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Albert D. Kallal
There is speculation that Obama, in his quest to be the next FDR, is going to seize 401k and IRA accounts and replace them with government guaranteed retirement accounts that pay a fixed rate of interest. Does this, or other contingencies, factor into your decision on whether or how much to contribute to a 401k?
Monday, May 04, 2009
This would factor into my decision whether to contribute to a 401(k). In fact, the government would have to guarantee an interest rate that offsets my tax liability for their replacement plan to be of any value. Given that Obama plans to raise some taxes and cut other taxes to the extent that I have no idea what I'll be paying in 2011, let alone when I retire, it's probably impossible to pick an acceptable interest rate and I'd consider the whole idea a non-starter.
Assuming for the stake of argument that they pick some absurdly low fixed interest rate, every other investment with any potential risk whatsoever, would have to be priced higher in order to compel investment, and the very minimum, you'd probably would be better off paying the taxes on your full income and then investing in a tax-free state municipal bond fund.
What I've been hearing is that the government is considering making employers automatically enrolling all employees in their respective funds, and requiring those employees to opt out (as opposed to the current practice of opting in). Under such a scenario, saving money for retirement would be the default and you'd have to make a conscious decision to either spend the money or invest elsewhere. The fund itself has to return a minimum return on investment in order to be listed.
While that plan has its flaws, I suspect that's where some of the more sensational media is accusing the government of wanting to take over 401(k) plans entirely (everyone contributes and gets a minimum guaranteed return).
Boy, if only that were true!
I have a hell of a lot more faith in the government than I do in wall street (not that that's saying much).
The bigger issue with 401K's I see is that the whole concept of 401Ks assumes that tax rates will stay relatively stable over time. You contribute pretax dollars to lower your tax bill today, then pay taxes on your withdrawals in the future, when you are not working and your income is lower, thus paying a lower rate.
As we know, however, the government is broke and taxes MUST go up in the future (or the dollar collapses). So does it still make sense to save via a 401K if you think taxes will be dramatically higher in, say, 20 years?
"So does it still make sense to save via a 401K if you think taxes will be dramatically higher in, say, 20 years?"
In fact, assuming that your available disposable income hits the sweet spot as far as their eligibility rules go, the recommended advice is to fund both a 401(k) and a Roth IRA. If your future tax liability is high, withdraw your retirement funds from the Roth. If your liability is low, leave the Roth alone and tap the 401(k). This is partially possible by the fact that your maximum contribution into each of these funds is capped anyway; you wouldn't be able to put all of your available income into one or the other anyway.
Now that I've said that, I should offer a warning. There are restrictions (for example, your max contribution is determined by your income) AND I am not a licensed financial adviser or accountant. There are scenarios where you'd want to make less than the maximum contribution and there are scenarios where you'd want to invest in a mutual fund, tax free income fund, bond fund, etc etc instead of a Roth IRA.
The general idea is sound though and generally, the only reason some people are in terrible shape (but not Joel readers of course), is that they spent the money and/or never really took the time to research and think about the options, warts and all.
With all the borrowing the gov't is doing (The Bailout and the Iraq War, etc.) I figure that tax rates have got to go up.
I fund my ROTH account first. I have a fair number of deductions (3 kids, non working wife, mortage interest, etc.), so my taxable income isn't all that much higher than I expect it to be in retirement.
Since the ROTH gain isn't taxable at all then you dont have to worry about what the rate is. Yes, they could change the rules but I think that'd be hard to do and cause people will read Emergency, which tells you how to live off the grid ala Jason Bourne and sneak your money out of the country.
Monday, May 04, 2009
Gosh, if only he HAD, before my 401K lost 50% of its value in the last downturn. Wall-Street now just gets to KEEP my money, with no associated benefit ever.
Bottom line, NO, the government will not seize 401K's, that's FUD from some Socialist fearmongering. It's good for the country and economy to have the Government provide a barely adequate safety net in Social Security, while allowing people to have private-sector Stock Market based retirement accounts.
>Will the government seize 401k's?
No. For the simple reason that as we put money into 401k and 403b plans, *we're* propping up wall street, so that Washington doesn't have to bail out those fat cats any more.
If anything, Congress is going to make 401k plans mandatory. Not all employers have 401k plans, and the ones that do have a default opt-in, as mentioned by TheDavid.
>in his quest to be the next FDR...
Only the fringe elements of the GOP think that Obama is FDR, or even wants to be.
>Does this, or other contingencies, factor into your decision on whether or how much to contribute to a 401k?
The idiots on wall street managed to lose 1/2 of my 401k and IRA assets last year: about $40k. If 2009 returns recover to pre-2008 returns, then my retirement is only delayed 4 years. If 2009 returns are close to 2008 returns, then I will never retire before I drop dead and there will be exactly zero reason to contribute a single penny to 401k and IRA accounts for the next 35-40+ years. I may as well spend it now, because if the clowns on wall street are going to lose my money, I may as well enjoy pissing it away myself.
I hear ya, Peter. I have 20+ years of balanced portfolio investing that now has a street value equal to the purchase value, which means I've lost quite a bit against inflation. The portfolio was the result of averaging the recommendations of 3 advisors, plus a grain of salt. My wife took different advice and is in the same boat. We're now getting calls from everybody involved, suggesting that we take a look at things.
Where were these vultures 2 years ago when anybody with eyes could see a collapse on the horizon? I'll tell you where. They were feeding the collapse instead of trying to help us find a way to avoid the collapse. At no time did they every suggest that we should be doing anything differently.
I should have followed my instincts and converted everything to bonds or something 2 years ago when I first started getting worried.
Tuesday, May 05, 2009
I don't participate in 401k. and the above complaints about 401k losing half it's value is why.
401k was always just another mechanism for investors to get at OPM (Other People's Money). If such programs were truly meant to be used to help ensure funds for retirement, you'd be able to have it taken directly out as taxes, much like social security.
"If such programs were truly meant to be used to help ensure funds for retirement, you'd be able to have it taken directly out as taxes, much like social security."
Which is exactly why they're considering changing the rules such that you're automatically enrolled in your company's 401(k) and you have to deliberately opt out.
At a higher, more abstract level, the housing bubble convinced a lot of people that housing prices and home equity will always increase; there was no need to save additional funds for retirement. In fact, I know some people who intended to retire this year, expected to be able to sell their home in Southern California for a million bucks, move to Arizona and buy a starter home for $250,000. We all know how well that turned out.
401(k)s were never intended to be the perfect solution or even a single all-encompassing solution to saving for retirement. They do have their risks. The real benefit gained from subscribing to a plan was to diversify your investments such that a downturn in any ONE sector would not wipe you out, i.e., all your eggs in one basket. We unfortunately had downturns in at least THREE sectors, simultaneously (housing, automotive and financial credit comes to mind, but there may be a fourth that I'm blanking on).
Assuming you have the money to invest, you really should be putting money away in a variety of vehicles. Which ones are appropriate, of course depends on your specific situation and future goals. If you had no money whatsoever, the first vehicle should be a good old fashioned savings account.
Sadly, a lot of people were too stupid to even do that, and they're the ones that ran screaming and crying to the government and asked the government to expand our safety net.
I should have attached some links about the proposal that was floated, so people can see what I'm talking about. It's not just reform of the 401k, but an outright elimination of the tax-breaks and a mandatory government savings program that promises 3% real return per year:
Although I agree with the sentiments about corruption on Wall St., I have even less faith in Washington. Surely the politicians in Washington are equally if not more corrupt, and certainly more inept when it comes to managing finances. The government's books would never pass an accounting audit if they were subjected to the same standards as corporations.
To answer my own question, it does factor into my planning. First, I am contributing enough to the 401k to get the company match. I also continue to max out my Roth IRA because the contributions can be withdrawn tax- and penalty-free. I did some planning and make sure I'm saving enough outside the 401k for other goals, such as a house down payment. I'm also putting some money to work in investments that I have greater control over - in options that are not available in my 401k. I'm able to cover all these bases and still contribute about 15% to the 401k, although I'm considering paring it back to just enough to get the match.
The problems with future tax rates being unknown, and the potential for the government changing the retirement age, are certainly problems with the 401k. But those uncertainties pale in comparison with the possibility of outright expropriation.
I put odds on seizure (like FDR did with gold, ordering Americans to turn in their gold for paper dollars) pretty low (less than 5%). But, considering all the crazy government interventions in the economy that have been happening recently - some of which I never would have imagined a year ago - I would not dismiss it and I would be naive not to consider its impact on my financial planning.
BTW it's not just fringe elements of the GOP that made the comparison to FDR. I read somewhere the Dems and Obama himself want to emulate FDR's first days in office.
Tuesday, May 05, 2009
"Sadly, a lot of people were too stupid to even do that, and they're the ones that ran screaming and crying to the government and asked the government to expand our safety net."
As usual, TheDavid, well said.
Tuesday, May 05, 2009
>401(k)s were never intended to be the perfect solution or even a single all-encompassing solution to saving for retirement.
401k plans were never intended to be retirement plans. Period.
401k plans were supplemental deferred savings intended for executives - to supplement their existing pension plans.
Only recently have 401k plans become a ~replacement~ for defined benefit plans, and only recently have become widespread.
A CNN article from 2001 about the 20th anniversary of 401k plans:
It gave legality to a tax dodge that companies had been doing for several years previously - but only for upper management - and it opened those plans up to all workers. Later legislation penalized plans where only the highest paid employees were participating in the plans.
In 1970, more than 40% of the workforce had a pension plan. Today, less than 10% of the workforce will be covered by one at any time during their working career. Most pensions have been terminated, and the previous administration wanted to eliminate every remaining one. Defined benefit plans are expensive for companies as the risk of inflation and insufficient returns are born by the company, not the employee. 401k plans push all the risk onto workers.
About one half of American workers have some kind of 401k plan offered where they work. About 50,000,000 people have a 401k. There are about 150,000,000 in the "civilian labor force."
Well, to be fair, would you wait until Congress calls a vote on the plan, to do your research and decide whether you were in favor of it or not? Until that vote is actually called, it's "mere speculation."
I've never heard of Teresa Ghilarducci before today and as far as I'm concerned, she has zero credibility. In fact, I'm particularly annoyed at the tone of her blog, implying that it's a sure thing the government is going to take over 401(k) plans.
That still doesn't mean that we don't have a civic duty to bitch, moan and whine about what we think is best for our country. I freely admit that on some things, I'm flat out wrong and listening to me may not be in your best interests, but the last thing you can accuse me of being is apathetic and willing to give Congress a blank check. :)
Did you read the US News article you linked to?
The economist they interviewed (Teresa Ghilarducci, who I too have never heard of) isn't proposing seizing people's 401K investments. She's proposing *ending the tax break on 401K contributions* (to stop encouraging people to put their money there) and having future mandatory contributions go into a new government-managed account with a guaranteed return -- but the only people who'd be required to pay into such an account would be those whose jobs don't come with a traditional defined-benefit pension.
In other words, money people have *already* put into 401Ks wouldn't be touched; the difference would be where *future* contributions go. And if you have a real pension plan already there'd be no difference for you at all.
Thursday, May 07, 2009
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