Retirement Planning

[GGT]

.....discussing the implications of poor retirement planning leading to the government "having" to step in to save people from themselves?

~Lewk

Some planned and saved very well but outlive their money due to:
*Unexpected costs of insurance premiums/co-pays/OOP
*Living decades longer than expected
*401-K and IRA aren't guarantee against market losses

I read an opinion from a financial planner that suggested using formulae based on a 100 yr lifespan.


edit

Besides, the purpose of government assistance to retirees or the elderly isn't to "save people from themselves", or any prior bad decision they've made. It's to maintain a certain level of civilized society where granny isn't freezing in an apartment without heat, wasting away from hunger or malnutrition to pay the heating bill, or cutting her pills in half to afford food. Those are the people living on SS, Medicare or Medicaid, section 8 housing, heating assistance, food stamps, etc.

Of course millions do not live that way, but instead find they've lived a very nice life-style without socking enough away for retirement, and SS isn't enough to comfortably live on either. Not with the same standard of living at least. I'm assuming those are the people you're talking about, Lewk? It depends on the state, but the people with a million dollar home and two Mercedes won't necessarily qualify for those "welfare" programs by simply being cash-poor.

[Dreadnaught]

Besides, the purpose of government assistance to retirees or the elderly isn't to "save people from themselves", or any prior bad decision they've made. It's to maintain a certain level of civilized society where granny isn't freezing in an apartment without heat, wasting away from hunger or malnutrition to pay the heating bill, or cutting her pills in half to afford food.

If this is happening and society isn't collapsing, isn't it most likely the result of a bad life decision or a bad employment situation that prevented them from saving?

Ultimately the main problem with retirement pensions is the defined-benefit aspect. If the government wants to collect x% of our paychecks and give it to old people, fine. But at the moment the only thing preventing me from saving more for retirement is that I'm paying 6% of my paycheck into a medical and pension system that is going to be insolvent/paying much less by the time I'm 65.

[wiggin]

Do you really think equilibrium wages would be at the same level if FICA didn't exist? Just saying.

[Dreadnaught]

Equilibrium or real wages?

[wiggin]

I think that what people take home at the end of the day doesn't change much with changes in payroll taxes except in the short term. That's assuming the taxes aren't ridiculously high to start with, but in general the market adjusts wages to keep take-home wages more or less the same for the same value labor. There are other reasons to keep payroll taxes (and the like) low, of course, but I don't think that if FICA magically disappeared you'd have 6% more money to spend.

[Veldan Rath]

I think that what people take home at the end of the day doesn't change much with changes in payroll taxes except in the short term. That's assuming the taxes aren't ridiculously high to start with, but in general the market adjusts wages to keep take-home wages more or less the same for the same value labor. There are other reasons to keep payroll taxes (and the like) low, of course, but I don't think that if FICA magically disappeared you'd have 6% more money to spend.

Why not?

If I make 50,000 a year before taxes, and taxes are 20% (to make it easy) then I take home $40,000.

If the 6% FICA was to magically disappear, you think my employer is going to keep it and lower my salary to 47k? They pay me $50 grand a year, the money is already being dished out, just now to me instead of the Fed.

We already have a 2% holiday this year from SS, and my (take home) paycheck went up.

[Ominous Gamer]

It would only take a couple of years of reduced or missing raises to help cover that 6%, no one is suggesting the effect would be immediate.

[GGT]

How much it takes to make ends meet:

Graph: http://www.nytimes.com/imagepages/20...ml?ref=economy

Article: http://www.nytimes.com/2011/04/01/bu...agewanted=1&hp

[Veldan Rath]

It would only take a couple of years of reduced or missing raises to help cover that 6%, no one is suggesting the effect would be immediate.

Are you saying it would be intentional?

Gods, what crappy companies you all must work for to have this outlook.

And why would they do it to cover the 6%? They are paying it already!

With this mantra in mind, we should never ask for taxes to go down as the greedy companies we work for will always take them back.

[Ominous Gamer]

Are you saying it would be intentional?
[...]
And why would they do it to cover the 6%? They are paying it already!

in general the market adjusts wages to keep take-home wages more or less the same for the same value labor.

New positions being filled would account for the extra 6% when bargaining for salary, and the rest of the jobs in the industry would follow suit over time.

[Lewkowski]

Some planned and saved very well but outlive their money due to:
*Unexpected costs of insurance premiums/co-pays/OOP
*Living decades longer than expected
*401-K and IRA aren't guarantee against market losses

I read an opinion from a financial planner that suggested using formulae based on a 100 yr lifespan.


edit

Besides, the purpose of government assistance to retirees or the elderly isn't to "save people from themselves", or any prior bad decision they've made. It's to maintain a certain level of civilized society where granny isn't freezing in an apartment without heat, wasting away from hunger or malnutrition to pay the heating bill, or cutting her pills in half to afford food. Those are the people living on SS, Medicare or Medicaid, section 8 housing, heating assistance, food stamps, etc.

Of course millions do not live that way, but instead find they've lived a very nice life-style without socking enough away for retirement, and SS isn't enough to comfortably live on either. Not with the same standard of living at least. I'm assuming those are the people you're talking about, Lewk? It depends on the state, but the people with a million dollar home and two Mercedes won't necessarily qualify for those "welfare" programs by simply being cash-poor.

In some instances people have planned well and life still kicks their but for some reason or the other. However I would venture to say that is not the typical case. Most people fail to live within their means and save for retirement. I mean seriously, a negative savings rate some years?

People prefer to eat out instead of save. People prefer to buy a new car when they could get a used car and save. People prefer to buy the latest gadget/TV/entertainment device then save. Heck remember my poor people thread? Poor people like to pay for lottery tickets then save for retirement...

Ultimately people are responsible for their own decisions. When you take away the consequences of bad decisions do you know what you get more of? Bad decisions.

[Dreadnaught]

I agree with Veldan on this one, it's tough to argue this without having the same issue apply to all tax decreases. Plus wages are sticky; most workers won't tolerate years of flat wages in a rapidly growing economy (which is what we would have in the medium-term if FICA disappeared).

[GGT]

But at the moment the only thing preventing me from saving more for retirement is that I'm paying 6% of my paycheck into a medical and pension system that is going to be insolvent/paying much less by the time I'm 65.

We already have a 2% holiday this year from SS, and my (take home) paycheck went up.

So you've both been able to save 2% more, or did you spend it?

It's disingenuous to claim everyone would save 6% more without the tax, or that employers would let their savings trickle down by increasing wages.

It's also a bit hypocritical to say it's ok to have a tax that's meant for the elderly or poor, then complain the fund won't be around when you're old enough to use it.

[GGT]

In some instances people have planned well and life still kicks their but for some reason or the other. However I would venture to say that is not the typical case. Most people fail to live within their means and save for retirement. I mean seriously, a negative savings rate some years?

People prefer to eat out instead of save. People prefer to buy a new car when they could get a used car and save. People prefer to buy the latest gadget/TV/entertainment device then save. Heck remember my poor people thread? Poor people like to pay for lottery tickets then save for retirement...

Ultimately people are responsible for their own decisions. When you take away the consequences of bad decisions do you know what you get more of? Bad decisions.

You make it sound like only poor people make bad decisions, or the only way to retire poor is due to bad decisions.

How about those in the financial and banking sectors that managed to royally fuck things up for everyone? For that matter, how about our perverse growing reliance on credit cards or long-term debt to afford things like education, healthcare, housing? How about those medical bankruptcies and mortgage foreclosures run amok? What about new therapies for prostate cancer that cost $93,000 per patient but can only be afforded by Medicare recipients?

No idea how you'd "save people from bad choices" in a consumer based economy like ours. If everyone suddenly imposed austerity on themselves, those restaurants, auto manufacturers, cell phone, computer-tablet, gadget makers and entertainment providers would have to fire people. The travel and leisure industry would dry up, hotels, airlines, cruise lines, etc.

[Dreadnaught]

How is that hypocritical? I don't want to keep paying into a system that will likely not be there for me. I would rather save it myself.

[GGT]

How is that hypocritical? I don't want to keep paying into a system that will likely not be there for me. I would rather save it myself.

Because it's that attitude making it practically impossible to change or reform SS, Medicare, Medicaid. "If I can't use it, I don't wanna pay into it." --- "If it's a welfare program, I don't wanna pay into that, either."

[Dreadnaught]

I would want to pay into it if I thought it was reformable. But the attitude making it impossible to reform comes from the AARP generation.

[GGT]

I would want to pay into it if I thought it was reformable. But the attitude making it impossible to reform comes from the AARP generation.

It is reformable, but people have to make up their minds. Is SS an elder welfare program for certain people, or a national retirement supplement for everyone? Is Medicare a subsidy just for elder healthcare, like Medicaid is for the poor, or should they be open to everyone in the form of a public option?

I keep coming back to the same glaring facts: If we had a functional and affordable health system, people wouldn't need a subsidy from an employer OR the gov't. But that would mean busting up the Insurance Industry monopoly and its middle men eating money. If we had a functional and reliable retirement savings system, people wouldn't need employer matching contributions and SS would look entirely different. If we had a functional and fair campaign funding process, legislators wouldn't be influenced by AARP or PACs or corporate/industry donors (or those unions you love to hate).

[wiggin]

I agree with Veldan on this one, it's tough to argue this without having the same issue apply to all tax decreases. Plus wages are sticky; most workers won't tolerate years of flat wages in a rapidly growing economy (which is what we would have in the medium-term if FICA disappeared).

Wage growth normally keeps pace with inflation or somewhat better. That means that a 6% bump in pay could be eliminated in 3 years or so if you just curtailed wage growth (rather than making a real cut). In all reality it would take a bit longer since companies wouldn't completely stop wage growth absent a recession, but you get the basic idea.

I agree that this logic works for both tax decreases and increases, though generally tax decreases are better (since they're helping the bottom line of someone - employers in this case). I'm just very skeptical that the average employee is going to enjoy more than a few years of increased paychecks if you cut out FICA and the like. Given that you're suggesting that 6% would be used for savings/investing rather than consumption (of dubious likelihood for most people, but I'll accept it's true for you), you need this to last for a lot longer to replace the benefits provided by FICA.

Now, while I find it unlikely employees are going to successfully demand and keep that extra salary, they probably will demand better benefits in the way of pensions and retirement healthcare plans if you were to scrap Medicare and SS. This would be a huge liability for companies and would do little to fix the fundamental problem.

[GGT]

Now, while I find it unlikely employees are going to successfully demand and keep that extra salary, they probably will demand better benefits in the way of pensions and retirement healthcare plans if you were to scrap Medicare and SS. This would be a huge liability for companies and would do little to fix the fundamental problem.

Because we don't have functional health care or retirement systems. No real alternatives outside employer or government subsidies. When people say it's time for everyone to be more "responsible" and "self-reliant" for their retirement planning, they don't usually mean to Go It Alone. They'd still expect the employer will deduct some salary and contribute to their plan, using HR or CFO recommendations. That leaves the self-employed and small businesses at a distinct disadvantage, swimming in financial waters with the big fish (and sharks).

Not to mention what happens after retirement.... http://online.wsj.com/article/SB1000...WhatsNewsForth

Fed's Low Interest Rates Crack Retirees' Nest Eggs

As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.

"Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making open market committee. "That state of affairs is not sustainable for a long period of time."

Low rates don't just hurt retirees. They also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts. Americans' net contributions to their financial assets, such as bank and 401(k) accounts, amounted to 4% of disposable income in 2010, according to the Fed. That's the lowest level since it began maintaining records in 1946—except for 2009, when people actually pulled money out.

[Veldan Rath]

So you've both been able to save 2% more, or did you spend it?

It's disingenuous to claim everyone would save 6% more without the tax, or that employers would let their savings trickle down by increasing wages.

It's also a bit hypocritical to say it's ok to have a tax that's meant for the elderly or poor, then complain the fund won't be around when you're old enough to use it.

I increased my contribution to my savings account with it (using direct deposit), finally getting it up to 10% of my take home pay.

Again, it is not increasing wages, it is just changing who get the money when the check is cut. Instead of going to the government it goes to the employee.

[GGT]

I increased my contribution to my savings account with it (using direct deposit)

finally getting it up to 10% of my take home pay.
Again, it is not increasing wages, it is just changing who get the money when the check is cut. Instead of going to the government it goes to the employee.

More take-home pay means "increased wages" (money) in my mind. Now, will that be taxed as income, so you really "lost" money?

[wiggin]

More take-home pay means "increased wages" (money) in my mind. Now, will that be taxed as income, so you really "lost" money?

What are you talking about? FICA taxes aren't deducted from income.

[GGT]

What are you talking about? FICA taxes aren't deducted from income.

I'm asking how the taxes would work out! Like the people who took advantage of the home buyer "tax credit initiative" being surprised the next tax year. FICA tax is a percentage of *payroll* income, but if there's a tax "holiday"....

Excuse me for asking for clarification. I'm not a CPA, I haven't done my own taxes in years, and the IRS is pretty hard to follow.

[wiggin]

Say you make $100. FICA takes out $6.20 a year normally, and you separately pay income taxes. Imagining you're in the 15% tax bracket, each additional $100 costs you $15 in taxes. The 15% is calculated from the original $100, not the $93.80 left after FICA taxes. Thus, if you drop FICA by 2% to $4.20 for a year, you still pay 15% of the $100, so your taxable income won't change.

In the short term, a payroll tax holiday gives people more money to play with - in the case of Veldan, it's used to boost savings, in other cases, people increase their consumption. In the long term, it probably has minimal effects on take-home pay.

[GGT]

Say you make $100. FICA takes out $6.20 a year normally, and you separately pay income taxes. Imagining you're in the 15% tax bracket, each additional $100 costs you $15 in taxes. The 15% is calculated from the original $100, not the $93.80 left after FICA taxes. Thus, if you drop FICA by 2% to $4.20 for a year, you still pay 15% of the $100, so your taxable income won't change.

In the short term, a payroll tax holiday gives people more money to play with - in the case of Veldan, it's used to boost savings, in other cases, people increase their consumption. In the long term, it probably has minimal effects on take-home pay.

Thanks, I suppose that makes sense. I wasn't sure about the first $100, whether the "holiday" also applied to the employer, or what would happen if someone on the cusp got bumped into the next tax bracket. The short term motives are easy to understand.....premise being a pumped up economy from consumer spending of any kind.

In the long term, if the "tax holiday" has minimal effect on take-home pay, how's the argument from proponents of opting-out or privatization come into play here? Especially at a time when some 80 million baby boomers are going to expect SS and Medicare to be solvent?

[wiggin]

The holiday only applies to the employee portion of FICA; the employer portion is untouched.

Opt-out systems are different. In that case, there isn't a universal incentive to change wage structures; rather, either the 6.2% goes to FICA as normal or it goes to the employee. Absent every employee of an industry going for opt-out, you won't get the same structural effects on wages as a change in tax rates would have.

[GGT]

The GOP (and Dread) has opined on the possibilities of opt-out or privatization. I was part of that early opt-out idea in the 80s, until our hospital network was told it was unconstitutional to opt-out. Quite the bru ha ha at the time. We all lost several quarters of SS eligibility, AND lost our private retirement plan. Too long ago to rely on memory, but I recall paying income taxes in arrears, after it was deemed our private pension was actually "taxable income". Basically, we were screwed. (The older employees were grandfathered into the pension plan by employment date, but the pension itself died a relatively fast death.)

[GGT]

One of five tough questions for Ben "Bubble" Bernanke ahead of his speech tomorrow:

3) Are near-zero interest rates are fair to savers and retired folks on fixed incomes?

Mr. Bernanke, earlier this year, you said on CNBC that the purpose of QE2 was “not to increase stock prices per se.” But at the same time, you said, “But the way monetary policy always works is through interest rates and asset prices. …By taking these securities out of the market and pushing investors into alternative assets, we have led to higher stock prices… The policy is affecting the stock market really in two ways. One is by lowering long-term yields and forcing investors into alternative assets.”

Thanks to your monetary policies, money-market mutual funds are now relying on fee waivers to avoid breaking the buck. For example, according to the Spring 2011 edition of the T. Rowe Price Report, without these waivers the firm’s money fund yields would be as much as 29 basis points in the red! Even Vanguard, a not-for-profit fund company, admits in its money-fund prospectuses, “Vanguard and the fund’s board have voluntarily agreed to temporarily limit certain net operating expenses in excess of the fund’s daily yield so as to maintain a zero or positive yield for the fund.” Read about

So tell me, Ben, if even a not-for-profit fund company can’t keep its money funds afloat without a subsidy, how can today’s savers and retirees secure their financial future? How much longer does the government plan to steal from savers in order to fatten bank profit margins?

http://www.marketwatch.com/story/5-t...6?pagenumber=1


Last time money market mutual funds "broke the buck" all hell broke loose. Everyone remember that?

[Lewkowski]

I'm in favor of higher interest rates but your reasoning is silly. Its not the Fed's job to determine what is "fair" for retired folks on fixed incomes.