I'm not planning on Social Security being around by the time I'm old enough to tap into it, and I'm also not planning on having any kids to bail me out when I go senile, so yeah I'm putting a lot into my 401k. I think a lot of people my age (turning 30 next week) are feeling the same way, so I wonder if it's younger workers driving this trend.
> "I'm not planning on Social Security being around by the time I'm old enough to tap into it"
You need to change that attitude or your complacency will allow politicians to take it from you. The fact is you pay ~16% of your paycheck into social security and medicare, it is designed to be like a pension. It is not an entitlement, it's your money.
"You need to change that attitude or your complacency will allow politicians to take it from you."
I really don't like the glibness of that sentiment, even if the idea is fine. As a voter or constituent, yeah, fight for Social Security, try to maintain it.
But as an investor? Recognize that your personal view has approximately no impact on whether Social Security exists unless you run for high office or devote your life to the topic. Make your best guess and save accordingly.
People shouldn't make their individual choices around the political views they support, because most individuals have virtually no influence on national outcomes.
It is not your money, it is a tax on income like any other. The Supreme Court established in 1960 (Flemming v Nestor) that contributions to Social Security are not your property and the government has no obligation to ever pay you benefits regardless of contribution. People have had this entitlement revoked in practice, though the targeting tends to be selective for out-groups and not a substantial fraction of the population.
The government strongly encourages belief in the myth that Social Security is something other than a welfare tax with no implied obligation to the taxpayer because that notion makes the tax much more palatable than the reality.
> The fact is you pay ~16% of your paycheck into social security and medicare, it is designed to be like a pension. It is not an entitlement, it's your money.
Except the facts don't match up with this.
It is not designed to be like a pension. It is the workers of today paying for the retirees of today, on the assumption that when you retire there will be workers to pay for you. There is no guarantee, and there is no fallback. The money is spent just as soon as it's taken from you.
It is an entitlement because I'm paying for my parents and my peers' parents. If it's around when I retire, I will be spending other people's hard-earned money, not my own. I mean the Wikipedia "definition" of entitle is "a government program guaranteeing access to some benefit by members of a specific group" which is exactly what SS is.
That's not how social security works. Every dollar you pay in flies out to fund promises made in years past. "Your" social security money needs to be earned by our children.
You need to change that attitude or your complacency will allow politicians to take it from you.
That's quite dismissive of his statement, and uncalled for. It's a pragmatic statement: politics aside, don't budget your retirement funds as if you'll still get the benefits promised to you as of today. Cram money in that 401K as if you won't be getting a dime of your money back from your SS contributions.
What you want to talk about is a different, and mostly unrelated, to what parent is talking about. Doesn't make it unimportant, just not relevant.
I think you'd be on higher moral ground if Social Security was on sound footing from an actuarial basis, the US had balanced budgets for the last 30+ years and had invested heavily in the next generation (here or abroad) through education, infrastructure and social capital. Writing an IOU from the general fund to the Social Security "Trust" fund is no more legitimate than "saving" for retirement by funding an IRA with a credit card cash advance.
Money is just an implied promise with future workers. As the last person on planet earth I could have stacks of hundred dollar bills and it won't get me a sandwich.
If you look at US demographics the entire notion of retirement is at risk unless we assume some combination of massive productivity boosts, massive immigration and/or massive, sustained trade deficits or a next generation of workers that is willing to forgo children and embrace minimalism and self sacrifice that would make a monk look like a hedonist.
Otherwise the future will consist of lower standard of living for the vast majority of seniors; working longer; and some combination of lower asset prices and higher long term interest rates.
It is your money that they spend now instead of properly invest. Regardless of what should be, there is little hope that it will be worth much to us in the future.
But it isn't your money. They take your money today and then tomorrow ship it out to someone on social security. Your money is well and long spent on Depends and Ensure by the time you retire at which point some other sucker is on the hook to pay for your dotage.
And like every pyramid scheme, if the bottom becomes too small it will fail spectacularly.
> You need to change that attitude or your complacency will allow politicians to take it from you.
I mean I want the money to be there and will fight tooth and nail to ensure it, but damn if my control over it isn't limited. We still need to look out for ourselves.
Social Security is a theft of my money by government. The smugness of government to decide what to invest for MY retirement itself is an insult to me.
I can do zilch. Voting against SS would mean labeling yourself some kind of moron who is not paying his "fair share" senile libertarian.
I think the only practical way is to think of this as some kind of ransom money we are paying to mafia not get into jail at this moment. The SS when I get old would mean nothing.
I'm in the same boat; I view my social security "contributions" as a lifestyle tax from the last generation, and I'd opt out of them in a second if I could. Instead, I'm planning my retirement around Roth IRAs and 401k savings.
I think this is definitely a common sentiment amongst us youngsters.
I read lots of thoughtful articles about how SS was broke, wouldn't last, etc.
As I got a little older, I started reading more about the history of SS, how it's always needed various adjustments over time, how people have always said it's going broke, it's unsustainable, etc.
I realized that, for most of its history, the people who have said those things are actually more likely the ones who'd like it to go away entirely.
While everyone else just makes the changes necessary to keep it going.
After a while, I found I'd move into the "let's just make the changes necessary to keep it going, because it's a good program and has always had its detractors" camp. (which is where I am now.)
SS is not a money transfer from today's young to tomorrow's old--it's a transfer from today's young to today's old. Don't think of it as "savings" you're "contributing" toward.
I don't see why changing the tax rules around retirement accounts (like taxing Roth withdrawals) would be any more difficult than changing Social Security payouts. You never know what may happen in the future. The government could even make owning gold illegal.
That's amusing. I'm 45 and said the same thing when I was in my mid-20's. And now I think it's just naive. The most docile 60 year olds I know become positively vitriolic at the idea of even the age of benefit payout being changed by 5 years. If Social Security were just done away with, I guarantee you the violent revolution they'd be considering wouldn't involve clever devices that take people's heads off cleanly, quickly and painlessly like the French did. Vlad the Impaler would be seen as a massage therapist in comparison.
So if Social Security (and don't forget Medicare it's part of the same FICA taxation) were to go away, it definitely means some nasty calamity happened first, like Yellowstone or a meteor just blew up half the country, in which case we've got other problems.
The thing to be concerned about is privatizing it. That's a con game to dump a shit ton of money into the stock market, with the ensuing distortion inflating the stock prices of the very wealthy. It's about helping them. It doesn't do squat to help the people who will depend on Social Security. They will not make more money. And just like with getting rid of it, there's no way it's tenable to tolerate the inevitable short term loss of asset value with recessions. We can't have retirees experiencing 5% let alone 20% loss of income for 1 month let alone 1 year let alone 5-8 years for a recovery. Old people would sooner pick up axes and make you shoot them, because shooting your grandma in the head is kinder than this Republican privatization of Social Security nonsense. Grandma is not going to go back to dumpster diving and living under a bridge again like the 1930's.
And you've got the same financial concern with an unbalanced 401K - that could leave you in a lurch the same way a privatized Social Security plan can. So take the risks in that 401k while you're young, but at some point probably in your 50's, you'll want to start moving it to inflation indexed treasuries.
Young people right now are more likely to be savers, because of 2007/2008. They saw what it did to the unprepared, so they know that sort of thing can happen. Gen X and the Baby Boomers didn't have anything nearly that scary.
> The most docile 60 year olds I know become positively vitriolic at the idea of even the age of benefit payout being changed by 5 years.
I guess I'm afraid of a slow rollout. ie. everyone who's 40 and older gets normal social security, if you're ~35 now, you'll have to wait a few years more. It's exactly the kind of "we got ours" BS that the boomers are so known for.
Only there's now bi-partisan recognition that SS is insolvent and something must be done. The left wants to increase taxes and remove the cap, who knows how far they could get to taking that if the populist Sanders side takes over, and the right wants to reduce benefits and/or privatize. If the stagnation keeps up until retirement, I guess they'll just quit writing checks.
I truly believe that whatever people think about social security not being around when they retire, that it will be around at some level. We will almost certainly reduce benefits and/or increase retirement age. What is the alternative?
There are far too many people who really can't save for retirement due to low wages for a significant part of the population. We aren't going to let these people live in abject poverty, and they aren't going to have any money to cough up to support themselves.
It's the same for Medicare. Paul Ryan wants a premium support system where seniors receive part of the cost of their insurance premium from the government and pay the rest on their own. For many people, the will absolutely not have the money to spend on this. If they can't afford it, they will go to the emergency room and receive care (they legally can't turn you away) once their condition becomes severe enough. We can either force the hospitals to care for these people (and jack up the prices for the rest of us to compensate) or we can have a sane system where we all pay a reasonable price and split the burden over a larger population.
I'm not arguing for some European style social welfare system. I think we ought to have a system that comports with the laws and norms we have in place now (norms/laws I understand: people can go to the ER and get care regardless of their ability to pay, elderly folks do not live in poverty).
> There are far too many people who really can't save for retirement due to low wages for a significant part of the population. We aren't going to let these people live in abject poverty, and they aren't going to have any money to cough up to support themselves.
The history of the US in the past several decades suggests that yes, we absolutely are going to let these people live in abject poverty. Unfortunately.
This seems to be the sentiment of younger professional workers. My wife has this view (we are both 32). I used to have it, but I doubt that SS won't be around in some form. It may pay out less or be means tested in the future, however.
I have not heard this sentiment from younger blue collar and service workers, who are much more likely to need to rely on social security. I'm planning our retirement without needing any SS money, and whatever we get will just be some extra on top. Many non-professionals don't have this luxury.
I'm 36 and in ~17 years of being a developer professionally, I've yet to find employment at a single company that offers any kind of retirement plan at all.
I max out my IRA each year, but my retirement plan is to basically work until I can't, then hop on an iceberg.
IMHO, between Americans being drastically underprepared for retirement and mass job automation, the country is on the cusp of a devastatingly colossal social disaster.
I just turned thirty and I can echo your sentiments; I'm saving aggressively and investing across a wide array of assets and tax sheltered accounts with the idea that I may at best retire early and be capable of taking care of myself into old age.
You think the stock market will be around when you are old enough to need your 401k? I max my contributions but I have no faith they won't be wiped out in some future crash.
You buy shares in the stock market, not dollars, so a crash shouldn't hamper your ability to retire, unless you want to retire during the crash itself (although diversity of assets would help with this).
The stock market recovered years ago from the Great Depression and is doing really well again.
fair enough, but if there's a broad based and persistent market crash then there will be broad based and persistent deflation. Ergo, you won't need to have saved all that much money to retire.
then how about you invest in gold, its traditionally been a good fear hedge. or more appropriately adjust the weighting between gold & market based on your perception of risk.
Note that I am not actually recommending investing in gold just making your abstract fearful thesis into something real. IMO unless you are talking about some civilization hurting disaster (like yellowstone .. not even then perhaps) markets recover from crashes. in a way they are a measure of optimism for future. so I'd factor than into my plans.
I read this a lot. Why do you expect this to be the case?
Social Security may become unable to pay the benefits that you're expecting at some point because the input from workers will not be enough to pay those benefits. But that doesn't mean it will pay nothing. It will just pay less. You'll still get some payments.
Agree wholeheartedly with this. The "Social Security is Failing" headlines are all ginned up to support political ends, they don't have much to do with the reality of the program.
Large adjustments were already made to accommodate the baby boomer generation. That's why we have a $2.8 trillion-dollar trust fund. With current demographics, we should be able to pay 100% of promised benefits until the late 2030's. Afterwards, with a pure pay-go system, we'd only be able to pay ~80% of benefits.
There are simple fixes that could dramatically extend the reserve depletion date to sometime in the 2050s. Not doing so is purely a political question.
Bear in mind that "it goes broke" isn't the only failure mode, and it's certainly not what I consider most likely. Every few years there's another push to privatize Social Security - you don't just have to count on the mathematical solvency of the program but also its political viability.
Social Security is a money funnel from the young to the old. It will end if and when young voters ever outnumber old voters. Pretty simple.
Likely will not happen while the Boomers are still alive because as a generation they're huge and they vote, but I can't imagine that today's Millennial generation is going to keep Social Security around for us relatively few Gen-Xers when we need it.
Maybe a little out of scope, but, is it not the important issue if the society we live when we retire is richer or poorer than the society today?
I mean, if we live in a society, for instance, three times richer (per capita) than today, it would be very strange that old people will have a hard time.
In the other hand, if it's a poorer society, even people with savings are probably to have a hard retirement.
Yeah I'm doing the exact same thing. Max out 401k / IRA every year + additional savings.
I'm assuming that SS wont be around but if it is, great! Unfortunately, I have a feeling Republicans are really going to fuck people my age (mid 20's) over with some sort of slow phase-out so I'm also hedging my bet.
This is my real fear here. I am an immigrant in valley for a while now. I have always thought that the reason america has such a thriving service sector based economy is because they have a safety net to fall back to, which allows ppl to be free to take more risks & be generally more consumptive. My fear is that slowly as republicans take that safety net away it will force people to fix these problems at the individual level which will make them more conservative. overall I feel that (alongwith the fkups on science education) will have a detrimental effect on american competitiveness & larger economy.
I do think that privatizing SS & medicare will give markets a one time boost & generally help those who are 'better vested'.
I was thinking it may be boomers putting in catch-up funds. Younger folks today may still be trying to get started on a mortgage down payment, let alone saving for kids' college or maxing out the 401k.
For self employed, it is even better. You can put up to 54,000 for 2017 [0]. If you are self employed and can afford to do this, do it. It usually splits in 2 parts:
- Employee portion: $18,000 that you can put as an employee.
- Employer portion: Up to 25% of W-2 wages.
The total of the 2 above cannot exceed 54K for 2017. One more thing, you can make contributions for employer portion until the calendar year end which is March. So even for 2016, you can still make the employer portion if you were enrolled in a self employed 401K. Another thing is that the employer portion can be shown as an expense of your business as well.
If you use Fidelity or Vanguard, stick most of it in an index fund and you have the S&P 500 returns by doing nothing.
I highly recommend any self employed to read this IRS publication.
Even though I'm doing all the right things like maxing out 401k etc., I can't help but feel that I will regret it later.
It feels like everyone grew up hearing the same thing (people are poor planners, people go broke in retirement) and now as adults have vowed that will never be them.
The problem is that now everyone thinks this way - index funds are on the rise, people are saving into their 401k, I can't help but think that I should be zagging here when everyone is zigging. Unfortunately, however, I can't figure out what that other thing should be.
I've been feeling the same way. Having millions of people and billions of dollars blindly dumped into index funds leaves me uneasy. Many view index funds as a "7% return machine". The conventional wisdom is "buy and hold", blindly, regardless of what the market does, what companies fail, or who you're investing in. Most 401k users probably couldn't name more than 10 stocks that their fund is comprised of. Stock markets assume people buy stocks because they believe in some fundemental value of the stock, and have thus done analysis to believe so. When markets are composed of people who don't adhere to this philosophy... I'm not sure what happens next. Having such a large mass of investors who are not thinking rationally about their investment seems like a recipe for disaster, but I'm no economist.
REITs, small-cap funds, international stocks, and perhaps commodities seem like the best choices if you're looking to diversify. The reality is if everyone's investment behavior precipitates a large collapse, pretty much no sane investment strategy is going to do well. Diversify, hedge your bets, and just stop worrying about it. That's the conclusion I've come to, anyway.
The whole point of index funds is to insulate yourself from a single company failing. What happens when 1 of the 500 S&P 500 companies even declines is that it is substituted for with another, stronger company. Index funds are not static, they just sometimes appear that way.
Far from "everyone" - the majority of Americans are massively undersaving. If you are able to max out your 401k every year and track the market in index funds you'll be far ahead of the vast majority of people at retirement.
The first generation of people who were expected to save privately are yet to retire. 29% of 55 and older have ZERO savings, and the average of those who do is $104k, which is a $310/mo annuity (GAO, 2015). There is a generational crisis brewing.
Investing is simply buying something you think will increase in value over time. US stocks have traditionally been an excellent vehicle due to their rates of growth. You could also invest in bonds, purchased annuities, real estate, gold and silver, foreign currencies & companies, Bitcoin/Ethereum, your offspring, domain names, collectibles...
What do you think people will value in the next 10, 20, 50 years?
You can always put some of your 401k into short term stuff like a money market account if you think the market is overpriced. That way you have money on the side you can throw into the market after it corrects. I've got like 20% of my 401k in a money market account for just this reason.
Same. I've maxed my 401k since my first job. Now just breaking into 30s... decided to move some of what I would be contributing to 401k into RE investments. Huge tax advantages in this space, and with 15 yr loans you can be cash flowing pretty solidly in your 40s (the earlier you start, the better).
FWIW "Billions of dollars" should be considered in the context that 1 million people * $1,000 = $1 billion. The US is ~300m people. So, this headline is something like "1/3 of 1% of the US is putting an extra $1,000 in their 401k recently" (really more like 1-2% of the _workforce_ but the point remains)
Am I the only one that is scared of 401ks? It sounds nice: put your money into an account tax-free, let it grow tax free over 30-40 years. When you retire, you have this nice large fund to pull money from.
My biggest fear is that in 30-40 years the US government and/or 401k funds are so poorly run that they tax 50/60/70% of the income (withdrawals) out of the 401k to sustain theirselves. Lots of people tell me "that won't happen" but when I study history, I realize that the only people who think that are ones who have never lived through a major war. Wars = higher taxes. To me, putting money in a 401k is trusting that everything will be ok for a long time to come, and it's just hard to justify that the way history books show the cycles of war.
It scares me so much that I'd rather pay the taxes now, and invest as I please.
Edit: as omouse mentioned, that is my other fear. That through technology and healthcare innovations, as well as the government recognizing the need to "adjusting" the retirement age, how do I know I will get my 401k at 65? What if it is 85? That's too risky for me :/
> It scares me so much that I'd rather pay the taxes now, and invest as I please.
If government is desperate enough to tax retirement funds at 2x the previous rates, they're desperate enough to tax everything at higher rates, so "investing as you please" won't get you anywhere better.
> That's too risky for me
If technology and healthcare innovations raise the healthy life expectancy by 20 years, why would that be too risky for you? Is it because you have non-standard medical problems?
You don't quite understand 401ks. You can choose either contribute tax free (traditional) or have tax-free growth (Roth). You can't do both in the same account.
This doesn't change the fact that the rules may be changed at some point, but given the ridiculously low limits on 401k contributions anyway you might as well put some money in one. Worst case scenario is you wind up paying taxes on t anyway, but then again you might not.
No matter how you slice it you won't wind up paying more taxes than you will if you pay them now and invest without any tax sheltering.
I suppose that (barring any fundamental transformation of the structure of our society during the intervening time) the income tax rates will still be progressive, and that the lowest brackets will be quite low - perhaps similar to the current ones.
If you assume that, and you've paid off your mortgage by the time you retire, and aren't planning to blow lots of money on air travel and hotels, then probably the rate at which you withdraw from your 401k will place you in one of those low-rate, bottom brackets.
You should be scared, in Canada the government pushed the retirement age from 65 to 67 so that's 2 years more of working and 2 more years before you have access to your own cash.
That is for CPP/OAS which is the equivalent of US Social Security. You don't get access to your own cash - that goes to current retirees. You pay to current retirees for longer and start getting access to current workers' cash later.
Canada's RRSPs are actually a much better system. They are straight up tax deferral. You can put money into your RRSP at any age up to 70 so long as you have contribution room (ie: you're employed). Later, if you wind up unemployed and therefore in a lower tax bracket than when you put money in, you can take the money out.
If the Canadian government instituted some sort of tax on RRSPs, they wouldn't be able to act fast enough to prevent people from massively draining their RRSPs before new rules took effect.
In the US, you have to wait until you are 59.5, or you begin collecting periodic payments (ie: as if it were a pension), or you pay a 10% penalty.
If you are scared of the tax rate rising (which is reasonable, since tax rate in the US is at like an all time low historically speaking), consider Roth type stuff that is taxed now, not later. Or do both, as a hedge.
It's interesting when the 401k was introduced it was meant to be one leg in a "three-legged stool" for retirement planning.
Those three legs consisting of pension, social security and savings when it was introduced.
For people in the private sector that is now a two-legged stool as pensions went the way of the evening news paper and indemnity health care plans.
Its interesting to note that law makers in Washington DC all have pensions and indemnity health care plans. Only the best for them. I've often wondered at how different things would be if they were subject to the same health care and retirement options as the rest of the population.
I wonder what percentage of 401k contributors has an IRA. General rule of thumb is to contribute enough to 401k to get maximum company matching and max out your Roth IRA contribution first. IRA is generally preferred because you can choose your own fund (e.g. Vanguard) and has more flexibility in certain situations. By having both pre-tax (401k) and post-tax (Roth IRA), you would be also diversifying your tax liability in your retirement.
One problem with the Roth IRA is the income phase out limits. If you're single, if you AGI is >117K, you can only contribute some percentage of the $5000 allowed for the Roth. If you're >132K, you can't contribute anything. For a married couple, those limits are 184K/194K. Granted, you can reduce your AGI by contributing to a 401K first, which allows you to take $18K off the top.
I know this doesn't affect many, but for the high-paid tech crowd, these limits right around the point in your career where you want to be pumping in money.
Those are still pretty high limits, well above the median tech salary even in the Bay Area. If you're in "income phase out" territory you're probably not worried about your retirement.
The thing I don't like about Roth is that you're contributing with post-tax money during your prime working years--the time when your taxes are probably as high as they will ever be. Especially true as a tech worker where your salary plateaus in your 20s. I'd rather save pre-tax now, and then pay taxes later when I'm 60 and back in the lowest tax bracket.
You can get around this by contributing to a traditional IRA and then converting it to a Roth. This is easy to do (until law changes) unless you have an existing traditional IRA where you can take a tax hit.
It's true that many tech workers are eventually affected by the contribution limit, but my understanding is that it's essentially always smart to contribute to tax-advantaged accounts while possible.
It's not quite that simple, it really depends on what you suspect your tax rates are going to be. Roth contributions are essentially taxed at your marginal rate right now, but traditional 401k withdrawals are taxed like income when you make the withdrawal.
There are lots of situations where you would want to lower your tax burden now instead of go for the Roth.
Note that you can also have a Roth 401k or a traditional IRA.
Worth noting that the limits are different between Roth IRAs and Traditional IRAs, though, if you have a retirement plan at work. A married couple making between 119k and 186k wouldn't get any deduction for the trad IRA, so might as well go with the Roth even if they think their income will be much lower in the future.
The Roth also lets you pull out contributions later without penalty, which is a nice worry-free safety net in case the emergency fund runs out.
> By having both pre-tax (401k) and post-tax (Roth IRA), you would be also diversifying your tax liability in your retirement.
The way your comment is written, it implies that 401(k)s are necessarily pre-tax and IRAs are necessarily post-tax. Both 401(k)s and IRAs come in Traditional and Roth forms, so you could also use pre-tax money for contributing to your IRA, and post-tax money for contributing to your 401(k), or any combination thereof.
You can also split contributions - ie, contribute to all four accounts in the same year - as long as your total contributions are within the limits.
Yes, that is correct. I generally prefer to have my 401k all pre-tax (traditional) and my IRA post-tax (roth) to make it easier to manage. Also, this would open doors for backdoor roth IRA contribution once you go over the government's income limit for contributing to IRA, but this is a whole different topic.
Everyone here is commenting on the Roth income limits. Look up what a backdoor Roth contribution is. Basically avoid having a tIRA by keeping all your pre-tax money in a 401k and then you can contribute to a Roth IRA every year. The only problem with this is if your 401k has horrible funds. I'm luckily in that my company recently added Vanguard funds to our 401k funds and I switched nearly all of my money to those.
That's a very interesting point about diversifying your tax liability. Is it a fairly common tactic to contribute evenly across pre-tax and post-tax buckets? I've mostly stuck to contributing to one bucket but spreading out contributions across buckets makes a lot of sense. If you have any sources about the pros/cons of diversifying tax liability in this way, I'd be very interested.
There's no one-size-fits-all type of advice because everyone's situation is very different. There are some great resources available online to get started though. This one [1] is for physicians but could also apply to everyone. The bogleheads [2] and their wiki page are also great resources for these topics.
More money enters when the market is hot. I expect the contribution percentage closely mirrors the price of the S&P. The graph doesn't show the 2007-8 crash but I'd also expect contributions dropped at that time, also providing a depressed baseline for the current gain. Of course, people would have been better served by contributing after the drop, and one could also be nervous about record dollars chasing the market now at its highest point.
along these lines, note how many news stories etc are currently touting the power of stock indices and index investing. given a shiller pe of ~28, i'd say most are in for a very rude awakening (again and forever).
Solely discussing stock valuations without also considering bond yields is a little misleading. With interest rates so low on a historical basis (albeit now possibly picking up), higher stock pricing is expected and isn't necessarily "overpriced"
Agreed, but bullish sentiment remains strong and most people are oblivious to valuation metrics.
As long as people don't panic sell in the next crash, they should be able to ride it out and break even in a decade or two. Unless we end up like Japan, that is.
Readit News
You need to change that attitude or your complacency will allow politicians to take it from you. The fact is you pay ~16% of your paycheck into social security and medicare, it is designed to be like a pension. It is not an entitlement, it's your money.
I really don't like the glibness of that sentiment, even if the idea is fine. As a voter or constituent, yeah, fight for Social Security, try to maintain it.
But as an investor? Recognize that your personal view has approximately no impact on whether Social Security exists unless you run for high office or devote your life to the topic. Make your best guess and save accordingly.
People shouldn't make their individual choices around the political views they support, because most individuals have virtually no influence on national outcomes.
The government strongly encourages belief in the myth that Social Security is something other than a welfare tax with no implied obligation to the taxpayer because that notion makes the tax much more palatable than the reality.
Except the facts don't match up with this.
It is not designed to be like a pension. It is the workers of today paying for the retirees of today, on the assumption that when you retire there will be workers to pay for you. There is no guarantee, and there is no fallback. The money is spent just as soon as it's taken from you.
It is an entitlement because I'm paying for my parents and my peers' parents. If it's around when I retire, I will be spending other people's hard-earned money, not my own. I mean the Wikipedia "definition" of entitle is "a government program guaranteeing access to some benefit by members of a specific group" which is exactly what SS is.
That's not how social security works. Every dollar you pay in flies out to fund promises made in years past. "Your" social security money needs to be earned by our children.
That's quite dismissive of his statement, and uncalled for. It's a pragmatic statement: politics aside, don't budget your retirement funds as if you'll still get the benefits promised to you as of today. Cram money in that 401K as if you won't be getting a dime of your money back from your SS contributions.
What you want to talk about is a different, and mostly unrelated, to what parent is talking about. Doesn't make it unimportant, just not relevant.
I think you'd be on higher moral ground if Social Security was on sound footing from an actuarial basis, the US had balanced budgets for the last 30+ years and had invested heavily in the next generation (here or abroad) through education, infrastructure and social capital. Writing an IOU from the general fund to the Social Security "Trust" fund is no more legitimate than "saving" for retirement by funding an IRA with a credit card cash advance.
Money is just an implied promise with future workers. As the last person on planet earth I could have stacks of hundred dollar bills and it won't get me a sandwich.
If you look at US demographics the entire notion of retirement is at risk unless we assume some combination of massive productivity boosts, massive immigration and/or massive, sustained trade deficits or a next generation of workers that is willing to forgo children and embrace minimalism and self sacrifice that would make a monk look like a hedonist.
Otherwise the future will consist of lower standard of living for the vast majority of seniors; working longer; and some combination of lower asset prices and higher long term interest rates.
And like every pyramid scheme, if the bottom becomes too small it will fail spectacularly.
I mean I want the money to be there and will fight tooth and nail to ensure it, but damn if my control over it isn't limited. We still need to look out for ourselves.
Deleted Comment
Not quite. This is actually split between the employee and the employer. With each contributing 6.2%.
https://www.ssa.gov/pubs/EN-05-10022.pdf
Also why are you admonishing the OP? He has every right to pessimistic about this current state of social security.
Deleted Comment
Deleted Comment
The politicians are itching to hand the pot of money over to Wall Street who will extract fees from it.
I can do zilch. Voting against SS would mean labeling yourself some kind of moron who is not paying his "fair share" senile libertarian.
I think the only practical way is to think of this as some kind of ransom money we are paying to mafia not get into jail at this moment. The SS when I get old would mean nothing.
I think this is definitely a common sentiment amongst us youngsters.
I read lots of thoughtful articles about how SS was broke, wouldn't last, etc.
As I got a little older, I started reading more about the history of SS, how it's always needed various adjustments over time, how people have always said it's going broke, it's unsustainable, etc.
I realized that, for most of its history, the people who have said those things are actually more likely the ones who'd like it to go away entirely.
While everyone else just makes the changes necessary to keep it going.
After a while, I found I'd move into the "let's just make the changes necessary to keep it going, because it's a good program and has always had its detractors" camp. (which is where I am now.)
So if Social Security (and don't forget Medicare it's part of the same FICA taxation) were to go away, it definitely means some nasty calamity happened first, like Yellowstone or a meteor just blew up half the country, in which case we've got other problems.
The thing to be concerned about is privatizing it. That's a con game to dump a shit ton of money into the stock market, with the ensuing distortion inflating the stock prices of the very wealthy. It's about helping them. It doesn't do squat to help the people who will depend on Social Security. They will not make more money. And just like with getting rid of it, there's no way it's tenable to tolerate the inevitable short term loss of asset value with recessions. We can't have retirees experiencing 5% let alone 20% loss of income for 1 month let alone 1 year let alone 5-8 years for a recovery. Old people would sooner pick up axes and make you shoot them, because shooting your grandma in the head is kinder than this Republican privatization of Social Security nonsense. Grandma is not going to go back to dumpster diving and living under a bridge again like the 1930's.
And you've got the same financial concern with an unbalanced 401K - that could leave you in a lurch the same way a privatized Social Security plan can. So take the risks in that 401k while you're young, but at some point probably in your 50's, you'll want to start moving it to inflation indexed treasuries.
Young people right now are more likely to be savers, because of 2007/2008. They saw what it did to the unprepared, so they know that sort of thing can happen. Gen X and the Baby Boomers didn't have anything nearly that scary.
I guess I'm afraid of a slow rollout. ie. everyone who's 40 and older gets normal social security, if you're ~35 now, you'll have to wait a few years more. It's exactly the kind of "we got ours" BS that the boomers are so known for.
There are far too many people who really can't save for retirement due to low wages for a significant part of the population. We aren't going to let these people live in abject poverty, and they aren't going to have any money to cough up to support themselves.
It's the same for Medicare. Paul Ryan wants a premium support system where seniors receive part of the cost of their insurance premium from the government and pay the rest on their own. For many people, the will absolutely not have the money to spend on this. If they can't afford it, they will go to the emergency room and receive care (they legally can't turn you away) once their condition becomes severe enough. We can either force the hospitals to care for these people (and jack up the prices for the rest of us to compensate) or we can have a sane system where we all pay a reasonable price and split the burden over a larger population.
I'm not arguing for some European style social welfare system. I think we ought to have a system that comports with the laws and norms we have in place now (norms/laws I understand: people can go to the ER and get care regardless of their ability to pay, elderly folks do not live in poverty).
The history of the US in the past several decades suggests that yes, we absolutely are going to let these people live in abject poverty. Unfortunately.
I have not heard this sentiment from younger blue collar and service workers, who are much more likely to need to rely on social security. I'm planning our retirement without needing any SS money, and whatever we get will just be some extra on top. Many non-professionals don't have this luxury.
I max out my IRA each year, but my retirement plan is to basically work until I can't, then hop on an iceberg.
IMHO, between Americans being drastically underprepared for retirement and mass job automation, the country is on the cusp of a devastatingly colossal social disaster.
I think it _could_ still be around, but I expect it to be replaced with something else or scrapped entirely.
IMO, it's life or death to save properly for retirement.
The stock market recovered years ago from the Great Depression and is doing really well again.
Note that I am not actually recommending investing in gold just making your abstract fearful thesis into something real. IMO unless you are talking about some civilization hurting disaster (like yellowstone .. not even then perhaps) markets recover from crashes. in a way they are a measure of optimism for future. so I'd factor than into my plans.
Social Security may become unable to pay the benefits that you're expecting at some point because the input from workers will not be enough to pay those benefits. But that doesn't mean it will pay nothing. It will just pay less. You'll still get some payments.
Large adjustments were already made to accommodate the baby boomer generation. That's why we have a $2.8 trillion-dollar trust fund. With current demographics, we should be able to pay 100% of promised benefits until the late 2030's. Afterwards, with a pure pay-go system, we'd only be able to pay ~80% of benefits.
There are simple fixes that could dramatically extend the reserve depletion date to sometime in the 2050s. Not doing so is purely a political question.
Trust fund stats: https://www.ssa.gov/oact/STATS/table4a3.html
Likely will not happen while the Boomers are still alive because as a generation they're huge and they vote, but I can't imagine that today's Millennial generation is going to keep Social Security around for us relatively few Gen-Xers when we need it.
I mean, if we live in a society, for instance, three times richer (per capita) than today, it would be very strange that old people will have a hard time.
In the other hand, if it's a poorer society, even people with savings are probably to have a hard retirement.
Inequality, it seems, is rising over time.
I'm assuming that SS wont be around but if it is, great! Unfortunately, I have a feeling Republicans are really going to fuck people my age (mid 20's) over with some sort of slow phase-out so I'm also hedging my bet.
I do think that privatizing SS & medicare will give markets a one time boost & generally help those who are 'better vested'.
Deleted Comment
But you assume your 401k will retain its favorable tax treatment?
Why? Because it was promised, implictly, when you paid into it?
- Employee portion: $18,000 that you can put as an employee.
- Employer portion: Up to 25% of W-2 wages.
The total of the 2 above cannot exceed 54K for 2017. One more thing, you can make contributions for employer portion until the calendar year end which is March. So even for 2016, you can still make the employer portion if you were enrolled in a self employed 401K. Another thing is that the employer portion can be shown as an expense of your business as well.
If you use Fidelity or Vanguard, stick most of it in an index fund and you have the S&P 500 returns by doing nothing.
I highly recommend any self employed to read this IRS publication.
[0] https://www.irs.gov/retirement-plans/one-participant-401k-pl...
It feels like everyone grew up hearing the same thing (people are poor planners, people go broke in retirement) and now as adults have vowed that will never be them.
The problem is that now everyone thinks this way - index funds are on the rise, people are saving into their 401k, I can't help but think that I should be zagging here when everyone is zigging. Unfortunately, however, I can't figure out what that other thing should be.
REITs, small-cap funds, international stocks, and perhaps commodities seem like the best choices if you're looking to diversify. The reality is if everyone's investment behavior precipitates a large collapse, pretty much no sane investment strategy is going to do well. Diversify, hedge your bets, and just stop worrying about it. That's the conclusion I've come to, anyway.
The first generation of people who were expected to save privately are yet to retire. 29% of 55 and older have ZERO savings, and the average of those who do is $104k, which is a $310/mo annuity (GAO, 2015). There is a generational crisis brewing.
What do you think people will value in the next 10, 20, 50 years?
My biggest fear is that in 30-40 years the US government and/or 401k funds are so poorly run that they tax 50/60/70% of the income (withdrawals) out of the 401k to sustain theirselves. Lots of people tell me "that won't happen" but when I study history, I realize that the only people who think that are ones who have never lived through a major war. Wars = higher taxes. To me, putting money in a 401k is trusting that everything will be ok for a long time to come, and it's just hard to justify that the way history books show the cycles of war.
It scares me so much that I'd rather pay the taxes now, and invest as I please.
Edit: as omouse mentioned, that is my other fear. That through technology and healthcare innovations, as well as the government recognizing the need to "adjusting" the retirement age, how do I know I will get my 401k at 65? What if it is 85? That's too risky for me :/
If government is desperate enough to tax retirement funds at 2x the previous rates, they're desperate enough to tax everything at higher rates, so "investing as you please" won't get you anywhere better.
> That's too risky for me
If technology and healthcare innovations raise the healthy life expectancy by 20 years, why would that be too risky for you? Is it because you have non-standard medical problems?
This doesn't change the fact that the rules may be changed at some point, but given the ridiculously low limits on 401k contributions anyway you might as well put some money in one. Worst case scenario is you wind up paying taxes on t anyway, but then again you might not.
No matter how you slice it you won't wind up paying more taxes than you will if you pay them now and invest without any tax sheltering.
I'm not interested in Roth for arguments sake.
If you assume that, and you've paid off your mortgage by the time you retire, and aren't planning to blow lots of money on air travel and hotels, then probably the rate at which you withdraw from your 401k will place you in one of those low-rate, bottom brackets.
Canada's RRSPs are actually a much better system. They are straight up tax deferral. You can put money into your RRSP at any age up to 70 so long as you have contribution room (ie: you're employed). Later, if you wind up unemployed and therefore in a lower tax bracket than when you put money in, you can take the money out.
If the Canadian government instituted some sort of tax on RRSPs, they wouldn't be able to act fast enough to prevent people from massively draining their RRSPs before new rules took effect.
In the US, you have to wait until you are 59.5, or you begin collecting periodic payments (ie: as if it were a pension), or you pay a 10% penalty.
I also have this bad feeling Roth's will face some type of tax / fee in the future :/
Those three legs consisting of pension, social security and savings when it was introduced.
For people in the private sector that is now a two-legged stool as pensions went the way of the evening news paper and indemnity health care plans.
Its interesting to note that law makers in Washington DC all have pensions and indemnity health care plans. Only the best for them. I've often wondered at how different things would be if they were subject to the same health care and retirement options as the rest of the population.
http://www.investopedia.com/ask/answers/09/three-legged-stoo...
http://financialanswers.com/page.php?b=24549975-0&c=1027
I know this doesn't affect many, but for the high-paid tech crowd, these limits right around the point in your career where you want to be pumping in money.
The thing I don't like about Roth is that you're contributing with post-tax money during your prime working years--the time when your taxes are probably as high as they will ever be. Especially true as a tech worker where your salary plateaus in your 20s. I'd rather save pre-tax now, and then pay taxes later when I'm 60 and back in the lowest tax bracket.
There are lots of situations where you would want to lower your tax burden now instead of go for the Roth.
Note that you can also have a Roth 401k or a traditional IRA.
The Roth also lets you pull out contributions later without penalty, which is a nice worry-free safety net in case the emergency fund runs out.
The way your comment is written, it implies that 401(k)s are necessarily pre-tax and IRAs are necessarily post-tax. Both 401(k)s and IRAs come in Traditional and Roth forms, so you could also use pre-tax money for contributing to your IRA, and post-tax money for contributing to your 401(k), or any combination thereof.
You can also split contributions - ie, contribute to all four accounts in the same year - as long as your total contributions are within the limits.
[1] http://whitecoatinvestor.com/the-proper-ratio-for-retirement... [2] https://www.bogleheads.org/
https://en.wikipedia.org/wiki/Roth_IRA#Income_limits
What about Traditional IRAs and Roth 401ks?
Tax deferral strategy (Roth v Traditional) is orthogonal to the plan type (IRA v 401k).
http://www.multpl.com/shiller-pe/
A good recent discussion of this: http://brooklyninvestor.blogspot.com/2016/11/bonds-down-stoc...
As long as people don't panic sell in the next crash, they should be able to ride it out and break even in a decade or two. Unless we end up like Japan, that is.