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$3.4 million provides $210,000 annual retirement income?
Old 02-05-2015, 03:11 PM   #1
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$3.4 million provides $210,000 annual retirement income?

From CNBC

"President Barack Obama's 2016 fiscal year budget includes a proposal to cap contributions to tax-preferred retirement plans like 401(k)s and IRAs. "While tax-preferred retirement plans are intended to help middle class workers prepare for retirement, loopholes in the tax system have let some wealthy individuals convert these accounts into tax shelters," the White House said. Under the proposal, individuals would be prohibited from contributing to or accruing additional benefits in such accounts once balances reach $3.4 million—enough, it estimates, to provide an annual income of $210,000 in retirement."

http://http://www.cnbc.com/id/102397248

I imagine its possible... if you don't plan on retiring early and do not expect to live very long.
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Old 02-05-2015, 03:16 PM   #2
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If that 6.1% WR -- some 3 percentage points more than long-term inflation -- is guaranteed, I'm all for it.
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Old 02-05-2015, 03:17 PM   #3
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Quote:
Originally Posted by 34rlsa View Post
From CNBC

"President Barack Obama's 2016 fiscal year budget includes a proposal to cap contributions to tax-preferred retirement plans like 401(k)s and IRAs. "While tax-preferred retirement plans are intended to help middle class workers prepare for retirement, loopholes in the tax system have let some wealthy individuals convert these accounts into tax shelters," the White House said. Under the proposal, individuals would be prohibited from contributing to or accruing additional benefits in such accounts once balances reach $3.4 million—enough, it estimates, to provide an annual income of $210,000 in retirement."

http://http://www.cnbc.com/id/102397248

I imagine its possible... if you don't plan on retiring early and do not expect to live very long.
Maybe that includes 2 high earners who will be receiving max social security benefit? Around 72k/yr for a couple who wait till 70, correct?
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Old 02-05-2015, 03:18 PM   #4
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The rub is that is if the $210k of benefits are fixed and don't increase for inflation. According to immediateannuities.com a 65 yo male would get a $224k annual benefit for an initial premium of $3.4 million.

I actually don't have much of an issue with them limiting the total that one can have in tax-deferred as long as the limit is reasonable and I don't see $3.4 million per person as being unreasonable. Above that someone is probably in a high tax rate while working or when retired too so I don't see a huge benefit.
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Old 02-05-2015, 03:31 PM   #5
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Budget proposals mean nothing. Especially ones from the Democratic President to the Republican Congress.... I see zero chance of this happening.
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Old 02-05-2015, 03:41 PM   #6
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Originally Posted by 34rlsa View Post
"While tax-preferred retirement plans are intended to help middle class workers prepare for retirement, loopholes in the tax system have let some wealthy individuals convert these accounts into tax shelters," the White House said.
They weren't tax shelters all along?
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Old 02-05-2015, 03:44 PM   #7
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Gotta love the language:

They weren't tax shelters all along?
Yes, but how can it possible be effective or worthwhile for the uber rich if they are in the highest tax bracket when deferring and when withdrawing? Why bother?

I don't see how a Bill Gates or even Mitt Romney get any juice from these if they defer a the maximum rate and then withdraw at the maximum rate.
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Old 02-05-2015, 03:49 PM   #8
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I don't see how a Bill Gates or even Mitt Romney get any juice from these if they defer a the maximum rate and then withdraw at the maximum rate.
Roth, with the money placed in closely held, initially underpriced investments.
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Old 02-05-2015, 03:51 PM   #9
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Ok, I can see the juice in a Roth in that situation and wouldn't mind seeing that opportunity limited.
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Old 02-05-2015, 03:52 PM   #10
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Yes, but how can it possible be effective or worthwhile for the uber rich if they are in the highest tax bracket when deferring and when withdrawing? Why bother?

I don't see how a Bill Gates or even Mitt Romney get any juice from these if they defer a the maximum rate and then withdraw at the maximum rate.
I think the main objection is when an investment (highly leveraged or speculative shares in a startup, etc) is put in as a Roth and then grows tremendously. Very little tax is paid going in (because the value was low) and zero tax is paid going out. Those who favor this type of cap want to limit that.
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Old 02-05-2015, 03:56 PM   #11
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I'm pretty sure the $3.4M is the 415b limit at SSNRA ($210K annually) converted to a lump sum using IRS segment rates.

So this $3.4M number can drop drastically before SSNRA as the 415b limit decreases...or looked at another way, how one's account balances are converted into a deferred annuities payable at SSNRA.

Also, this is an aggregate cap on DB accruals and DC/IRA (etc.) balances, which would make it problematic to enforce.


They tried to implement this limit a year or two ago I believe. Should be plenty of material out there on how it would work.


http://www.usatoday.com/story/money/...s-cap/2071529/
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Old 02-05-2015, 04:13 PM   #12
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Also, this is an aggregate cap on DB accruals and DC/IRA (etc.) balances, which would make it problematic to enforce.
Lots of new complexity and compliance/enforcement costs, another sharp "cliff", and probably not much new revenue for the gummint after people (predictably and rationally) respond by adopting alternative ways to shield the money from taxation. But if the purpose is not a fiscal one, it might be just the ticket.
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Old 02-05-2015, 04:19 PM   #13
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it also potentially penalizes those that save early on for retirement
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Old 02-05-2015, 04:20 PM   #14
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what does immediate annuities dot com give you for a 40 year old buying a deferred annuity at age 70 with $1M....is it over $210K?
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Old 02-05-2015, 04:21 PM   #15
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Originally Posted by pb4uski View Post
I don't see how a Bill Gates or even Mitt Romney get any juice from these if they defer a the maximum rate and then withdraw at the maximum rate.
Not only do they pay the higher rate, they give up any favorable capital gains tax treatment.

I'm somewhat a victim of the same issue. I had money taken out of my pay that went into my SERP. Because of my misunderstanding, I will pay a marginal 33% tax rate. If I had paid the taxes at 25%, about half of the payment would have been capital gains that I could have spread out any way I chose.
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Old 02-05-2015, 04:25 PM   #16
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The rub is that is if the $210k of benefits are fixed and don't increase for inflation. According to immediateannuities.com a 65 yo male would get a $224k annual benefit for an initial premium of $3.4 million.
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I'm pretty sure the $3.4M is the 415b limit at SSNRA ($210K annually) converted to a lump sum using IRS segment rates.
I think these are the reasonable ways of asking if $3.4 million is equivalent to $210,000.

This idea has been floated before and didn't go anywhere. Even if it did, I don't have that much money in tax preferenced accounts. Even if I did have that much money, they'd probably grandfather in existing balances.

I could make a comment on this as public policy, but I think that would attract Porky.
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Old 02-05-2015, 04:26 PM   #17
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^^ but I believe the limit is significantly lower than $3.4M at younger ages, and much significantly lower at higher interest rates...of course it will go up over time as the 415b limit increases
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Old 02-05-2015, 04:29 PM   #18
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Roth, with the money placed in closely held, initially underpriced investments.
Bingo!
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Old 02-05-2015, 05:53 PM   #19
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it also potentially penalizes those that save early on for retirement
+1000

I was good boy and started adding to my IRA the year after college, maxed out my 401K as soon I was at company with a good one. A story that is fairly common on this forum.

I haven't added a dime since I turned 40 to a retirement account. Now at 55 my retirement stash is over 1.7 million or more than 1/2 way to the 3.4 million
I need a 6.9% annual return over the next 10 year to hit the 3.4 million mark by age 65. Not to be too immodest but there have been very few 10 year period where I didn't exceed that figure quite handily. Even adding 2% for inflation, I think I have decent shot of hitting a real 3.4 million in the next 10 years just from growth in my IRAs.

If I still had be maxing out my contributions for the last 15 year, my IRA balance would be in the 2.4 million range and I'd need only 3.5% real returns to exceed the cap.
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Old 02-05-2015, 06:11 PM   #20
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Quote:
Originally Posted by 34rlsa View Post
From CNBC

once balances reach $3.4 million—enough, it estimates, to provide an annual income of $210,000 in retirement."



.

I have to assume the WR is designed to draw the account down to zero at the average age of death. Otherwise the WR seems rather high.
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