Welcome back to the Bull Pen. If you don't remember me, my name is Dean Akey and I will be your guide for another fun filled edition. Are you ready? OK then, let's get started...
Ronald Reagan once said, "Politics is supposed be the second oldest profession. I have come to realize that it bears a very close resemblance to the first." Never were truer words spoken. We live in an era where our elected officials are more concerned with protecting their individual interests versus ours. Don't get me wrong, this article isn't about bashing the Democrats or Republicans. They are both equally guilty in my eyes and a topic for another day.
You may have heard that the tax cuts originally instituted by President Bush were extended in an eleventh hour bill for the 2011-12 tax years. While some of this legislation will help directly address the needs of Middle America, there are a few components which give me great concern. Specifically, the temporary reduction of the amount we individually contribute to social security. Before I tell you why, let me start by stating that I don't feel old. So when should I start acting or feeling old? With constant advances in medicine, wellness, nutrition and public health many of us need to rethink what constitutes old age.
For many of us, our conception of being old or at least being retirement age is when we turn 65. How did we arrive at the age of 65 as being symbolic of retirement & trading in our careers for rocking chairs?
Actually, the age of 65 was chosen by Otto Von Bismark, who created Europe's first pension plan in the 1880's. Bismark selected an age which people were considered too enfeebled to work and should be provided for via the government. Now one thing you need to know was back in the 1880's, the average life expectancy in the United States & Europe was 45. I guess if you worked your whole life and lived 20 years past your life expectancy this was a reasonable plan.
Now let's fast forward to the current day. If we use the math that Otto used when would we be considered old & worthy of financial support? As I mentioned, the life expectancy in the 1880's was 45. I suspect you already know that we now live longer than 45 but how much longer? The most recent life expectancy for women in the US is just shy of 80 years old. The life expectancy for men is just shy of 75.
Now back to the math, if we use Otto's formula, you would receive financial support at about 97. Now don't think for a minute that I am suggesting we postpone retirement or social security until you are in your 90's but I do want to challenge your thinking on what is considered old.
So I guess there is good news and bad news here. The good news is that you are going to live longer. The bad news is that you are going to live longer. So what does this mean? It means that as a society we need to rethink what old age is and what our "useful" years are. Many of us started the countdown when we entered the workplace. You know what I am talking about..... 30, 20, 15, 10, 5, 4, 3, 2, 1 years to retirement. Unfortunately we still think retirement age is 65. Don't get me wrong, it still can be but only if you are prepared.
Let's say you entered the work force at 21 and worked until 65. That's 44 years of hard work which is a lifetime by anyone's standards. What did you do during that 44 years? The average Americans save far less than what would support your retirement but let's say you put away 15% of your earning a year. Is that enough? It very well may be but do you know? Saving 15% equates to about 6.15 years of earnings before we account for inflation and of course how your money has grown over the years.
So what does this mean for you in the short & long term? Well, as I mentioned earlier, the wizards in Washington decided that for 2011, your individual contribution to social security will be reduced from the current rate of 6.2% to 4.2%. Lower taxes should be a good thing shouldn't they? Don't believe everything you hear. The one potential good thing here is that this will essentially look like a 2% pay increase before taxes. For example, a worker earning $50,000 per year would pay $2100 in 2011 (4.2% of $50K) vs. having paid $3100 (6.2% of $50k) for a net decrease in taxes paid of $1000. If you earned $100,000, your net decrease in taxes paid would be $2000. Now remember, if you earn an extra $1000 or $2000, Uncle Sam and your state will want their cut which will ultimately reduce your take home pay by your effective tax rate. But isn't $600-$1200 or so more in your pocket a good thing?
It can be if you pay yourself first. The pointy heads in Washington are counting that they will tax your additional 2% of income and you will blow whatever is left. Don't get caught in this trap. Unless you live in a cave, you probably have heard that we have some major issues with the solvency of social security. In a nutshell, social security pays out more than it collects. By most estimates, social security will be broke in less than ten years. By reducing what you pay into social security, we accelerate the demise of what many of you were counting on to help you survive in your retirement years.
In the past few years we have seen the age in which you can draw full retirement increase from 65 if you were born in 1937 or earlier to 67 if you were born in 1960 or later. Don't fool yourself by thinking that this hurdle won't be raised again. It will. So what should you do?
As I mentioned, you should use this opportunity to pay yourself first. Instead of falling in to the tax & spend scheme that was set for you, take this opportunity to increase your retirement savings at work so that your money ultimately works for you. If you don't have a retirement plan, give me a call and I will help you start one. I may even be able to help save you a few bucks on your insurance as well.
Well, that's it for this month. When I am not sharing my wisdom with you via my editorials, I run an insurance agency west of Chicago. I enjoy working with fellow bikers helping you protect what matters most. If I can help you please drop me a note at deanakey@allstate.com or give me a call at 877-232-9899. Until next month, enjoy the ride.
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