First is this blog post from BusinessWeek about average 401k balances that was a followup from earlier in the week. Depending on how one looks at the numbers, whom they exclude (like workers in their twenties maybe) the average balance ranges anywhere from $86,000 to as low as $12,000. A median calculation came in around $43,000.
Anyway you look at it these numbers are depressingly low. Taking the high number, $86,000, how long does it take you to make that much money and how long does it take to spend $86,000 on common living expenses? Forgetting the taxes owed upon a normal withdrawal I doubt the typical person could get four years of expenses out of $86,000 unless they have baloney for lunch every day and macaroni and cheese for dinner.
So the first four years is covered (not really) what about the other 25 or 30? Everyone learns at a very early age that they need to save money. I'm not sure whether people start out on the right path as adults and then fall off or if they never make it on to the path when they start out but this is a real problem and based on the way the mortgage bailouts are being handled any attempt to fix the savings shortage may come at the expense of people who do the right the thing WRT to their saving habits. I'm thinking something like means testing for social security benefits. If you have a pile of money then no payout for you as an example.
On a different note IndexUniverse reported that iShares filed for a couple of new bond ETFs including the iShares 10+ Year Credit Bond Fund (CLY) which will tack an index that combines US Corporates and Yankee bonds. Yankee bonds are issued in other countries in US dollars. Depending on the issuer it is a way of offering stability to bond holders or effectively going short US dollars. FT Alphaville has had several posts recently about Germany issuing Yankee bonds.
If this fund ever makes it to the market you may read some commentary that says it is a way to buy foreign bonds without taking currency risk. That may deserve a not so fast my friend. If a bond issued in dollars will generally be serviced by a US dollar income stream then currency risk is very unlikely. Is a bond issued in dollar and paid for with a USD income stream really a foreign bond? If however it really is an attempt by the issuer to take advantage of what looks like an obvious trade in the dollar and the dollar has another massive rally like it did a year ago (counter trend or not) then the bond, more correctly the issuer, could be negatively impacted.I'm not saying these are crazy risky just pointing out that if an issuer is betting on a lower dollar the bet will at times be wrong. The fund could actually be quite interesting, I just don't think it would be immune from currency risk.
11 comments:
Roger: I agree that means testing Social Security may be one way to address its projected shortfalls as well as the anticpated savings deficits. However, means testing also changes Social Security from an income insurance program to a welfare program. We already have welfare programs that subsidize the "improvident" (pardon the Scrooge tone), and I think Social Security should retain its non-welfare characteristics. Therefore, I favor such corrective actions as extending the retirement age, removing the cap on the Social Security tax, and reducing benefits across the board when necessary. In other words, keep the program self-funding and consonant with the original design of the system.
right or wrong I do not expect social security to be there for me when i turn 70 in 2036. this belief makes raising the cap very unpalatable to me. that one would kick me square. paying in the $16k is ok because i'm used to it but paying more? ouch. yes, talking my own book.
If someone wants dollar denominated foreign bonds they should buy a hedged foreign bond fund. It doesn't have the issuer currency risk.
Just look at USD issued Brady bonds from EM countries as an example. When the USD strengthens the issuer has to spend more local currency to buy USD to pay the bond coupon. A huge USD strengthening can cause defaults. Luckily for the countries that issued them they have a lot of USD reserves because we export USD through our trade imbalance and being the world's reserve currency or our current run up would have really hurt EM countries with Brady bond issues.
Would you be interested in an option where the government simply totaled everything that you'd paid into SS and returned it to you at retirement, tax free, with some nominal interest accrued? In effect, the program would then have acted as a lifetime forced savings account.
You'd then invest your lump sum in lieu of receiving SS payments. You wouldn't have to worry whether the program would be there when you retire, and lifting the cap would only put more money into your pocket at retirement. In the meantime, the government would have use of your money to pay those who chose to continue receivng traditional SS payments and not elect the lump sum option.
I don't think you can call the average 401k account balance "depressingly low" until you know the average age of the account holder.
I'm guessing it would probably still be low, but keep in mind there are tons of minimum balance accounts owned by people who have a full pension, tons of minimum balance accounts for young people now that large companies automatically start accounts for you on hiring you, etc.
anon, the way you frame it yes i would rather have something than my expectation of zero.
anon 7:45--When I retired, that's essentially the choice that my employer gave me. I could either take a lump sum, which most retirees at my company chose to do, or a traditional retirement annunity with depressingly small payments. Given the frequency with which employers are stiffing their retirees, I'm very glad that I took the payout.
I'd not be surprised if every single thing became means-tested. We already do this with federal income tax, state income tax, education and charity. Soon throw in healthcare and SS.
To date, these items have all used annual income. I don't know if it is possible for them to start considering total assets or net worth. I don't personally plan to have significant annual income in retirement, so it is only the asset-based approach that I'm afraid of. If you didn't already know, there are other countries that tax a percentage of your assets each year.
On the other hand, I have a feeling that anything that hits the pockets of old-timers is unlikely. They are the voters and political contributors.
SS *is* means tested. The more you put in the lower the returns in actual amounts. Then there is the taxes on SS income. 40 years ago there weren't any.
Social Security means testing?
I contributed to social security for over thirty years, but do not qualify for ONE PENNY of ss because of my defined benefit pension earned as a school administrator. My wife, a teacher, also is not able to receive ss due to the same defined benefit "means test".
This is due to provisions in the 1986 tax reform act.
Together, we contributed several tens of thousands of dollars into the ss fund, but will receive zip, zero, nada.
Frankly, you can shove means testing up your a _ _.
T
I cannot see how SSI will not be around. I understand that it is way underfunded but I think the Government will (they will have no other choice) find some way to get the money.
Post a Comment