By John Rafferty
Right or wrong, $250,000 seems to be the current inflection point for the definition of “wealthy” in the United States, if recent political rhetoric is any indication. In the ongoing debate in this country over how to help shore up our federal, state, and municipal finances in the wake of the financial crisis, those making over $250,000 a year have become the target of discussion where potential tax increases are concerned.
For those who live in big cities and/or on the coasts, you are all too aware of the fact that this kind of income, while healthy, does not necessarily make one “rich” given the high cost of living in these areas.
Nevertheless, given this number as a starting point, it might be instructive to see what kind of challenges a household at or above this level of annual income faces with regard to accumulating enough resources to help sustain a comfortable retirement, and ultimately what kinds of solutions that are available today to help address those challenges.
To help illustrate those challenges, we will take a closer look at the classic three-legged retirement stool, examining each of the three legs in the context of the specific challenges facing the $250,000-and-up income cohort. Those three legs are Social Security, Defined Benefit Pensions, and Personal Savings, which includes Defined Contribution plans like 401(k) and 403(b) plans, as well as IRAs and other vehicles designed for personal asset accumulation objectives.
Part 1: Social Security
Two numbers bear mentioning when trying to understand the special challenges that the affluent face with regard to Social Security being a viable portion of their future retirement income: $110,100, and $2,513. The first number is known as the maximum taxable wage base in 2012. This is the maximum amount of gross income on which social security taxes may be deducted from one’s paycheck during their working years. If you are making, say, $300,000 a year in gross income, for social security purposes you are only being taxed on the first $110,100 of that income, meaning you are NOT being taxed on $189,900 of gross income. While not being taxed sounds great, it also means you are not accruing any future benefits based on any of your earnings in excess of $110,100.
Which is a perfect segue into the second number, $2,513. This happens to be the maximum monthly benefit for a worker retiring at full retirement age in 2012. On an annualized basis, this equates to $30,156. Assuming the worker’s spouse did not work outside the home, or accrued a benefit worth less than half the worker’s, the spouse’s benefit is automatically set at 50 percent of the worker’s benefit amount. In this example, the total benefit for the affluent worker and spouse would then be 1.5 x $30,156 or $45,234.
While $45,234 is nothing to sneeze at, look at it in the context of the lifestyle expectations to which a family, used to an income of more than $250,000, has become accustomed. Again, assuming a pre-retirement gross income of $300,000 a year, that $45,234 income is as AS GOOD AS IT GETS for the first leg of the retirement income stool, meaning that first leg is only supplying 15 percent of gross pre-retirement income.
The upshot: those other two legs have their work cut out for them. In future articles within this series*, we will dive into the details of those other two legs of the classic retirement stool, offering a different perspective on the shortcomings and challenges they present in the context of retirement preparedness for the affluent. Once we examine those other two legs, we’ll discuss opportunities for a “fourth” leg of the stool that may make sense in helping address the unique challenges of this affluent group.
*NOTE: This is Part I of an article series.
Information provided in this article shall not be construed by any person as legal, tax or accounting advice. American General is solely the provider of the insurance product. American General strongly suggests that any life insurance owner, proposed owner, insured or proposed insured retain the services of qualified tax, accounting and legal counsel for advice on such matters. To ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
John Rafferty is vice president of marketing at American General Life Companies and offers a full line of life insurance, annuities, and accident and health products to serve the financial and estate planning needs of its customers throughout the United States. He can be reached at John.Rafferty@innfeedback.com. For Producers Only – Not for Dissemination to the Public.
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