My Retirement Rant
First, I will say that I am perfectly happy for folks who are either good earners or good savers or both and who choose to use their accumulated wealth to stop working at some age.
However, I am completely lost as to how we have somehow decided that multi-decade end-of-life paid vacations, starting as early as age 50, is somehow an inalienable right that must be guaranteed by government. I suppose I can see a safety net for folks who, though age and disability, simply get too old to be productive (but remember that I have nearly 500 people mostly over 65 who work for me, mostly doing manual trades, so don't tell me older people can't be productive). And that was what Social Security initially was -- the age 65 was chosen as a retirement age not because it guaranteed 10-15 years of senior leisure but because it matched the life expectancy at the time. The equivalent age would be well into the 70's today.
Of course, others think differently. A group is now proposing an expanded Social Security program that would guarantee nearly 100% of earnings to low-income retirees (there are smaller increases for higher income workers but most all the change is for low-income folks).
While they are proposing higher taxes to support this, my guess is that it will not be long before a wealth tax is suggested. After all, they are hoping to replace 401K's as a savings vehicle. If so, why not seize those funds to help pay for the plan. The other day, Kevin Drum mocked those who fear a government seizure of 401K's as the tinfoil hat brigade. I would be willing to bet him that within the decade, it will become a mainstream idea in the progressive community to fund shortfalls in Social Security and Medicare with a full or partial seizure of 401K's.
Rick Caird:
Guys like Kevin Drum make a career our of not seeing what is ahead or misinterpreting what is ahead.
April 3, 2013, 9:26 amBill:
If government seizes our 401K accounts, will we have to pay income taxes on the amount "withdrawn"? If the seizure takes place before age 59.5, will we be obligated to pay a 10 percent penalty, in addition to income taxes, on the amount "withdrawn"?
April 3, 2013, 9:28 am3rdMoment:
Ha ha, nice one.
Seriously, I think there is zero chance that any serious "seizure" of 401(k)s is politically possible in the foreseeable future.
April 3, 2013, 9:44 amMatthew Slyfield:
Are you willing to bet your life's savings on that?
April 3, 2013, 9:47 ambigmaq1980:
Apparently he is or he has no savings.
It does not have to be an outright "seizure" either. It can be simply a "wealth tax", or forcing account holders to put a percentage of their savings into a government plan or special bonds.
Look, when the LA Times has an Op Ed (about a year ago) discussing this, you know it is out there not far from "mainstream" thinking.
The logic went something like:
1) Very few of the 99% were able to participate in saving via a 401K, therefore it would be "fair" if all were covered by a government program.
2) People are not sophisticated enough to make the right decisions when they do invest, and, as happened in 2008, many/most are "over-exposed" to market fluctuations, further whittled away by the "unconscionable fees" that "Wall Street" advisers take.
3) Therefore, government can/should be their guarantor, providing a retirement annuity in return for 10-15% annual contribution.
No doubt, the scheme would require a "one time contribution" from those who already saved.
There will be no discussion about responsible behavior and sacrifice by those who saved vs those who did not, nor responsible/thoughtful decision making that enabled a lifetime of earnings sufficient to save for retirement, and planned a family that would be able to live within their means.
No, the focus will be entirely on how "unfair" it is that the "unfortunate" (conflated with the irresponsible) shouldn't retire in poverty.
April 3, 2013, 10:22 amjon:
Haven't they already done a partial seizure of 401k's? From what I understand, it is possible, that large companies who have 401k plans for their employees have certain portion mandated to go into government funds, like securities - or whatever you call them. This suspicion is not conformed, but I wouldn't doubt it. It would be nice if someone would look into it.
April 3, 2013, 11:02 amjon:
Look at my comment on it. The government may not be the smartest one of the bunch but there are less "intrusive" ways to get your cash.
April 3, 2013, 11:04 amChris:
As an active employee and 401k participant at a F100 company, this is news to me. I have 100% allocation to the passive S&P index option.
April 3, 2013, 11:09 amChris:
On the bright side, how filthy rich are we, as a country, that a sizable minority--if not majority--of people can seriously contemplate this?
April 3, 2013, 11:13 amSamWah:
They always deny their plans. Their evil plans!
And Rick? They are NOT not-forseeing.
April 3, 2013, 11:18 ammarque2:
It is kind of interesting, once you are in the 90% companies start restricting your 401K contributions. I am only allowed to put in 4% (That forces me to invest less than 5K in the plan rather than up to $17,000 that lower income workers are allowed. Also the whole 401K think is phased out at 188K per year. So the folks who have 401K's are all in the 99% and are certainly not the super wealthy that the progressives would like to hit.
April 3, 2013, 11:27 amjon:
Thanks Chris, so it probably isn't true then.
April 3, 2013, 11:32 amdan:
it get's better here's Krugman mocking the idea that government healthcare will destroy freedom:http://krugman.blogs.nytimes.com/2013/04/02/jack-booted-insurance-bringing-thugs/
Krugman lives in a city where the mayor has chosen to ban unhealthy foods bewcause of healthcare costs, a clear example of government healthcare limiting freedom.
April 3, 2013, 11:42 amSandro Rettinger:
No bet.
April 3, 2013, 1:16 pmbigmaq1980:
Oh, they can limit your total contribution, or just the level at which they will match?
I hadn't heard that a company can limit your income deferral. The income limit seems to be $255K, but a restriction like you cite is a serious impediment in efficiently saving to your targeted needs.
http://www.shrm.org/hrdisciplines/benefits/articles/pages/2013-irs-401k-contribution-limits.aspx
I hope your company has other great benefits/features that make up for that shortfall.
April 3, 2013, 2:21 pmMingoV:
"... my guess is that it will not be long before a wealth tax is suggested..."
My wife and I, back in 1985 when were newly married, planned our retirement needs. Our primary assumption was that by the time we were 65 (2020), Social Security would either be gone or would means-test benefits. Anyone with big IRAs would get nothing. We also assumed that we would not get Medicare for the same reasons.
Obama repeatedly has mentioned a wealth tax. I fear that there will be both a wealth tax and Medicare and Social Security means testing.
Our federal and state governments repeatedly urge us to save and invest our money, but then they penalize those who do and reward those with the most debt. I'm very frustrated with politicians who pander to irresponsible people and heavily tax the responsible ones.
April 3, 2013, 2:37 pmmarque2:
Yes, congress set this up because they want HCE (Highly compensated employees) to get all the 401K benefits, so the government for 401K purposes divide folks into HCE and other categories, the HCE's contributions must be similar within a percentage point or two of the low income earners. The thinking is that this would make the HCE's come up with plans to encourage the low income earners to save more. I actually received a letter in the mail last year that I am HCE and therefore my company will only invest 4% of my income. I suppose if my company did a better job of getting the low income earners to contribute, then I would be able to contribute more, but they don't really care, since I work for an employment agency.
Looking on the web, this is probably the best explanation
http://en.wikipedia.org/wiki/401(k)#Highly_compensated_employees_.28HCE.29
After reading a bit more, I don't think there is a max income level for contributing to 401K's - just the HCE - I think I got confused between a ROTH IRA and 401K - because of a not too clear web article I was reading.
April 3, 2013, 2:38 pmmarque2:
Your link also shows the HCE limit as 115K per year based on previous years salary. I get messed over because I am a contract, so I get all the money - and then have to save for my own pension, and pay for my own insurance. Because I get all the money - instead of the company spending it tax free on my behalf, it shows up in my income. If I weren't a contract I would earn about 20K less (company provided benefits) and would not be subject to the HCE limit.
April 3, 2013, 2:41 pmMingoV:
Obama's administration floated that idea as a trial balloon. It's a lead balloon for now, but I expect it to re-float in future democrat administrations.
April 3, 2013, 2:41 pmTed Rado:
Collectively, we cannot get more USG benefits than we paid in over our lifetime. If we do, someone else is paying the difference. That amounts to government assisted theft. Able bodied persons should do constructive work as long as they can. Alternatively, USG benefits should be limited to what we collectively pay in. That was supposed to be the deal when SS was last adjusted. Since then, if SS or medicare results in overruns, full speed ahead and borrow the difference. Are we crazy or what?
April 3, 2013, 4:42 pmMatthew Slyfield:
Yes, you are confused. There are 2 limits on a 401K to consider
1. Employer match limit (you get less benefit over this amount)
2. Pre-tax contribution limit. There is a fixed limit (similar to IRAs) for annual pre-tax contributions to your 401K of $17,500 (increased for 2013) That I am aware of there is no income test for this. If your employer told you otherwise they are probably wrong and you should consult an attorney.
However there is one more possibility with a 401K. You can contribute POST tax money to a 401K. Total contributions (pre and post tax) are limited to the lesser of $50K or 100% of your wages.
http://www.forbes.com/sites/financialfinesse/2012/07/17/the-401k-option-that-youve-probably-never-heard-of/
April 3, 2013, 5:13 pmmarque2:
No Matt you are confused, You didn't bother to read either of our links. If you earn more than 115K per year you are considered a HCE - and your contributions can be limited by your company if the NHCE's are not contributing enough. This is a codified IRS enforced law. Where I was confused was about upper income limits - and not allowing 401K contributions at all.
Please read here
http://www.401khelpcenter.com/mpower/feature_030702.html#.UVzGvZOG1Zc
or here
http://en.wikipedia.org/wiki/401(k)#Highly_compensated_employees_.28HCE.29
If the low paid employees do not contribute enough the HCE's are restricted. My company enforces this by only allowing me to contribute 4% of my pay. The law was all done in the name of fairness. Companies that violate the fairness standard which are caught, are forced to refund some of the money the HCE's put into their 401Ks and make it taxable (assuming the money was put in a standard and not Roth 401K)
Ways around it - work for a company with relatively high salaries
Work for a company that attempts to force a large contribution from all workers.
Switch your company often, since the evaluation is based on last years salary.
I am becoming an expert at this.
April 3, 2013, 5:22 pmmesaeconoguy:
Wrong.
April 3, 2013, 5:40 pmMatthew Slyfield:
My employer's 401K almost certainly qualifies as a safe harbor plan. Which would explain why I haven't ever heard of this before. I have been in a 401K with my current employer for 15 years and they have never done a refund on the 401K.
April 3, 2013, 5:42 pmmesaeconoguy:
It already is mainstream thought.
http://www.americanthinker.com/2013/02/the_feds_want_your_retirement_accounts.html
I have lawsuits prepared when they try this. Not if, but when.
If those fail, there are other options.
April 3, 2013, 5:42 pmmesaeconoguy:
Same here, multiple options, and if you open a super-duper secret account, you can trade virtually anything, not just the limited 10 or 20 funds your employer patronizingly and paternalistically deems appropriate.
April 3, 2013, 6:48 pmmesaeconoguy:
The first time I heard it was 4 or 5 years ago when a couple of Dems floated the idea, for "safety" reasons/good of society, of course. Can't find the article on Bloomberg right now, though.
April 3, 2013, 6:49 pmmarque2:
Mine has also never "refunded" the money either, because they strictly limit how much I can put in in the first place. Needless to say, I am "maxing" my 401K, though retiring by saving 4% of my income would be a stretch.
April 4, 2013, 8:36 amMatthew Slyfield:
We don't have any limits that I am aware of either. In fact I am aware some who make post tax contributions.
April 4, 2013, 8:41 amJ.S.Bridges:
This is for those of you who are getting limited by your company/employer of record on making deposits to your 401k RetirementPlan via the HCE vs. NHCE "percentage-balancing" requirement: There is sometimes a way around this - although it may not work for everyone, as it requires that your company's/employer's 401k Plan admin be not-so-attentive to what you're doing. As you are likely aware, you are allowed to request a change to the percentage of your pay that is deducted for deposit into your Plan account once each quarter (i.e., once every three months of the year). Also, it is common for this to be done by some folks for the last quarter of each year, so they can maximize their deposit total for that year, but there are also a few who, for various reasons, will make a change earlier in the year. Since the limit on contribution percentage (if it applies to you) is required to be applied in the first quarter of the year - you CAN simply wait until the end of the quarter, then file a request (during the short period when you are allowed to make a change request) to have a higher percentage deducted and deposited into your Plan account.
April 4, 2013, 2:36 pmWith luck - the request will be o.k.'d, and you will be back to making your contributions/deposits at the higher level you want. The worst that can happen is, the admin catches onto what you're trying to do - whether right away or later in the year, or even the following year - and reverses the change, and of course you'll have it to do all over again the next year, probably. But still...
I've done this successfully several times (years ago, so I'm no longer in those Plans where I managed this) - only on one occasion was this reversed on me, and the only thing that happened was I was given a check for the difference - which I promptly deposited in my after-tax IRA (it upped my taxes a tiny bit, but not much).
As for now - I took advantage of the one-time two-year-spread on taxation for the changeover, and converted the bulk of my consolidated 401k deposits (from two Rollover IRAs I used to collect the various 401k deposits from prior employers) into two Roth plans and a conventional IRA. When I change employers again (I work contract, mostly, so this happens pretty regularly), I will take any 401k funds I have deposited directly into the one of the Roth plans - I'm old enough now that I don't get "bitten" with the 10% early-withdrawal penalty.