The financial crisis of 2008 apparently served as a wake-up call to Americans to take charge of their own financial futures and get serious about funding their retirement. But new budget plans from the White House may limit the ability for people to save for their future needs.
The budget proposal issued by President Barack Obama earlier this year seeks to prohibit investors from accumulating more than $3 million tax-favored retirement accounts.
The concept is to limit retirement account balances — including employer-sponsored plans, IRAs and other tax-deferred accounts — to an amount necessary to finance an annuity of no more than $205,000 a year in retirement. The proposal calculates a balance of $3 million would be necessary to generate the annual annuity payment.
“Individual retirement accounts and other tax-preferred savings vehicles are intended to help middle-class families save for retirement. But under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than needed to fund reasonable levels of retirement savings,” claims the president’s budget proposal.
As might be expected, the words “more than is needed to fund reasonable levels of retirement savings,” are causing a strong reaction.
“While relatively few 401(k) participants would be affected by this at first, the impact would likely spread over time, perhaps substantially, depending on interest rates and whether individuals also participate in a defined benefit retirement plan,” said Jack VanDerhei of the Employee Benefit Research Institute.
The ERBI calculates one in 10 current 401(k) participants are likely to hit the proposed cap sometime before age 65.
Bottom line, the institute believes federal policies should be encouraging people to save for their retirement, and not be reliant on entitlement programs, rather than limiting the amount that can be saved.
Young and old, rich and not so rich, people are taking advantage of tax-favored retirement accounts and benefiting from the stock market rally taking the major indexes to record highs repeatedly throughout 2013.
Fidelity Investments reports the average balance of a 401(k) employer-sponsored retirement plan at the end of the second quarter of 2013 was $80,600, up nearly 11 percent from the same period a year earlier.
At the same time, average investments in individual retirement accounts — IRAs — have now increased by more than 50 percent since the great recession started five years ago. The average balance in a Fidelity IRA rose to $81,100, up from $52,900 in 2008.
“The data confirm that, even through tough economic times, the discipline of 401(k) plans — staying the course by investing and continuing contributions — served savers well. Dollar-cost averaging and putting away money paycheck by paycheck have made a big difference in the bottom line of these savers,” said Paul Schott Stevens, president of the Investment Company Institute.
The Plan Sponsor Council of America reports that Americans have amassed $7.8 trillion in direct contribution plans such as 401(k)s and IRAs. It estimates that 87.6 percent of eligible employees have a balance in a retirement plan with the average worker contributing 6.8 percent of pay, up from 6.2 percent in 2010.
“Those critical of the direct contribution system in the past thought the system would collapse during a sharp economic downturn. They were wrong,” said Bob Benish, PSCA executive director.
The true power of retirement savings comes from time. Fidelity calculates a worker continuously employed and contributing to a 401(k) plan for the last 10 years would see their average balance grown to $211,800, well above the overall average.
With fewer companies offering defined benefit programs, the emphasis on retirement savings has been shifted to the employees. While matching contributions by companies are on the rise — 95.3 percent of companies with retirement plans matched a portion of workers’ contributions in 2012 — the bulk of savings will have come from employees.