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Scott Burns: Social Security, Pensions Are The Great Equalizers To Assets When It Comes To Wealth
FWIW: I'm thinking they would pay more in taxes due to having more income. Thus income from SS , once tax would somewhat even the playing field between those" with " & " without ". Have a great Sunday, Derf
As @Derf points out, taxes are a consideration. In addition, A’s heirs will inherit considerably more money than B’s heirs.
If A were to buy a single premium annuity with $450,000, he would increase his income by $30,000 per year ($450,000 is 3/4 of the $600,000 needed to secure a $40,000 income stream as calculated in the Burns’ article). Person A would also have $50,000 of investments that will probably grow much more than B’s $50,000 of savings. Also I do not consider including the $600,000 equivalent to a $40,000 pension as wealth - neither the $600,000 or $40,000/yr pension will be inherited by B’s heirs.
The above considerations raise the question of what is the function of a single premium annuity in retirement? The money used to purchase the annuity is no long yours but the income stream is only taxed on investment income, not on return of principle (the money used to purchase the annuity).
I also don’t consider A and B to be equal. For B to have $6,000 more per year in Social Security and to receive a $40,000/ pension, B would have had to be employed in a much higher paying job.
In conclusion, I do consider Social Security, pensions and single premium annuities important to retirement, but not necessarily to wealth because they cannot be inherited.
My wife's parents are a perfect example related to this article...they are 87 & 85 years old and never accumulated much of any cash savings during their working lifetimes...I mean none. Her father worked as a teacher until he retired at 65 and worked odd jobs outside of school during breaks and summers. Her mother worked as a secretary.
But, between their social security and pensions they have an annual income in the $70,000 + range and live in a nice gated community for 55 years old and up individuals.
Don't mean this to sound the way it might, but why did they not save for retirement? I mean, what do they say now by way of retrospective analysis? Because they knew they had this sort of security? Needing to spend on kids etc.?
The annuity idea is only valid if the product is bought with AFTER-TAX dollars. If it is IRA or other pre-tax money, the entire annual distribution amount is taxable. Unfortunately, the folks who are sold annuities are seldom, if ever, told this critical point. And most people do not have $600,000 in after-tax dollars available to put into an annuity. Most folks have the majority of their 'retirement' dollars in pre-tax accounts.
@BobC: An excellent point; an annuity should be bought with AFTER-TAX dollars. One possible way people would have $600,000 to invest would be to sell a house. The resulting income stream could then be used to rent/lease other living accommodations.
One thing that makes my wife, a retired schoolteacher, angry are the fact that some school districts offer annuities as a component of a tax-deferred 403(b) account.
One thing that makes my wife, a retired schoolteacher, angry are the fact that some school districts offer annuities as a component of a tax-deferred 403(b) account.
Don't mean this to sound the way it might, but why did they not save for retirement? I mean, what do they say now by way of retrospective analysis? Because they knew they had this sort of security? Needing to spend on kids etc.?
David,
Most of my father-in-law's teaching career was during a time when teachers salaries were pretty meager and his wife never made much as a secretary. They always struggled financially, had 4 kids to raise, would take vacations on a credit card and repay before the next vacation, etc. Both would admit that Christmas spending was more than it probably should have been. They always drove beaters so they could live in a little better neighborhood.
Today, my father-in-law advises to be sure and save up regularly...wishing they had done better in that regard. Though they have a better than average monthly retirement income, the issue arises when "big" expenses pop up...home repairs, etc.
My mother-in-law has a little bit different take as she always says not to place "too" much importance on money...no guarantee of happiness. Live for memories...and they do have many good family memories despite the struggles.
They are very fortunate to have their pensions, because if social security was all they had in monthly income their situation would be far, far different. Had they not had pensions to fall back on, would they have done things differently...good question? Not sure how much they ever really thought about that.
Comments
Have a great Sunday,
Derf
If A were to buy a single premium annuity with $450,000, he would increase his income by $30,000 per year ($450,000 is 3/4 of the $600,000 needed to secure a $40,000 income stream as calculated in the Burns’ article). Person A would also have $50,000 of investments that will probably grow much more than B’s $50,000 of savings. Also I do not consider including the $600,000 equivalent to a $40,000 pension as wealth - neither the $600,000 or $40,000/yr pension will be inherited by B’s heirs.
The above considerations raise the question of what is the function of a single premium annuity in retirement? The money used to purchase the annuity is no long yours but the income stream is only taxed on investment income, not on return of principle (the money used to purchase the annuity).
I also don’t consider A and B to be equal. For B to have $6,000 more per year in Social Security and to receive a $40,000/ pension, B would have had to be employed in a much higher paying job.
In conclusion, I do consider Social Security, pensions and single premium annuities important to retirement, but not necessarily to wealth because they cannot be inherited.
Cheers
But, between their social security and pensions they have an annual income in the $70,000 + range and live in a nice gated community for 55 years old and up individuals.
One thing that makes my wife, a retired schoolteacher, angry are the fact that some school districts offer annuities as a component of a tax-deferred 403(b) account.
Cheers
403bwise.com/participants/index.html
Most of my father-in-law's teaching career was during a time when teachers salaries were pretty meager and his wife never made much as a secretary. They always struggled financially, had 4 kids to raise, would take vacations on a credit card and repay before the next vacation, etc. Both would admit that Christmas spending was more than it probably should have been. They always drove beaters so they could live in a little better neighborhood.
Today, my father-in-law advises to be sure and save up regularly...wishing they had done better in that regard. Though they have a better than average monthly retirement income, the issue arises when "big" expenses pop up...home repairs, etc.
My mother-in-law has a little bit different take as she always says not to place "too" much importance on money...no guarantee of happiness. Live for memories...and they do have many good family memories despite the struggles.
They are very fortunate to have their pensions, because if social security was all they had in monthly income their situation would be far, far different. Had they not had pensions to fall back on, would they have done things differently...good question? Not sure how much they ever really thought about that.