

At retirement when you need money:

  1. Consider a trustee-to-trustee transfer from your company 401(k) to an IRA or a one-person 401(k).

  2. Spend nonretirement assets (money you already paid income tax on.)

  3. Then, when your after-tax assets run down, spend your retirement plan money (IRAs, 401(k)s, etc.)

  4. Spend your Roth IRA last.

  5. Plan for needed or required minimum distributions during your lifetime.

  6. Keep your required minimum distributions to a minimum.

  7. Pay income taxes only when retirement funds are distributed to you.

  8. Put in place a specially drafted Change of Beneficiary Form for your retirement plan and IRAs. The plan recommended in Retire Secure!, Lange’s Cascading Beneficiary Plan, could allow continued tax deferral up to two generations after your death while at the same time providing or overproviding for your spouse or other heirs.

  9. Determine if you are eligible for a Roth IRA conversion and, if so, determine whether and when it would be advantageous for a conversion to be made.

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It sounds simple when put into that list, of course, but the details and the cogent, concise arguments he makes for each step is where the value of the book really lies. It’s worth the purchase just to understand the Cascading Beneficiary Plan. I’m actually going to do 2 or 3 posts based on some of the best material in the book in the next month or two. If you can’t wait that long, you know what to do. (The cheapskates like me will go reserve it from the library, and the smart people will go buy the book so they can keep it on their shelf as a reference.)

The very best part of the book shows up before you even get to page 1. Here it is:

After tax vs retirement accountsThis is a message I’ve been trying to drum into the heads of physicians for years. He used very reasonable assumptions to make this graph-

  • Investment rate of return of 7% including 70% capital appreciation, 15% portfolio turnover, 15% dividend income, and 15% interest income.
  • The “pay taxes later” guy makes retirement savings contributions of $5K per year. Mr. “Pay Taxes Now” pays 25% in taxes, then invests the rest. Both amounts are indexed 2.5% for inflation, starting at 30 and going to 70.
  • At 71, both of them spend an amount equal to Mr. Pay Taxes Later’s RMDs less income taxes.
  • Ordinary tax rate is 25% both in accumulation and distribution years. Capital gains tax rates are 15% for the first three years (2008-2010 in the book) and then 19% after that. Dividends are taxed as capital gains for the first three years then as ordinary income later. (That part is obviously different now, but that’s how the law was written back in 2008.)

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These are all reasonable assumptions, although you may wish to squabble over some of the minor points. At the end of the day, Mr. Pay Taxes Later ends up with $2 Million more while Mr. Pay Taxes Now runs out of money at age 90. Convinced of the merits of retirement accounts? You should be. He has a graph later in the book that adds on a stretch IRA for your heirs, which makes the case for retirement accounts even more dramatic.
Mr. Lange’s book is a masterpiece and the best defense of the retirement account I have ever read. It took me a long time to figure out all the benefits of retirement accounts (asset protection, estate planning, lower taxes, higher returns, etc.) I could have saved myself a lot of that effort by just reading this book first.

Buy your copy of Retire Secure! today on Amazon!

Have you read the book? What did you think? Do you find Mr. Lange’s case for retirement accounts compelling? Why or why not?