Proposed Federal Budget Plan Caps Retirement Savings

The government wants to limit how much money you can save in a tax-deferred retirement account, saying too many people are taking tax deductions for saving more money than they are likely to need.

That’s a proposal in the president’s much-delayed budget plan — a proposal the Obama administration figures will generate an additional $9 billion in revenue over the next decade, by capping total retirement savings for individuals.

But at what cost? The budget gap might be narrowed now — but this limitation would leave a huge swath of baby boomers without enough savings to fund a 30-year retirement, and offset the impact of inflation.

The irony is that this is “IRA season,” when financial services firms are focused on getting people to put the allowable limit of $5,000 into their IRA as they pay their taxes. The limit rises to $5,500 for 2013 contributions and $6,500 for those 50 and older who need to catch up — in recognition of the need for more, not less, retirement savings.

The budget proposal would prohibit workers from having more than $3 million in a retirement account. But that math simply won’t work for the middle class.

If an individual starts an IRA in her 20s and contributes only $2,000 a year for 50 years, and earns the historic average return of nearly 10 percent annually in an IRA, she would have a retirement account worth $2.5 million at retirement age.

The Ibbotson historical average return for a diversified portfolio of large company American stocks with dividends reinvested over the past 70 years is 9.8 percent.

But will even $2.5 million be enough to support your lifestyle over a presumed 30-year retirement period?

Most financial analysis says you could withdraw about 4 percent of your diversified retirement account every year and make your money last your lifetime. So having a $3 million portfolio the day you stop working means you could take out about $125,000 per year — pretax, of course. And assuming tax rates will be higher, not lower, you would have about $90,000 per year to spend.

That sounds great, until you realize that at even Ibbotson’s historic average inflation rate of 3 percent annually, the buying power of your money would be cut in half in less than 25 years of your retirement.

Is it better for our nation to have a generation living on the equivalent of $45,000 a year in retirement? What cars or health care will they be able to buy? How much money will they be able to leave in their investments — funding capital growth for newly created businesses? Or helping their grandchildren pay for college? Or buying Treasury bills to help fund our national debt?

The sad fact is that most Americans won’t have anywhere near that $3 million amount saved when they retire. They will be dependent on a Social Security program that, under the new budget plan, will give less adequate cost-of-living increases.

This proposal to lower the cap on total retirement savings is designed to make everyone share this dependence — or force them to work (if they can find jobs) until they die.

Limiting incentives to save for retirement is the last thing this country needs. Since our politicians — both parties — can’t figure out how to make our government more solvent, they should at least keep encouraging us to build our own savings for the future.

Terry Savage is a registered investment adviser and is the author of the new book, The New Savage Number: How Much Money Do You Really Need to Retire?

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