Retirement Savings Rates
A recent study brief from the Retirement Research Center at Boston College1 sheds light on the rate of savings people will need to set aside to achieve a goal of successfully retiring with about 80 percent of their pre-retirement incomes.
The study “takes an 80-percent replacement rate as the goal, assumes Social Security benefits remain as promised under current law, then calculates the required saving rates for individuals at different earnings levels, at different starting and ending ages, and at different rates of return.” Here’s an example for a 25-year old average earner retiring at the full retirement age (67):
| EXAMPLE: Person who is 25 in 2010, earning Social Security’s medium earnings of $43,000 | |
|---|---|
|
Full retirement age (2052)
|
67
|
|
Income replacement goal at retirement
|
80%
|
|
LESS: Projected percentage of earnings replaced by Social Security
|
41%
|
|
EQUALS: Projected percentage of earnings needed to be replaced by savings
|
39%
|
|
Savings needed at retirement to fund the 39% replacement rate
|
$660,000
|
|
Required savings rate to achieve goal if savings contributions start at age 25 and earn 4% on average
|
12%
|
|
Required savings rate to achieve goal if savings contributions start at age 35 and earn 4% on average
|
18%
|
|
Required savings rate to achieve goal if savings contributions start at age 35 and earn 4% on average
|
31%
|
The central message of the study is similar to the message presented in numerous other studies and expert views:
(S)tarting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return. This strategy of saving for a longer period of time is especially effective given the greater risk that comes from attempting to earn that higher return. And the further along an individual is in his career, the more effective working a few years longer becomes.
The study provides added value because it also presents specific target savings rate goals for 401k participants to measure themselves against. Following, for example is the full range of savings rates for medium earnings under varying rates of return and retirement age assumptions:
Even the most liberal assumptions used in the study for a medium earner (i.e. age start contributing at 25, retire at 70 and earn 7%) require a 3% retirement savings rate to achieve the 80% replacement ration. Sadly, many people are not even setting aside this much for retirement.
The complete study is available for free download by clicking here. It is well worth reading and using to measure the adequacy of your personal savings rate.
Notes:
- How Much to Save for a Secure Retirement, Center for Retirement Research at Boston College (CRR [↩]
How Much Will Social Security Replace?
A basic question all retirement savers need to ponder is: how much income will Social Security replace?
Conventional wisdom holds that retirees will need about 80% of their pre-retirement income in order to maintain their lifestyles. 1
For most, Social Security can be expected to provide a large chunk of that 80% — but just how much?
Some answers come from the The 2010 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Federal Disability Insurance Trust Funds. This is the annual report card for the Social Security system covering nearly 250 pages and packed with detailed charts, tables and financial statistics. One table in particular provides useful insights into the amount of pre-retirement you can expect Social Security to replace in the years ahead.
| Pre-Retirement Earnings Level |
Retirement at Normal Retirement Age
|
Retirement at Age 65
|
|---|---|---|
| Lower Earner (Career-average earnings about 45 percent of the national average wage index (AWI), or about $19,388 in 2010.) |
54% – 56%
|
49% – 52%
|
| Medium Earner (Career-average earnings at about 100 percent of the AWI, or about $43,084 in 2010.) |
40% – 42%
|
36% – 38%
|
| Higher Earner (Career-average earnings at about 160 percent of the AWI, or about $68,934 in 2010.) |
33% – 34%
|
30% – 32%
|
As you can see, Social Security can be expected to replace one-half or more of pre-retirement income for workers having relatively low earnings over the course of their careers. As career earnings increase, Social Security replaces a smaller portion of retirement income meaning that these workers need to rely more on 401k’s, other retirement savings and, increasingly more likely, continued employment in order to achieve the 80% replacement goal.
Notes:
- There is much debate over whether 80% overstates or understates income needs in retirement. One study by Georgia State University researchers shows needed replacement rates ranging from 78% for two-earner, higher income couples to 94% for two-earner, lower income couples. For this discussion, we can assume 80% is an overall accurate income replacement target. [↩]
IRS Announces 2012 401k Limits
The IRS has issued the cost-of-living adjustments for 2012 that affect employee benefit plans.
There are several “limits” that apply to 401k plans under the Internal Revenue Code (IRC). The limits are found in various sections of the IRC. 401k plans must comply with the various IRC limits to maintain tax-qualified status. The Internal Revenue Service (IRS) annually increases 401k plan limits to reflect changes in the Consumer Price Index (CPI). Often, adjustments are made only if the change in the limit attributable to the CPI exceeds a certain threshold (e.g., $1,000 or $5,000).
The applicable cost-of-living index was increased for the 2012 tax year, by statute some of the limits were adjusted and others remain unchanged. The table below presents key limits for 2012 and compares them with the 2011 and 2010 limits. Brief descriptions of the various limits are also provided.
2012 401k Limits
| Maximum Deferral and Threshold Limits for 2010, 2011 & 2012 | |||
|---|---|---|---|
| Limit | 2012 | 2011 | 2010 |
| Elective Deferral Maximum for 401(k) Plans and 403(b) Plans – IRC § 402(g)(1) | $17,000 | $16,500 | $16,500 |
| Elective Deferral Maximum for 457 Plans – IRC § 457(e)(15) – (below note a) | 17,000 | 16,500 | 16,500 |
| Catch-Up Limit (Age 50 and Older) for 401(k), 403(b), and 457 Plans – IRC § 414(v)(2)(B)(i) | 5,500 | 5,500 | 5,500 |
| Maximum Contribution to a Qualified Defined Contribution Plan – IRC § 415(c)(1)(A) – (below note c) | 50,000 | 49,000 | 49,000 |
| Maximum Compensation Limit – IRC § 401(a)(17) – (below note d) | 250,000 | 245,000 | 245,000 |
| IRA Contribution Limit | 5,000 | 5,000 | 5,000 |
| IRA Catch-Up Limit (Age 50 and Older) – IRC § 219(b)(5)(B)(ii) | 1,000 | 1,000 | 1,000 |
| Social Security Maximum Taxable Earnings – OASDI | 110,100 | 106,800 | 106,800 |
The complete text of the IRS news release announcing these changes follows:
WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged. Highlights include:
- The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
- The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
- The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.
Below are details on both the unchanged and adjusted limitations.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) generally will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will increase from $16,500 to $17,000 for 2012. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the Federal Government’s Thrift Savings Plan.
Effective January 1, 2012, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $195,000 to $200,000.
Under section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule. This special rule takes into account the following recent history of changes in the cost-of-living indexes: (1) the cost-of-living index for the quarter ended September 30, 2009, was less than the cost-of-living index for the quarter ended September 30, 2008; (2) the cost-of-living index for the quarter ended September 30, 2010, was greater than the cost-of-living index for the quarter ended September 30, 2009, but less than the cost-of-living index for the quarter ended September 30, 2008; and (3) the cost-of-living index for the quarter ended September 30, 2011, was greater than the cost-of-living indexes for all prior periods.
For a participant who separated from service before January 1, 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant’s 2011 compensation limitation by 1.0327 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2008, to the quarter ended September 30, 2011. For a participant who separated from service during 2010 or 2011, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant’s 2011 compensation limitation by 1.0376 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2010, to the quarter ended September 30, 2011.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2012 from $49,000 to $50,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2012 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $16,500 to $17,000.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $985,000 to $1,015,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $195,000 to $200,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $110,000 to $115,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $360,000 to $375,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $16,500 to $17,000.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $95,000 to $100,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $195,000 to $205,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2012 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $34,000 to $34,500; the limitation under Section 25B(b)(1)(B) is increased from $36,500 to $37,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $56,500 to $57,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $25,500 to $25,875; the limitation under Section 25B(b)(1)(B) is increased from $27,375 to $28,125; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $42,375 to $43,125.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,000 to $17,250; the limitation under Section 25B(b)(1)(B) is increased from $18,250 to $18,750; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $28,250 to $28,750.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $90,000 to $92,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $56,000 to $58,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $169,000 to $173,000.
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $169,000 to $173,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $107,000 to $110,000.
The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430(c)(2)(D) has been made is increased from $1,014,000 to $1,039,000.
IRS Announces 2011 401k Limits
The IRS has issued the cost-of-living adjustments for 2011 that affect employee benefit plans. Due to continued low inflation, most 2011 limits applicable to 401k and other plans will remain at their 2010 levels.
There are several “limits” that apply to 401k plans under the Internal Revenue Code (IRC). The limits are found in various sections of the IRC. 401k plans must comply with the various IRC limits to maintain tax-qualified status. The Internal Revenue Service (IRS) annually increases 401k plan limits to reflect changes in the Consumer Price Index (CPI). Often, adjustments are made only if the change in the limit attributable to the CPI exceeds a certain threshold (e.g., $1,000 or $5,000).
The table below shows the primary 401k plan limits in effect for 2011 and 2010. Brief descriptions of the various limits are also provided.
Imported Table
| Maximum Deferral and Threshold Limits for 2010 and 2011 | ||
| Limit | 2011 | 2010 |
| Elective Deferral Maximum for 401(k) Plans and 403(b) Plans – IRC § 402(g)(1) | $16,500 | $16,500 |
| Elective Deferral Maximum for 457 Plans – IRC § 457(e)(15) – (below note a) | 16,500 | 16,500 |
| Catch-Up Limit (Age 50 and Older) for 401(k), 403(b), and 457 Plans – IRC § 414(v)(2)(B)(i) | 5,500 | 5,500 |
| Maximum Contribution to a Qualified Defined Contribution Plan – IRC § 415(c)(1)(A) – (below note c) | 49,000 | 49,000 |
| Maximum Compensation Limit – IRC § 401(a)(17) – (below note d) | 245,000 | 245,000 |
| Highly Compensated Employee Salary Threshhold – IRC 414(q)(1)(B) | 110,000 | 110,000 |
| IRA Contribution Limit | 5,000 | 5,000 |
| IRA Catch-Up Limit (Age 50 and Older) – IRC § 219(b)(5)(B)(ii) | 1,000 | 1,000 |
| Social Security Maximum Taxable Earnings – OASDI | 106,800 | 106,800 |
A Number to Remember: 15.7
Retirement and 401k planning can be incredibly complex. Or not.
We are big fans of keeping things simple whenever possible with easy to understand rules of thumb. That’s why we were pleased to see a new report from Hewitt Associates that includes some well researched guideposts for retirement planning. Based on analysis of the retirement needs of 2.1 million employees at 84 large companies, the study finds that for employees who currently contribute to their employers retirement plan:
- on average will need to accumulate a retirement resources equal to 15.7 times times their pay at retirement to maintain pre-retirement living standards (e.g. $785k for a $50k salary)
- Social Security will provide, on average, retirement resources equal to 4.7 times pay
- other retirement savings – such as 401k’s and DB pensions – will need to provide the remaining 11 time pay
- only about 18% of these employees are presently expected to satisfy 100% of their needs at retirement
- on average, workers who rely solely on a defined contribution plan to fund their retirement are projected to meet just 74% of their needs in retirement
Next time you ponder the question: How Much Should I be Saving for Retirement?, keep in mind the 15.7 factor. It’s a well-researched yet simple way to target the retirement nestegg you need to work towards accumulating.
Inertia and My 401k
in·er·tia [in-ur-shuh, ih-nur-] –noun
- inertness, esp. with regard to effort, motion, action, and the like; inactivity; sluggishness.
- Physics. the property of matter by which it retains its state of rest or its velocity along a straight line so long as it is not acted upon by an external force.
- Medicine/Medical. lack of activity, esp. as applied to a uterus during childbirth when its contractions have decreased or stopped.
As 401k participants everywhere ponder “What should I do with my 401k in this current market” they may want to give some thought to the beneficial aspects of inertia.
Synonymous with “inactivity” and “sluggishness”, inertia is typically viewed as a negative characteristic in the 401k world. Indeed, the push by government and the 401k industry to make 401k’s a truly workable retirement solution has centered on introducing policies specifically designed to counter what we can call “bad” inertia. Examples:
| Examples of “Bad” 401k Inertia | |
|---|---|
| Inertia causes workers to fail to enroll in 401k plans, often missing out on company match | Response: automatic enrollment |
| Inertia keeps workers from increasing contributions as wages rise | Response: automatic contribution arrangement |
| Inertia at the root of workers opting for low-yield investment options such as money market accounts | Response: automatically place 401k participants in qualified default investment alternatives |
But there apparently is a bright side to 401k inertia as well. Some commentators credit employee inaction in the face of the historic market collapse of 2008-09 as the primary reason behind the remarkable recovery of 401k account balances that has occurred in the past year. Relatively few 401k participants reacted to the market turmoil by reducing their 401k contributions or moving account balances from riskier asset classes that were hardest hit into “safer” investments. Doing so, of course, would have been the classic panicked behavior expected of amateur investors: selling at exactly the wrong time.
401k participants who were guilty of inertia in the last year have been rewarded.
For whatever reasons, workers by and large stood pat with their 401k’s and were rewarded nicely. By the end of 2009, just 9 months after the market bottomed (DJIA @ 6,443 in March 2009) Fidelity and Vanguard both were reporting that most 401k participants had account balances higher than they did at the market’s peak in October 2007.
“I think the good news is inertia took over and most people did nothing. During the rebound from April (2009) on, the inertia value of the 401k is very good.”
- Jane Bryant Quinn as quoted in Employee Benefit News (4/1/2010)
“What to do with my 401k in this current market?” Consider setting a long-term course with regular 401k contributions, a solid 401k investment portfolio strategy and letting inertia take over from there.
Older Workers Fare Better Through Crisis
There’s no doubt that the financial crisis of 2008-09 has shaken up retirement planning like no other event in memory. Public defined benefit pensions, a mainstay of government employment, are teetering. Hundreds of companies have pulled the plug on matching contributions to 401k plans and are only now starting to reinstate them. And everywhere, workers – especially the oldest baby boomers – have been forced to rethink and remake retirement plans.
But a just released study from Boston College’s Center for Retirement Research reaches a surprising conclusion: Even taking into account the massive losses brought about by the financial crisis, when viewed from a career-spanning perspective, early baby-boomers (those closest to retirement) have fared quite well in terms of financial market returns. The study looks at 401k investment returns over the careers of three hypothetical retirement savers:
- Early Boomers (age 50 in 1999)
- Late Boomers (age 40 in 1999)
- Gen Xers (age 30 in 1999)
The early boomer turned 60 in 2009 and was preparing for retirement just as markets hit bottom in March of that year. These workers – and their decimated retirement nest eggs – were the subject of countless stories highlighting the shortcomings of the 401k. How was it possible for someone to work and save diligently over an entire career only to have the rug pulled out from beneath them on the doorstep of retirement?
Even at the low point, early baby boomers realized 7.9% career market rates of return. More recently, as markets are recovering, career return rates exceed 9%.
But as devastating as the crisis has been, it is amazing to realize that even at the lowest point (March 2009) the career-long rate of return for an early boomer 401k saver was +7.9%! This is because these workers were old enough to benefit fully from the historic run-up in the stock market that occurred between 1982 and 2000. Late Boomers and Gen Xers, on the other hand, had to deal with precipitous market declines in 2000 and 2008 without the benefit of the 80′s market boom.
None of this is to suggest that early boomers’ retirement plans weren’t tragically impacted by the 2008-09 financial crisis. They certainly were and, unlike younger generations, they do not have time to recoup losses. Moreover, percentages and rates of return mask the more fundamental problem that, by every measure, workers across all age cohorts have not (and are not) adequately saving for retirement. A healthy rate of return on a pint-sized nest-egg is not a formula for retirement success.
“As jarring as the financial collapse may have been for the Early Boomers, the market has actually treated them well over their lifetime. Hypothetical workers investing either all in equities or in half equities and half bonds have enjoyed fairly high returns compared with long-run averages. This agreeable outcome is the result of these workers having substantial assets during the long bull market that began in 1982 and ended in 2000.
Moreover, the market has treated Early Boomers a lot better than the subsequent cohorts. Late Boomers and Gen Xers never benefited fully from the 1982-2000 bull market and were hard hit by two market collapses. The Late Boomers are the most vulnerable, as they would need substantial returns in the future to end up with the same ratio of assets to income at age 60 currently enjoyed by Early Boomers.”1
Notes:
- Returns on 401k Assets by Cohort, Center for Retirement Research at Boston College, March 2010. [↩]
Bill Would Require Lifetime Income Statements Be Provided
Social Security mails benefit projection statements annually detailing the projected monthly benefit participants can expect to receive at retirement. Now, U.S. Senators Jeff Bingaman (D-NM), Johnny Isakson (R-GA), and Herb Kohl (D-WI) want 401k plans to also provide lifetime income reports. According to an announcement on Senator Bingaman’s website:
The Senators’ Lifetime Income Disclosure Act (S. 2832) would require 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance. The measure is patterned on the Social Security Administration’s annual statements, which are mailed annually to working Americans to inform them of estimated monthly benefits based on their current earnings. Congress mandated annual Social Security statements in 1989, and they have proven to be very useful to workers in preparing for retirement.
By providing similar information for 401(k) plans, the Lifetime Income Disclosure Act would give American workers a more complete snapshot of their projected income in retirement.
Specifically, under the Act, defined contribution plans subject to ERISA – including 401(k) plans – would be required annually to inform participants of how the account balance would translate into guaranteed monthly payments – a “retirement paycheck for life” – based on age at retirement and other factors.
To ensure there is no material burden or potential liability on employers who voluntarily sponsor 401 (k) plans, the legislation directs the Department of Labor issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure. Employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would be insulated from liability.
As far as Congressional bills go, the Lifetime Income Disclosure Act is relatively simple and straightforward – only six wide-margin, double-spaced pages in length. The heart of the bill is comprised of three sections setting forth the type of lifetime income disclosures to be made:
- DISCLOSURE — A lifetime income disclosure shall set forth the annuity equivalent of the total benefits accrued with respect to the participant or beneficiary.
- ANNUITY EQUIVALENT OF THE TOTAL BENEFITS ACCRUED — For purposes of this subparagraph, the ‘annuity equivalent of the total benefits accrued’ means the amount of monthly payments the participant or beneficiary would receive at the plan’s normal retirement age if the total accrued benefits of such participant or beneficiary were used on the date of the lifetime income disclosure to purchase the life annuities described in subclause (III), with payments under such annuities commencing at the plan’s normal retirement age.
- LIFE ANNUITIES.—The life annuities described in this subclause are a qualified joint and survivor annuity (as defined in section 205(d)), based on assumptions specified in rules prescribed by the Secretary, including the assumption that the participant or beneficiary has a spouse of equal age, and a single life annuity. Such annuities may have a term certain or other features to the extent permitted under rules prescribed by the Secretary.
Details concerning the assumptions to be used and implementation rules are left for the Labor Department to determine.
With the transition from defined benefit pensions to 401k’s, Americans have been forced to assume greater responsibility for their own retirement funding. Too many are ill-prepared for the task. If the defined contribution retirement model is to succeed, it is critical that workers be better educated on retirement issues and provided good information on which they can base their savings decisions. Senate Bill 2832 appears to provide a low-cost, common-sense way to greatly improve 401k planning.
IRS Announces 2010 Contribution Limits
Benefit Plan Limits (2003 – 2010)
The IRS has issued the cost-of-living adjustments for 2010 that affect employee benefit plans. Most 2010 limits applicable to 401k and other plans will remain at their 2009 levels.
There are several “limits” that apply to 401k plans under the Internal Revenue Code (IRC). The limits are found in various sections of the IRC. 401k plans must comply with the various IRC limits to maintain tax-qualified status. The Internal Revenue Service (IRS) annually increases 401k plan limits to reflect changes in the Consumer Price Index (CPI). Often, adjustments are made only if the change in the limit attributable to the CPI exceeds a certain threshold (e.g., $1,000 or $5,000).
The table below shows the primary 401k plan limits in effect for 2010 and 2009. Brief descriptions of the various limits are also provided.
| Maximum Deferral and Threshold Limits for 2009 and 2010 | ||
|---|---|---|
| Limit | 2010 | 2009 |
| Elective Deferral Maximum for 401(k) Plans and 403(b) Plans – IRC § 402(g)(1) | $16,500 | $16,500 |
| Elective Deferral Maximum for 457 Plans – IRC § 457(e)(15) – (below note a) | 16,500 | 16,500 |
| Catch-Up Limit (Age 50 and Older) for 401(k), 403(b), and 457 Plans – IRC § 414(v)(2)(B)(i) | 5,500 | 5,500 |
| Maximum Contribution to a Qualified Defined Contribution Plan – IRC § 415(c)(1)(A) – (below note c) | 49,000 | 49,000 |
| Maximum Compensation Limit – IRC § 401(a)(17) – (below note d) | 245,000 | 245,000 |
| Highly Compensated Employee Salary Threshhold – IRC 414(q)(1)(B) | 110,000 | 110,000 |
| IRA Contribution Limit | 5,000 | 5,000 |
| IRA Catch-Up Limit (Age 50 and Older) – IRC § 219(b)(5)(B)(ii) | 1,000 | 1,000 |
| Social Security Maximum Taxable Earnings – OASDI | 106,800 | 106,800 |
401k Planning: To Retirement or Through Retirement?
A question garnering lots of attention these days in defined contribution (DC) retirement circles is: should 401k planning and investment strategies focus on getting participants to retirement or through retirement? Mostly, this question is asked in relation to the appropriate risk exposures assumed by “target date funds” (TDF’s). These are the default investment option for many 401ks – i.e. where the money goes if no other investment choices are made.
But the to or through consideration also provides a helpful framework for understanding how individuals view 401k’s and how they view 401k planning in general. Everyone has their own thoughts of what retirement should be so there are no right or wrong answers. Reflecting on the to retirement or through retirement question is a useful exercise that can help you clarify these thoughts. Below are some things to consider:
| Issue | My 401k Planning Focus is on Getting To Retirement | My 401k Planning Focus is on Getting Through Retirement |
|---|---|---|
| Retirement Goal | Focus is on living well during early retirement years, perhaps using big share of 401k savings to indulge in a major purchase such as a new motorhome. | Focus is on not outliving savings and, perhaps, guaranteeing a lifetime retirement income stream. |
| 401k Plan Participation | Most 401k participants quit employer-sponsored 401k’s when they retire and rollover assets to an IRA. | Benefits of being a “participant for life” in your employer’s 401k after retirement may include lower management/investment costs and better investment choices. |
| Sales Pitch | 401k rollovers are a major source of revenue for mutual funds and investment advisors. There is considerable sales pressure to get participants to rollover their accounts. | Plan sponsors are recognizing the value of keeping participants after they retire – more assets can equate to lower fees and management costs. Also, sponsors are providing low-risk annuity products that guarantee lifetime income. |
| Investment Risk Posture | Low (or no) exposure to equities as retirement age nears. Example glidepath: 40% cash; 60% US Treasury inflation protected securities (TIPS). Goal is to preserve capital even through a market melt-down like that experienced in 2008. | Maintain equity exposure throughout retirement, recognizing that equities historically produce highest return over long-term. Example glidepath: 65% equities at age 65; 35% at 80; 20% at 90. |
