In an opinion piece appearing in today's Wall Street Journal, Gov. Arnold Schwarzenegger complains that the state of California is saddled with $550 billion of retirement debt, "thanks to huge unfunded pension and retirement health care promises ... and also to deceptive pension-fund accounting that understated liabilities and overstated future returns."
If the professionals don't get pension fund accounting right, how are individuals supposed to manage? After all, we have to make a lot of assumptions when we do our own retirement planning. We have to guess how many years we will live and what kinds of returns we can expect on our investments going forward, among other things. ...
After the last 10 years, it seems optimistic to hope for even meager positive returns.
Gov. Schwarzenegger desperately wants pension reform because the state of California may fall into the Pacific Ocean if things keep going the way they are. I'm using poetic license here; he doesn't say that exactly. But he does make this startling statement:
"Few Californians in the private sector have $1 million in savings, but that's effectively the retirement account they guarantee to public employees who opt to retire at age 55 and are entitled to a monthly, inflation-protected check of $3,000 for the rest of their lives," he writes in the editorial.
Roth vs. traditional 401(k) contributions
Individuals are left to their own devices as they plan for retirement. For instance, what's better? Deferring 401(k) contributions on a pretax or aftertax basis? Should we get the immediate gratification of a tax break now, or delay gratification and get a tax break later?
The answer is not immediately obvious. But in a column that appears in Plansponsor.com, Fred Reish, managing director and partner of the Los Angeles-based law firm of Reish & Reicher, points out that the first $20,000 of income that you take from a tax-deferred account, such as a regular 401(k) plan or traditional IRA, will be free of tax. So why pay tax upfront with a Roth?
I asked Bankrate's Tax blogger Kay Bell how Reish came up with that tax-free $20,000 number. After all, the 2010 tax bracket rates for married couples filing jointly indicate we get taxed 10 percent up to $16,750, 15 percent above that to $68,000, etc. Kay answers, "Because at filing time, a couple gets a $3,650 personal exemption each plus the standard deduction amount of $11,400. That comes to $18,700 that gets deducted from income."
Oh yeah. That approaches the $20,000 figure Reish alludes to.
So, assuming a 5 percent withdrawal rate during retirement, it makes sense for people to save at least $400,000 in a non-Roth account before stashing any money in a Roth 401(k) or Roth IRA, since they save tax money going into the account as well as going out.
Of course, this forces us to make yet another assumption -- that our tax system won't change in the future.
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