In President Obama’s recent budget proposal, he proposed capping tax-favored retirement accounts at $3 million. No contributions would be allowed if the account value is over this amount. This wording is from page 18:
“Prohibit Individuals from Accumulating Over $3 Million in Tax-Preferred Retirement Accounts. 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 is needed to fund reasonable levels of retirement saving. The Budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013. This proposal would raise $9 billion over 10 years.”
This prohibition would apparently apply to all of your tax-favored accounts, including IRAs, Roth IRAs, 401ks, pension plans, and HSAs.
What is “Reasonable”
In this proposal, President Obama wants to restrict you to what he considers to be a reasonable retirement funding of $205,000 per year (much less than that which he will retire on). One can easily argue that the $205,000 limit is not at all a reasonable limit. It is estimated that the average couple will need $270,000 just to cover medical expenses during retirement. But many couples, particularly those with chronic conditions needing long-term care, are way above average. For instance, nursing home care can easily cost $150,000 a year or more.
And inflation can quickly wipe out the value of a $205,000 annuity. If you are fortunate to live another 30 or 40 years in retirement, that $205,000 may eventually be worth just $50,000 a year in today’s dollars.
Unforeseen circumstances such as the need to support a family member, or sustain business losses, or expenses involving any number of potential disasters, may further one’s need for money.
As technology progresses, tomorrow’s seniors will face a multitude of expensive life-extending and life improving options. But I wouldn’t count on the government paying for it all. In fact, their response to the problem will be to ration what is covered. Consider that your 95 year-old body might be needing some serious medical attention that you’ll need to pay for out-of-pocket, and there goes the rest of your bingo spending money.
But really, trying to figure out how much is “reasonable” is not the question to ask. The government should not even be deciding what is a reasonable amount of retirement savings, and then trying to put a cap on it. It is your life, and only you have the right to determine, for yourself, what is a “reasonable” amount for you to be spending each year.
The Wrong Incentives
Social Security is basically structured as an unstable Ponzi scheme. According to Congressional Budget Office calculations, the fund will run out of money by 2031, just 18 years from now. And the 2012 Medicare Trustees Report projects Medicare running out of money in just 10 years. So now, more than ever, it is important to encourage people to save for their own future, rather depending on government to provide for them.
The answer is not to punish the savers and inhibit how people can prepare for their retirement. Instead, legislation should encourage savings, and offer even more tax incentives to help people put away money for future years. For instance, HSA contribution limits should be substantially raised, and should be made available to all.
A nation of savers and investors, with money in their IRAs, 401ks, and HSAs, is a strong nation. Our future lies not in increasing dependency on government to provide for our retirement and our medical care. Instead, let’s do everything we can to encourage everyone to save for future medical and retirement expenses in these tax-favored accounts. We’ll all be better for it.