General discussion

SS and Medicare

Because of the multiple subthreads elsewhere with animosity already rampant, I decided to ask this in a new thread. I think most realize that SS, medicare/medicaid and the military compromise a huge part of our budget and any attempt at large budget reduction is going to include cut backs in these areas.

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Not specific to your list but I'd like to see SS withholding

dealt with honestly. One's employer's share isn't free money. It's money in lieu of what could be salary. If employers are required to set aside retirement funding, there should be options. I'd allow the employee to decide where that money should go. It could go into the SS plan as it does now or it could go into some qualified IRA or even the employer's 401k plan if such exists. Any financial planner will tell you to develop multiple sources of potential income. In most cases, social security should be considered as supplemental income and not relied on as the majority of it.

I might consider abolishing any plan that's offered as tax deferred. These can be a trap and one can end up paying more in taxes later than they'd pay by having the income taxed now.

As to question 4 about means testing...SS should not be a gamble like term or some life annuity plans. If you pay the money into something, you should get a fair return

As for SS and medicare, it would make sense to have the ages of full eligibility match.

The question about using extreme measures for long shot cures is a tough one but it's my opinion that we need to be realistic here. We're all going to die and, when we do, it provides space for someone else. There's nothing rational about wanting to cling to a life that cannot be enjoyed. What we need to consider when we have to make tough decisions is just whose suffering is it that we want to allay. Usually it's our own pain that bothers us most if we really are honest with ourselves.

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Your point of future tax rats

has been raised in things I've read. It's generally assumed that you'll probably have a lower income when you retire than while working and thus will be in a lower bracket.

However, historically taxes average upward, so that may not be true, especially for someone saving while young. And most of what I've recommend mixing tax deferred and tax paid savings. If they don't monkey with it's setup in a later time, Roth IRA's may appeal to people of that mindset. You pay taxes on what you put in when you earn it, but never pay taxes on the interest.

But you do get to earn interest or dividends etc on what you would have paid in taxes if it wasn't tax deferred. I think it's probably at least some more with tax deferred accounts in the end as it would be with tax paid monies invested at approximately the same return. Just don't believe you won't have to pay much when you do spend it. Unfortunately I'm not that smart at high finance obviously or I'd be rich.

The fairness of means testing does seem doubtful. I guess one question I didn't raise was should the cap on what you pay SS taxes on be raised. Again, that would seem to be an unfair move to many, since those making over the limit (currently 106,800) would pay more without a corresponding increase in payout.

I guess it a lot of it boils down to if you want to leave it up to the individual to provide for himself and if he doesn't you're wiling to let him suffer the full consequences up to death even.

The extreme measures is a real sticking point for most people. They don't like to figure life, disability, or death on a cost verses benefit basis. It seems too cold or callous. It's done anyway under a lot of different disguises, but people don't like to have it put to them in plain terms so they have to face the decision and it's consequences.

The medicare and SS age difference does surprise me, but then the age increase was put into effect in 1983 and perhaps they didn't forsee medical cost increases would be what they have. Since retiring at 65 instead of whatever your full retirement age is still gives most people over 90% of full SS, as long as Medicare is 65 that is still going to be a lot of people's retirement age.

And honestly there is a problem that for physically demanding work, working older is a much more difficult option if an option at all. I work with a man who is 67 and still at work because he rather work. I'm amazed at how well he does get along, heck he probably does better than me in many ways and I'm 20 years younger. But I've worked with others that at 60 could barely physically get their work done. Frankly, given my obesity problem (my responsibility I know) I have doubts I'll be as fit at 67 as he will, and I'm suppose to work until 66 anyway to draw full SS. (I still hopeful that my other savings will allow me to stop by 65 or even before that time.)

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The idea of deferring the tax until later thinking you'll

be in a lower bracket didn't work with the old traditional IRAs. You may well be in a lower bracket than when you began working but, with pay increases and inflation, you should be able to expect to rise into higher tax brackets. When you retire, you may only take a small step backward in income. What happens, however, is that what you set aside early plus the interest earned is now taxed at a higher rate anyway. You pay more. My own traditional IRA that I started when they were first offered was paying at over 9%. But inflation was also very high and wage increases were larger during that period. At that time, there was no indexing for inflation so moving up into higher tax brackets was rather rapid. Fortunately, I'd only contributed to that IRA for a very few years as my employer introduced a 401k. I stopped contributing to the IRA and put the money into the new plan. But I couldn't touch that IRA until I was 59 1/2 years of age and, by then, then the interest being paid was a mere pittance and I couldn't convert to a Roth without paying the taxes owed. I ended up converting it to some sort of bond fund that will begin paying out when I reach 65 and be fully paid within 5 years. I figured this to be the way to lose the least to taxes. I figure, at best, I may have my principle back in full but little if any interest. I'd have been better off spending it back then because it would have purchased far more than it will today. The government will get the lion's share due to my youthful naivete.

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I'm a bit uncertain as to the advantage
I'd only contributed to that IRA for a very few years as my employer introduced a 401k. I stopped contributing to the IRA and put the money into the new plan.

Unless it was because the early IRA's didn't have the stock market plans perhaps?

Otherwise, how is a 401K tax deferral better than an IRA deferral?

When you retire, you may only take a small step backward in income.

I guess that depends on how good your employer retirement plan is and how much of your lifetime income you've saved. I don't know many personally that their income wasn't much less after retirement than while they were working. I know some that it's drastically less. I would think for most on the lower quarter of the income scale it would be difficult to save enough to maintain even 75% of their income after retirement. The catch of course you're assume to have much less expenses.
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401k versus traditional IRA

The IRA only allowed a certain dollar amount per year to be tax deferred. I could put in whatever I wished but I could take a maximum of $2000 off my taxable income. I believe this amount increased later. As for the 401k, it added an employer matching component. That was the selling point. I was matched at 1/2 % for up to 10% of what I contributed to the plan. If I had the max withheld, I was banking 15%. That matching amount has decreased since the plan was first implemented, however. Of course no invested money grows unless it outstrips inflation. But essentially, what I'm saying is that the $2000 I started my individual IRA with is probably worth about 1/3rd or less today. I'm in a higher bracket so will need to pay a higher percentage of that $2000 when it's withdrawn. The initial 9+% rate did not hold. It was tied to the "money market" and that rate is about 1/2 % now. There's no way my account ran ahead of inflation and the higher bracket I'm in now will cause me to pay more on that meager interest as well. Such is how it goes. About the best an average person can hope for when building their savings is that it will lose as little value as possible over time. It does require and teach discipline but there's not much hope for real growth of that savings.

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DUH on me.

I was trying to tie it into the tax rates etc.

I don't remember what the limits were on 401K by law, since my first one and my next one had different limits. And of course the matching is a big hedge against the lost due to inflation or the stock market.

Sorry Steve, I was so focused on your tax rate points I overlooked the obvious trying to tie the difference to that.

Right now the IRA total limit (traditional and Roth) is $5000 if your under 50, $6000 if you're 50 or older. If my 401K plan is in line with the max allowed limit, it's $16,500 if you're under 50 and $22,000 if you're above 50. I did see somewhere that if you had a 401K and and IRA the 401k limits would probably apply to the total contribution to both for the year. I wish I was anywhere near that max.

Your match is better than either of mine has been. Of course, you can put more than the matching amount, but that negates the advantage you were just point out.

But as far as your old IRA, it could have been rolled over to a different type plan with more potential growth couldn't it? Of course, more potential growth is more potential loss. Sometimes just holding on to what you got is more important.

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I eventually did roll the old IRA as I said but it's

no where near the initial rate of over 9%. I'll be getting about 4% for the 1st 3 (of 5) years and then there will be an "adjustment" but a guaranteed minimum of somewhere in the 1-2 % range. At best, I figure the value of the IRA will just remain flat. Because I start taking it right after my retirement age, I will have less that's taxed in the higher bracket. There's no way do accurate math regarding the value then versus now but those graphs showing steep growth inclines that were presented when banks did their sales pitches were little more than "voodoo economics". Where have we heard that expression? Wink

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