$3.4 million provides $210,000 annual retirement income?

[clifp]

The more I think about the harder this proposal would make it to retire early, this really hits directly at the core of the ER board.

Right now if Sam's introduction post was something like. I'm Sam, I'm 49 and I really want to retire. I make 120K/year I am eligible for 50%@50 pension, with no Cola. If I wait until age 55K I am eligible for 70% pension on my final salary. I have 100K in saving and $750K in 401K. DD starts college next year, and DW and I would like to spend next winter in Australia. I think we'd need to spend 100K until DD is out of college and then our spending would drop to 80K.

These facts would generate a spirited debate with some saying go for it, and others advising caution due to the lack of COLA on the pension and difficulty of withdrawing cash to fund the next 4 years of high spending.

However, if the retirement proposal was adopted. There would be little point in Sam continuing working, his pension wouldn't increase and he couldn't add more money to his 401K.

3.4 million sounds like a lot, but it really isn't in terms of present value of perfectly upper middle class pension and reasonable tax deferred savings that we see on the forum every week.

 

[Big_Hitter]

The more I think about the harder this proposal would make it to retire early, this really hits directly at the core of the ER board.

3.4 million sounds like a lot, but it really isn't in terms of present value of perfectly upper middle class pension and reasonable tax deferred savings that we see on the forum every week.

+1000

 

[growing_older]

There would be little point in Sam continuing working, his pension wouldn't increase and he couldn't add more money to his 401K.

As far as I know this proposal has nothing to do with DB pensions, so why do you say the pension cannot increase. Also, if there was a limit that prevented additional contributions to a 401k, then Sam could continue to save whatever he wanted in a regular taxable account and use that toward retirement.

I do agree that if this proposal selectively prevented employer contributions or matches to 401k that would unfairly punish Sam.

 

[Big_Hitter]

DB was included when they tried this two years ago. Why wouldn't it be this time?

 

[samclem]

As far as I know this proposal has nothing to do with DB pensions, so why do you say the pension cannot increase.

See link at Post 29. Reporting indicates the proposal includes DB pensions.

 

[Big_Hitter]

Also, if there was a limit that prevented additional contributions to a 401k, then Sam could continue to save whatever he wanted in a regular taxable account and use that toward retirement.

that shaves the effective savings in half, doesn't it?

 

[Independent]

Of course you are penalized.

I think the problem is the connotations of the word "penalized". It seems like a value-heavy word in this context.

I don't get a tax break on the money I spend of food, or clothing, or gasoline. But, I wouldn't say I get "penalized" for buying those things.
I do pay taxes on my earned income, but I don't call that a "penalty".

I take taxes as a fact of life. We want a gov't, we have to pay for it. Those with more seem to pay more.

Our tax code is so riddled with these targeted tax breaks that we seem to be drifting into a belief that any tax at all is a "penalty".
After all, somebody else must be doing this: How Retirees Pay Zero Taxes - Forbes

I'm not sure why anybody "should" get a tax break on money saved for retirement. Some people want to save enough to generate six figure retirement incomes, others want to retire at 50. I'd like to do both!
But it seems that I shouldn't feel "penalized" if the gov't doesn't give me a special tax break if I decide to do those things.

 

[dallas27]

I'm pretty sure life is not fair, by design.


Sent from my iPhone using Early Retirement Forum

 

[samclem]

I'm pretty sure life is not fair, by design.

To be fair, I'm pretty sure life's not designed.

 

[Big_Hitter]

I'm not sure why anybody "should" get a tax break on money saved for retirement.

it all started back in the day so your employer would have a tax-efficient means to provide you a pension - it's the backbone of the qualified pension concept

same concept has applied to the individual since the mid 80s

taking away that ability is a penalty

 

[clifp]

it all started back in the day so your employer would have a tax-efficient means to provide you a pension - it's the backbone of the qualified pension concept

same concept has applied to the individual since the mid 80s

taking away that ability is a penalty

+1

As society, the US doesn't save enough, and individually we don't save enough for retirement.

Uncle Sam wanted to encourage both of these activities, so they invented, and have continuously improved tax deferred saving accounts. For us Ants, who did what were told we should do and maxed out our 401K, IRAs etc, to then come back when we are in the retirement Redzone 50+ and 5 years or less from retirement and being told you saved too much, you did too well. No more tax deferred savings, no more employer matches, or pension accumulations, solely for the crime of saving too much, while allowing the grasshoppers to take advantage of these saving breaks and employer contributions, sets a horrible precedent.

This proposal has zero chance of being adopted (thank god), so I don't think it is really worth debating anymore.

 

[Sunset]

Personally, I'm concerned when the gov't starts looking for ways to tax our retirement savings in some special way.
This $3.4 MM limit was just one of many proposals.
If DW and I could each have $3.4 MM and then let it grow, I would be happy as I'd feel well saved for retirement.

I want to point out a positive point of this $3.4 MM limit, it would force people to invest in other things, and therefore limit their RMD's when they hit 70.
They would if smart, invest in outside things early to slow the approach of the cap and be eligible for 30 yrs of employer matching contributions.

Other investments could be things that also throw off no dividends so you don't affect income each year unless you really have a big expense. (ex BRK.A shares).

 

[MooreBonds]

No more tax deferred savings, no more employer matches, or pension accumulations, solely for the crime of saving too much, while allowing the grasshoppers to take advantage of these saving breaks and employer contributions, sets a horrible precedent.

Not to mention the HR nightmares:

1. What happens to those who 'break the rule' and then contribute to a tax-deferred account, either an employer or employee contribution. Is it the employer's fault? The employee's? Is there a penalty? Who pays? Is there a gov't list that has everyone's SSN and their total retirement plan assets as of 12/31 of the prior year that is distributed to all HR departments in every company? Or is it the employee's responsibility to tell the employer "you can't contribute to my 401k with the employer portion because my balance is too high"? If the employee doesn't tell the employer, are the both fined? Just the employee?


2. And if there is a company that has a pension plan, do you then re-write the entire pension equation if someone has both tax-deferred dollars in a 401k/IRA in a former employer's plan, as well as a pension they qualify for, and their total accumulated plan benefits exceed the 'cap'? It's no longer "years of service times x% per year", but some really whacky equation, because your total tax-deferred assets exceed the cap.

And then when interest rates change, the cap changes. Necessitating a new equation.

And when your portfolio fluctuates and your total plan assets is below the cap, it then necessitates another equation.

Oh, and interest rates changed again. Time to re-calculate everything. Oh, 3 executives just tried contributing to the 401k this pay period and are over the cap.

From what I have gathered, it can be difficult enough for accounting and HR departments to keep track and do elective deferrals correctly as it currently stands. Imagine having to also keep logs and track EVERY employee's 401k balances from an annual gov't report? Not to mention a big trust issue with companies having to have access to a list of every employee and their total retirement plan balances that they own, both inside and outside the company.

And what about HSAs and 529 plans? Do they count towards retirement assets? The HSA moreso than the 529 plan (since there's no penalty to withdraw from an HSA after 65) - but shouldn't both of them, in theory, be counted as tax-deferred plans, and be counted towards the tax-deferred plan cap? If not, I suppose there might be a sudden surge in "retiree education", especially distance learning at a semester over in Europe, or a "semester at sea" on a cruise ship.

 

[pb4uski]

For the naysayers, as I recall prior polls, most forum members are retired with less than $3.4 million for singles and less than $6.8 million for couples, so the practical reality is that the proposal is unlikely to have a broad effect as some seem to fear. Also, very few are targeting annual withdrawals of $210k for a single or $420k for a couple in today's dollars. Get a grip.

 

[clifp]

For the naysayers, as I recall prior polls, most forum members are retired with less than $3.4 million for singles and less than $6.8 million for couples, so the practical reality is that the proposal is unlikely to have a broad effect as some seem to fear. Also, very few are targeting annual withdrawals of $210k for a single or $420k for a couple in today's dollars. Get a grip.

Forget the 3.4 million that ain't the problem.
It is Sam

It is the 45 year old who has saved a $1 million in his IRA, and has a spouse who has saved very little in her IRA. They'd like to retire at 55 or even a few years earlier if they assets to generate 70K which is what ~2.0 million. At 6% discount rate no more contributions, no more company match it makes it quite bit harder to retire early.

It is in all likely Tdoug58, a brand new forum member. A a 56 year old teacher with a 72K/year pension depending on how much of the pension he gets vs his spouse, it possible one of them has hit the cap and can't earn any more pension credits.

 

[Big_Hitter]

For the naysayers, as I recall prior polls, most forum members are retired with less than $3.4 million for singles and less than $6.8 million for couples, so the practical reality is that the proposal is unlikely to have a broad effect as some seem to fear. Also, very few are targeting annual withdrawals of $210k for a single or $420k for a couple in today's dollars. Get a grip.

agreed, stop focusing on the 3.4 - that's just a present value using today's interest rates for 100 pct J&S pension payable to a 62 year old married couple - it's merely a "feel good" number to get support for the proposal

focus on the 210k max annuity at 62 and how that can be purchased with current tax qualified balances

compound interest over a 25+ year period can vary results greatly

 

[pb4uski]

But as I read the proposal, the way it would affect people younger than 62 is only if they have accumulated enough to purchase a $210k annuity at age 62 (in 2015 $). So for discussion purposes, let's say the amount is $3.4m at age 62 (in current $ since the $210k will increase with inflation).

To calculate the cap for someone less than 62 you would discount the $3.4m by an assumed real rate of return since the $210k (and hence the $3.4 million) increase with inflation. So if the assumed nominal earnings rate is 5% and assumed inflation is 3%, then a 50 year old might start being restricted once they have $2.5 million because the $2.5 million with no further contributions would be expected to grow to $4.5m when they are 62 and that could purchase an annual benefit of $299k (which is ~ the $210k inflated at 3% for 12 years).

I don't see restricting tax deferral benefits on a 50 year old with $2.5 million saved for retirement as being an outrage. The 50 year old will just save on a taxable basis and not get the benefit of tax deferral.

In reality, even those restricted will end up with more than the maximum benefit because it is likely that the account actually grows by more than the assumed rate of return (which is based on bond returns as I recall) it will be much higher when the participant is 62. For example, if our 50 year old is restricted as described and makes no further contributions and invests their balance in Wellesley and earns 7.5% (Wellesley's 10 year return) then they will actually have a balance of $6.4m when they are 62 and an annual benefit of $394k.

 

[samclem]

Not to mention the HR nightmares:

Right. And people/couples who are close to the cap (a number which is projected to grow a lot over the coming decades, even if the cap is indexed for inflation) will have considerable uncertainty from year to year about whether they can contribute to these accounts--depends on fluctuations inthe interest rate, their account balances, etc.

There are already limits on contributions. The very large balances in some of these accounts generally occur when "special" investments (usually highly leveraged closely held ones) are placed in them, then they can grow astronomically. Rather than try to corral and account for all the disparate retirement assets that might be under a person's name (some with his employers, etc), just restrict the types of assets that can be put into these accounts. (Only publicly traded securities, etc.) Much simpler, and addresses the root cause of the "problem".

 

[Big_Hitter]

To calculate the cap for someone less than 62 you would discount the $3.4m by an assumed real rate of return since the $210k (and hence the $3.4 million) increase with inflation. So if the assumed nominal earnings rate is 5% and assumed inflation is 3%, then a 50 year old might start being restricted once they have $2.5 million because the $2.5 million with no further contributions would be expected to grow to $4.5m when they are 62 and that could purchase an annual benefit of $299k (which is ~ the $210k inflated at 3% for 12 years).

almost entirely incorrect - if you don't have the time to read the pdf I posted on post 37 here's an example

The max limit at any age is calculated as follows (415db limit) * (age 62 annuity factor)/(1+i)^(62-x)

At 4.25%, the annuity factor at age 62 is about 16.2 so if you take the 16.2*210000 you get the magic 3.4M number that everyone thinks is so big.

So let's say we are a few years down the road and the 415b limit has grown to 220K (it's cola adjusted annually like the SS bend points, max DC limits, etc.)

Bill, aged 42 has been working for the same company for 20 years and has accumulated $875K is his 401k/profit sharing plan. His company has a generous PS plan but no DB plan. Interest rates used to calculated the limit have risen to 6.25%. The age 62 annuity factor is now about 13.2 since interest rates have gone up. Bill's balance limit is 220000*13.2/(1.0625)^20 or about $864K. Now Bill doesn't get any match or deferral or profit sharing allocation until the limit increases or his DC balances decrease if he loses his ass in the market.

Make sense now? What happens if he's limited this way for 3 years then takes a 20% hickey during a correction? No dollar cost averaging for this poor guy, he just got short knocked.

 

[pb4uski]

It makes absolutely no sense at all to use the 4.25% or 6.25% in doing a calculation like that without factoring in that 415b limit will increase with inflation. You need to use the interest rate less the inflation rate. That is just basic finance. What you want to do is to restrict people who have a balance that with no further contributions is expected to grow to the limit when they are age 62 from making additional contributions.

You are right in that if there is a correction that the individual would be allowed to resume contributing. I see no problem with that.

 

[Big_Hitter]

It makes absolutely no sense at all to use the 4.25% or 6.25% in doing a calculation like that without factoring in that 415b limit will increase with inflation. You need to use the interest rate less the inflation rate. That is just basic finance. What you want to do is to restrict people who have a balance that with no further contributions is expected to grow to the limit when they are age 62 from making additional contributions.

You are right in that if there is a correction that the individual would be allowed to resume contributing. I see no problem with that.

it doesn't have to make sense, it's an IRS rule;

in a DB plan, when you receive a lump sum distribution in any year you limit it to the current 415b limit times a lump sum factor - it's in the 415 regs

during any year, the current 415b limit is used, period - calcing the pv at 62 is similar to how lump sum payments are calculated - the 4.25% is what's called an "effective interest rate" which is, per the proposal, equivalent to current IRS segment rates

again, drop the 3.4M number, it's pretty meaningless

 

[Chuckanut]

My fear is that we are in a slippery slope towards undoing all the good things we have available for our retirement savings. For example, while not directly taxing Roth IRA withdrawals, they could use the withdrawal amount to figure tax brackets creating a de facto tax on the Roth withdrawal via higher taxes on the non Roth money.

 

[pb4uski]

here is a more technical write up of how this would work


The Impact of a Retirement Savings Account Cap | EBRI

Here is the actual proposal: see page 167

http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf

I don't think EBRI has interpreted it correctly. It would be silly to not include in adjustment for inflation since you already know the limit will increase for inflation.

 

[Big_Hitter]

maybe it's silly to you but that's how it works

this is exactly the same thing they tried 2 years ago; I read the current proposal the same way EBRI read the old one

do you think I just made up that annuity factor at 4.25%? how else would the 3.4M number be calculated? it's simply 210K times that annuity factor which is NOT a COLA factor

 

[pb4uski]

it doesn't have to make sense, it's an IRS rule;

in a DB plan, when you receive a lump sum distribution in any year you limit it to the current 415b limit times a lump sum factor - it's in the 415 regs

during any year, the current 415b limit is used, period - calcing the pv at 62 is similar to how lump sum payments are calculated - the 4.25% is what's called an "effective interest rate" which is, per the proposal, equivalent to current IRS segment rates

again, drop the 3.4M number, it's pretty meaningless

But this is a whole new and different application of those rules. But even if you are right, it only means that people might be restricted from contributions and later allowed to make contributions as n, the annuity factor, i and the limit change. While I concede that it is too complicated for my taste, there are simpler ways to achieve the ultimate goal

If you read that actual proposal, the intent is to simply preclude additional contributions for people whose balance would exceed the limit at age 62 using certain assumptions. You're pushing the panic button before the detailed calculations are even presented.