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Old 05-04-2011, 07:48 PM   #61
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i do wish they would raise the limits. but, that's my own selfish reasons. between the 401k, company match, and ROTH IRA's for both me and DW, we can stuff over $36k into retirement account vehicles. Since DW has a small business, we're also starting a solo 401(k) for her. i assume those who are also in their 20's who save this much is less than 5%.
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Old 05-04-2011, 08:16 PM   #62
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Originally Posted by Independent View Post
+1

I don't see any public policy reason for providing tax breaks for saving for $100k retirements, whether they are in DB pensions or DC savings.
Maybe. But if someone has no pension and means testing is increased in Social Security to the point where today's young folks may have good reason to not assume they'll get it, they'd need a $1.25M portfolio to withdraw $50K at 4%, and if you want more safety and choose 3%, you'd need $1.67M for $50K. So a $100K retirement would require $2.5M at 4% and $3.33M at 3%.

Unless you still believe the market is a pretty "sure thing" to deliver 10-11% over 30-40 year periods, you can save more money than is allowed today and still come nowhere near a "$100K retirement" unless you get returns that I think are unrealistic to expect.
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Old 05-04-2011, 08:34 PM   #63
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I have a reason to not want them raised. I have always maxed any retirement plans I had. I put 2K into IRA when that was the limit and 15% into 401K the few times I had one even when it was hard for me.

I got a new 401K in 2003 that wasn't limited to 15% but I was over 50 so could put in 14K plus around 5K in a ROTH. Saving 19K was hard but I could do it. Then they raised the limits so now it is 22K and 6K or 28K total for me. I stopped maxing it out last year but if I was attempting to max it and couldn't make the full 28K I might give up. If I was doing 28K and they raised it to say 50K I would know I couldn't do it and might give up sooner.

A reasonable 401K limit means you can reduce your marginal tax rate when you work but when you withdraw you are paying taxes at perhaps a higher rate because you don't have minor children, mortgage or some other things to deduct and are forced to do a RMD at regular tax rates.

I have my retirement money in 401K, ROTH and taxable and will only be adding enough to 401K now to get out of the highest marginal rate and the bulk of my saving will be in taxable accounts. They are taxed at long term gains or left to heirs at a stepped up basis. ROTH is great because it is tax free income and you can spend it all in one year without raising marginal rates so if you need a car or roof or something you could draw out 20-30K in a year without a tax problem where adding 20-30K to a 401K withdrawal would all be at a high rate.
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Old 05-04-2011, 09:23 PM   #64
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I read over the material you quoted, looking for such a statement. It's not there. Just because it's obviously true doesn't mean it was stated by Gone4Good.
My bad... I was reading between the lines where he was trying to show that the mean pension is $20K so it is not as bad as it seems with the fat cats... so, I think his meaning was clear even though he did not state it...
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Old 05-04-2011, 09:26 PM   #65
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But to counter, the person with the 401K can get an 11% or higher return on their money, even though it is mostly their contribution with a little bit added in by the employer. The person with the public pension on the other hand has to settle for a guaranteed 8% (I think that is about the return they assume?) although I guess also they get it adjusted for inflation...not sure about that.

It is kind of strange that a public employee gets a pension *and* gets to contribute to a tax defered account like 401K *and* gets social security in some cases. I guess they get a 5 or 6 leg stool while the rest of us make do with 2 or 3. Three legs are more stable than five anyway
You kind of kill your first paragraph with the second....

The gvmt people have pensions.... they do not contribute more than half of their money for that pension (I will say most, because I am sure there are some that do pay).... BUT, everyone that I know in gvmt has the option of putting money into a 403(b) and get those 11% returns you mention... but it is with their money...


I will not pile on the ones that get pensions and SS because they do pay into the SS system just like everybody else.... so they should get the benefits of that system...
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Old 05-04-2011, 09:30 PM   #66
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I have a reason to not want them raised. I have always maxed any retirement plans I had. I put 2K into IRA when that was the limit and 15% into 401K the few times I had one even when it was hard for me.

I got a new 401K in 2003 that wasn't limited to 15% but I was over 50 so could put in 14K plus around 5K in a ROTH. Saving 19K was hard but I could do it. Then they raised the limits so now it is 22K and 6K or 28K total for me. I stopped maxing it out last year but if I was attempting to max it and couldn't make the full 28K I might give up. If I was doing 28K and they raised it to say 50K I would know I couldn't do it and might give up sooner.

A reasonable 401K limit means you can reduce your marginal tax rate when you work but when you withdraw you are paying taxes at perhaps a higher rate because you don't have minor children, mortgage or some other things to deduct and are forced to do a RMD at regular tax rates.

I have my retirement money in 401K, ROTH and taxable and will only be adding enough to 401K now to get out of the highest marginal rate and the bulk of my saving will be in taxable accounts. They are taxed at long term gains or left to heirs at a stepped up basis. ROTH is great because it is tax free income and you can spend it all in one year without raising marginal rates so if you need a car or roof or something you could draw out 20-30K in a year without a tax problem where adding 20-30K to a 401K withdrawal would all be at a high rate.

I have a big enough pile in taxable accounts that I can put in whatever I want and not be concerned.... just moving it from one bucket to the other...
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Old 05-05-2011, 09:50 AM   #67
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Maybe. But if someone has no pension and means testing is increased in Social Security to the point where today's young folks may have good reason to not assume they'll get it, they'd need a $1.25M portfolio to withdraw $50K at 4%, and if you want more safety and choose 3%, you'd need $1.67M for $50K. So a $100K retirement would require $2.5M at 4% and $3.33M at 3%.

Unless you still believe the market is a pretty "sure thing" to deliver 10-11% over 30-40 year periods, you can save more money than is allowed today and still come nowhere near a "$100K retirement" unless you get returns that I think are unrealistic to expect.
I don't have any problems with your numbers.

I thought the OP and most of the posters seemed to think we should shift taxes around so that people who want to retire with $100k annual incomes should get lower taxes to make that easier. In my world, that means someone else pays more. I don't know why I would want to set up the tax laws that way.
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Old 05-05-2011, 10:03 AM   #68
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I don't have any problems with your numbers.

I thought the OP and most of the posters seemed to think we should shift taxes around so that people who want to retire with $100k annual incomes should get lower taxes to make that easier. In my world, that means someone else pays more. I don't know why I would want to set up the tax laws that way.
The way I read it, the OP wanted to equalize the retirement opportunities of the private sector with the guaranteed retirement of the public sector. I am not informed enough to know how to calculate the value of the public pensions, but I guess you could assign them a value by seeing how much a cost of living adjusted annuity of the same amount would be.

I just went to an online calculator and put in a request for a immediate annuity for a married couple both age 55. For 1.5 million dollars invested into it, the payout was $6930 a month, or about 83,000 a year. No adjustment for inflation, so after 20 or 25 years you could be eyeing that cat food coupon on isle 7

Is it pretty hard to get 1.5 million in a 401K with the current contribution limits? Could you even purchase the above annuity inside the 401K or would you have to take a lump payment with the tax consequences before you could purchase it?
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Old 05-05-2011, 10:49 AM   #69
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The way I read it, the OP wanted to equalize the retirement opportunities of the private sector with the guaranteed retirement of the public sector. I am not informed enough to know how to calculate the value of the public pensions, but I guess you could assign them a value by seeing how much a cost of living adjusted annuity of the same amount would be.

I just went to an online calculator and put in a request for a immediate annuity for a married couple both age 55. For 1.5 million dollars invested into it, the payout was $6930 a month, or about 83,000 a year. No adjustment for inflation, so after 20 or 25 years you could be eyeing that cat food coupon on isle 7

Is it pretty hard to get 1.5 million in a 401K with the current contribution limits? Could you even purchase the above annuity inside the 401K or would you have to take a lump payment with the tax consequences before you could purchase it?
I'll agree that the OP wanted to raise the cap on DC plans so people could use them to fund $100k retirement incomes, pointing out that some public DB plans provide that much. (I'd add that it's not just public pensions. Private DB pensions can pay large amounts, too).

I said that I think it's better public policy to lower the cap on DB pensions rather than to raise the cap on DC. I don't see why we should give tax preferences to people who choose to fund large retirement incomes.


On the issue of using a 401k to fund an SPIA. I think the standard approach would be to retire, roll the 401k to an individual IRA, then buy the SPIA inside the IRA.
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Old 05-05-2011, 12:07 PM   #70
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As someone else mentioned above, a 401K is only one option to save for retirement. I am OK with the current 401K limits, as I personally prefer keeping most of my money in taxable accounts anyways because of the flexibility it offers.

But 401Ks have one very nice feature: strong creditor protection.

I know next to nothing about pensions, but are pensions protected from creditors?
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Old 05-05-2011, 02:19 PM   #71
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I always assumed maxing out your 401K was a top priority because it can be viewed as taking money right off the top of your income...is it really better to just put the money in a taxable account instead?

Say I make $100,000 as a single individual. If I take $16,500 right off the top of that, then even before deductions I am only looking at federal tax on $83,500. Even if my overal federal tax rate ends up being 10% or whatever, the $16,500 is coming off the top end, where it is saving a tax of 20% or more, right? So the government is contributing 20% to my retirement account on the front end, and letting it compound with my money for 30 to 40 years. I don't see how putting after tax dollars (a reduced amount since you had to pay the government up front) in a taxable account could be anywhere near as good a deal.
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Old 05-05-2011, 02:24 PM   #72
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I always assumed maxing out your 401K was a top priority because it can be viewed as taking money right off the top of your income...is it really better to just put the money in a taxable account instead?

Say I make $100,000 as a single individual. If I take $16,500 right off the top of that, then even before deductions I am only looking at federal tax on $83,500. Even if my overal federal tax rate ends up being 10% or whatever, the $16,500 is coming off the top end, where it is saving a tax of 20% or more, right? So the government is contributing 20% to my retirement account on the front end, and letting it compound with my money for 30 to 40 years. I don't see how putting after tax dollars (a reduced amount since you had to pay the government up front) in a taxable account could be anywhere near as good a deal.

If you make the same amount of money.... but have a wife and two kids... and expensive health care plan.... your taxable income drops to the 15% tax bracket pretty quick...

If I am only savings 15% in tax I would rather put it somewhere else... like a ROTH account.. or even a ROTH 401(k)... or the taxable account... if I am at the 28% tax bracket I would put it in the regular 401(k)....
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Old 05-05-2011, 03:14 PM   #73
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I always assumed maxing out your 401K was a top priority because it can be viewed as taking money right off the top of your income...is it really better to just put the money in a taxable account instead?

Say I make $100,000 as a single individual. If I take $16,500 right off the top of that, then even before deductions I am only looking at federal tax on $83,500. Even if my overal federal tax rate ends up being 10% or whatever, the $16,500 is coming off the top end, where it is saving a tax of 20% or more, right? So the government is contributing 20% to my retirement account on the front end, and letting it compound with my money for 30 to 40 years. I don't see how putting after tax dollars (a reduced amount since you had to pay the government up front) in a taxable account could be anywhere near as good a deal.
Tax deferral is a good deal. But investing retirement assets in a taxable account also has advantages.

- You pay capital gains taxes on the equity growth vs income taxes on the tax deferred withdrawals.

- You withdraw assets when you choose vs a mandated withdrawal schedule.

- You can use investment losses to offset gains and reduce your tax bill.

Once you stop earning a salary and finance your lifestyle entirely from your portfolio you have a great deal more control over the taxes you pay. The point is not that one is preferable over the other, just that both are legitimate ways to build wealth and finance one's retirement, and the limitations or absence of one doesn't really impede anyone from achieving their retirement portfolio goals.
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Old 05-05-2011, 03:46 PM   #74
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I feel embarrassed to admit this, but my wife and I legally put $225,000 into tax deferred accounts this year, about half of our income. How? I am self employed and set up a pension for my wife and myself, plus we have solo 401(k) accounts.

http://www.schwab.com/cms/P-967488.0...efpid=P-461125

Solo Defined Benefit Pension Plan for Highly Compensated Self Employed - Financial Advisor Robert Hunter, Marin County & Bay Area

DB plan Request form
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Old 05-05-2011, 03:47 PM   #75
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I always assumed maxing out your 401K was a top priority because it can be viewed as taking money right off the top of your income...is it really better to just put the money in a taxable account instead?

Say I make $100,000 as a single individual. If I take $16,500 right off the top of that, then even before deductions I am only looking at federal tax on $83,500. Even if my overal federal tax rate ends up being 10% or whatever, the $16,500 is coming off the top end, where it is saving a tax of 20% or more, right? So the government is contributing 20% to my retirement account on the front end, and letting it compound with my money for 30 to 40 years. I don't see how putting after tax dollars (a reduced amount since you had to pay the government up front) in a taxable account could be anywhere near as good a deal.

The 401K can give you a "good deal" because it saves you taxes today. But will it still be a good deal when you cash in the 401K? When you contribute to a 401K, you basically lock the money in a box and give the key to the government. They decide when you can take the money out and how much you are entitled to keep after they take their cut. They are also empowered to change the rules at any time. So, those tax savings today could end up costing you a bundle tomorrow. In that regard, I think it is unadvisable to overdo the 401K. Taxable accounts offer advantages of their own that should not be overlooked.

In addition people taking full advantage of the $16,500 deduction on 401K contributions are likely high income earners. They have the means to build a retirement nest egg outside of a 401K and don't need extra incentives.
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Old 05-05-2011, 04:33 PM   #76
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Taxable accounts offer advantages of their own that should not be overlooked.
True, at least as long as dividends and long term capital gains are given preferred tax treatment, and as long as unrealized gains can be deferred indefinitely.
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Old 05-05-2011, 05:17 PM   #77
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I thought the OP and most of the posters seemed to think we should shift taxes around so that people who want to retire with $100k annual incomes should get lower taxes to make that easier. In my world, that means someone else pays more. I don't know why I would want to set up the tax laws that way.
Because that is how public sector employees are treated.

When I was an employee with the University of California (using 2011 tax year limits), I could invest $16,500 + $5500 catchup in a 403b, $16,500 + $5500 catchup in a 457, and another ~$5000 in a 401a. That's about $50K of tax-differed money. In addition, I could contribute about $27,000 in after-tax contributions to the 401a, and then immediately roll this money into a backdoor Roth IRA with essentially no tax consequences beyond the after-tax component (post 2010 conversion rules). Note that the $49,000 415c limit does not apply to the 457.

Then there is the DB pension. UC's pension is 2.5% x salary x years, with a full retirement age of 60 and an early retirement age of 50 (1.1% at 50). The pension has a partial COLA, which is about 75% of the CPI. Up until a couple of years ago, no employee contributions to the DB pension were required.

The salaries for the 9 employees (5 BS, 3 MS, 1 PhD) in my group ranged from about $120K to $190K (these were 2007 national laboratory salaries projected into 2011). I should mention that UC employees with 20 years of employment have 24 days of paid vacation, plus 12 holidays, and 12 days of paid sick leave each year.

So it is not too difficult to save $75K/yr in tax advantaged accounts and then be eligible for a $100K/yr mostly COLA'ed pension. These are not police officers, fire fighters, or prison guards. These are people who pretty much sit in an office all day, with no dress code, and have a good deal of flexibility about when they arrive in the morning and leave in the evening.

I believe that was the OP's point. Why should the public sector, but not the private sector, have it so good at tax-payer expense?

But it's for the children.
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Old 05-05-2011, 06:25 PM   #78
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True, at least as long as dividends and long term capital gains are given preferred tax treatment, and as long as unrealized gains can be deferred indefinitely.

If capital gains and dividends were to lose their preferred tax treatment and unrealized gains were to be taxed yearly, the stock market would become pretty unattractive compared to other investments. Someone with a taxable account could divest from the stock market and invest the money in investments offering better tax treatment (like real estate for example). What would you do if the bulk of your money was in a 401K?
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Old 05-05-2011, 06:52 PM   #79
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Just a little history for you "young-uns".

Back in the halcyon days of the 1980's I was able to contribute 30K per year to my 401k, which was the then maximum. In fact, one year I was able to contribute 50K (not sure why, but my employer said I could, so I did). Of course, the top marginal tax rate was only 28% back then.
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Old 05-05-2011, 06:57 PM   #80
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Just a little history for you "young-uns".

Back in the halcyon days of the 1980's I was able to contribute 30K per year to my 401k, which was the then maximum. In fact, one year I was able to contribute 50K (not sure why, but my employer said I could, so I did). Of course, the top marginal tax rate was only 28% back then.
!!! I had no idea the limits were ever that high...
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