What the Government Retirement Stimulus Means for You
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This past week, the Obama administration outlined new federal rules to stimulate savings for retirement, particularly among lower income workers. President Obama pointed to the fact that in the last year Americans have lost over $2 trillion from their retirement accounts and not enough of us are contributing to our retirement plans in the first place. After looking at the average U.S. savings rate and low percentage of Americans with retirement accounts, it is easy to see why action was needed. We’ll take a look at the numbers and discuss what the changes could mean for you.
The Average American’s Saving Rate
According to the Bureau of Economic Analysis, the average American was only saving 1% of their disposable personal income as recently as the first quarter of last year. That number has jumped to 5% in the 2nd quarter of 2009, the highest percentage in the last decade.
At the same time, according to the US Census Bureau, the average retirement age in America is 62 and average life expectancy is 77, meaning that 20% of the average American’s lifespan would need to be financially covered between personal savings and Social Security. Yikes!
Long-Term Sustainability for the Country
For long-term sustainable economic growth, that’s simply not good enough. The White House realizes that if Americans are saving only between 1 and 5% of their income per year for retirement, then just about everyone is going to need to live almost entirely off of social security. Not only is that unsustainable, it is downright frightening to think of what that might mean for the nation’s financial health.
In his weekly address, President Obama explains, “We cannot continue on this course. And we certainly cannot go back to an economy based on inflated profits and maxed-out credit cards; the cycles of speculative booms and painful busts; a system that put the interests of the short-term ahead of the needs of long-term. We have to revive this economy and rebuild it stronger than before. And making sure that folks have the opportunity and incentive to save – for a home or college, for retirement or a rainy day – is essential to that effort.”
Federal Changes to Retirement Plans
According to White House analysts, half of America’s workforce doesn’t have access to a retirement plan at work. Additionally, fewer than 10 percent of those without workplace retirement plans have one of their own. The federal changes will take effect to address these issues. Some of the biggest changes that could impact you are:
1. Auto enrollment in retirement plans: It will now be easier for smaller and medium-sized employers to automatically enroll workers into retirement plans due to an elimination of paper-work hurdles for employers to offer that option. Employees could still choose to opt out of the retirement plans if they choose to.
2. Saving tax refunds: To make it easier for those owed tax refunds to save, the IRS will allow tax filers in 2010 to recoup their refund by issuing US savings bonds. Last year, over 100 million US households received check refunds. And we all know what happens to most of those.
3. Sick and vacation days can become 401k contributions: It will now be easier for employers to convert (or allow workers to convert) unused vacation and sick leave pay into 401k contributions. Historically, this money is almost always converted into cash.
4. Automatic Percentage Increases: Many 401k administrators already have this, but now employers can boost contribution amounts automatically unless employees opt to have them not to.
Even if you’re not impacted by the government’s plan, there are still a lot of things you can do yourself to make sure you are in good shape for retirement. Start by asking yourself two questions:
What percent of your income are you presently savings towards retirement?
What percent do you need to save in order to retire when you want to?
Then follow this four step action plan to ensure you’re doing everything you can.
1. Boost your Savings. If you’re presently saving 10% of your income, boost it to 12%. If 20%, boost it to 25%.
2. Start a Roth or Traditional IRA. You can contribute up to $5,000 in 2009 ($6,000 if you’re 50 and above).
3. Take advantage of 100% of your company’s 401k match. You can’t beat free money.
4. Run the numbers. The Social Security Administration, Bloomberg, and AARP all have free retirement calculators to help you determine how much you need to be saving.
For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.
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7 Comments so far
leave a commentAs a voice for the younger generation (20s) – LET US OPT OUT OF S.S.! I want no part in a program that will eventually collapse and is unsustainable. Let me opt out and instead of paying in to the program let me save it myself. Sure it will make it tougher to pay off the current recepients, but I’d rather do that and knock off the liability I am to the gov. in the future.
Plus, I can invest it a lot better than the current ponzi scheme we currently call “social security.”
SS would not be in as much trouble as it is now if congress didn’t abuse the SS Trust and the program itself over the years.
“Throughout the 1950s and 1960s, during the phase-in period of Social Security, Congress was able to grant generous benefit increases because the system had perpetual short-run surpluses. Congressional amendments to Social Security took place in even numbered years (election years) because the bills were politically popular, but by the late 1970s, this era was over. For the next three decades, projections of Social Security’s finances would show large, long-term deficits, and in the early 1980s, the program flirted with immediate insolvency. From this point on, amendments to Social Security would take place in odd numbered years (years that were not election years) because Social Security reform now meant tax increases and benefit reductions. Social Security became known as the “Third Rail of American Politics.” Touching it meant political death.”
“As a result of these changes, particularly the tax increases, the Social Security system began to generate a large short-term surplus of funds, intended to cover the added retirement costs of the “baby boomers.” Congress invested these surpluses into special series, non-marketable U.S. Treasury securities held by the Social Security Trust Fund. Under the law, the government bonds held by Social Security are backed by the full faith and credit of the U.S. government. Because the government had adopted the unified budget during the Johnson administration, this surplus offsets the total fiscal debt, making it look much smaller[citation needed]. There has been significant disagreement over whether the Social Security Trust Fund has been saved, or has been used to finance other government programs and other tax cuts.”
Source: http://en.wikipedia.org/wiki/Social_Security_(United_States)
Do Obama’s proposals go into effect immediately, or in 2011, or are they just ideas at this point? These proposals will not create a mandate for my employer, but I’d like to know when I should start cajoling my employer and/or 401(k) plan administrator to implement these changes.
@David
HAHAHA! Opt out of Social Security? I needed a good laugh. You can’t have a Ponzi scheme without new investors. By allowing people to opt out and making them responsible for their own retirement (I would sign up in heartbeat) there will be no fresh suckers to pay the retirees who have paid in their entire working life.
Something has to give..
@David… You think you can beat the market because of the inefficiencies, the moment they allow all to invest their SS individually, those who have time and means (more money than you) will gyp you… Computerised trading w/ time advantage and stuff will eat you dry… Plus, 5.2% for SS and 1.45% for medicare after retirement sounds good even when as a young single male I make over a 100k. Over a 35 year career I may contribute roughly $350,000, but healthcare in the last 15-20 years is worth a lot more, plus the SS benefits… This works even better for a vast majority (median household incomes of $50k), at least their health care in retirement is taken care of… And this is a kind of insurance, if you get in an accident tomorrow or a debilitating disease, god forbid either, you will be taken care of…
You may think you’re very rational, but none is…
The reason the administration wants us to save for retirement is NOT for our retirement. The real reason the administration wants us to save is so the Government can have another source of revenue. Washington is scheming now trying to come up with a plan to tax our retirement accounts.
WISHING YOU A PROPEROUS 2010….
BUY Australian blue chips stocks and hold them for your retirement income!
Australia’s positive GDP growth has been in an UNBROKEN uptrend for the last 17 years. This unblemished economic growth which now is accelerating due to expanding resource exports to China and India, this will return profits far in excess of the average US growth.
Take for example WESTFIELD, if you invested just $1,000 into it 40 years ago and then reinvested the dividends, it would now be worth over $100 million dollars!!!
AUSTRALIAN’S (4) BANK STOCKS are exceptional growth and dividend machines with their monopolistic position in both Australia & NZ, they have continually returned growth rates of 20% p.a. with additional 6% p.a. fully franked dividends (NO TAX).
Presently any of the BANKS in Australia are fantastic investments.
ANZ
CBA
NAB (Also owns 100% Michigan National Bank)
WESTPAC
Only 8 banks in the WORLD now have AA+ ratings, so the Australian Banks count for 50%.
“Fortune favors the brave”