Welcome to the 21st Century. Retirement is not what it used to be. That’s because the economy, and the world of work, are no longer what they used to be. As the number of employment opportunities decreases in all but a few lines of work, employers no longer feel obliged to offer competitive benefits, let alone competitive salaries. As a result, even well-paid long-term employees can no longer assume that their employer-provided nest eggs will hold them in good stead when they decide to retire. Time was when even automobile factory workers or municipal workers could simply lateral-out from a fully paid position to a retirement income, and feel confident they’d live out their remaining years comfortably.
Now all workers must remain fully aware of their employer’s plan, learn to supplement it with their own savings and investments, and learn to tweak their income for pre- and post-tax benefits. Employees need to remain knowledgeable and engaged. When necessary, they need to consult financial planners and to be conscious of special programs, legislation and, for that matter, retirement minefields. With this in mind, we call your attention to three current trends that could eventually affect your own retirement income:
The Administration’s Stated Intention to Help the Middle Class Could Easily Backfire
The old maxim “we’re from the government and we’re here to help” acquired more sinister overtones in President Obama’s January 28, 2014 State of the Union Address. The President wants to limit payments for each person saving for retirement to $205,000 from all annuities combined: 401(K)s, IRAs and pension benefit payouts.
Effectively, this comes down to limiting tax-advantaged accounts to $3.4 million, because that’s how much you’d have to pay out to receive $205,000 for life. The problem is such legislation could hamstring contributions early in employees’ careers, because once the calculations are made over enough time, the final balance could come down to $500,000 for a lifetime instead of the intended $3.4 million.
As Jack VanDerHel of the Employee Benefit Research Institute states:
“In the real world you have to figure out not only the sum of all your IRAs and defined contribution balances are every year in time presumably for tax filings, but also go back and figure out your accruals on defined benefit plans of current and previous employers …”
So much for taking from the wealthy to benefit the Middle Class. This proposal would do yet one more thing to hobble us.
The Administration’s Proposal to Implement Mandatory IRAs for Small Business
Businesses at least two years old with more than 10 employees would be required to automatically enroll employees into an IRA if these businesses don’t already have a company-sponsored retirement plan. Actually, if you believe in enforced savings, this is one of the administration’s less punitive proposals; particularly since such a bill would also offer incentives to employers for putting in place a company-sponsored plan.
An Administration Proposal to Eliminate Required Minimum Distributions on Savings Less Than $100,000
Ordinarily, if a retirement saver fails to take a minimum distribution, he pays a penalty of 50% of the would-be distribution. By doing away with such a penalty for accounts under $100,000, this proposal gives smaller accounts a fighting chance to increase over time.
As long as the economy remains weak, the government will look for creative ways to raise tax revenue. You’re going to have to stay tuned from year to year to see what’s in store for you. If enacted, these proposals could alter the ultimate payout figure of your retirement account.