Tuesday :: Dec 27, 2005

Busting The Retirement Balloon

by pessimist

As our wrong-wing friends like to tout, "It's easy to save for your own retirement! So why worry about the privatization of Social Security?"

As I hope to demonstrate, there is PLENTY to worry about!

Let's start with what I think would be a legitimate (to our wrong-wingers, that is!) source for retirement planning:

How Average Joes can retire rich
By Walter Updegrave, MONEY Magazine
December 16, 2005

You needn't be an investing genius to retire with a big 401(k) balance. [A] recent study by Putnam Investments shows that investing prowess isn't what matters.

It's how much you sock away.

In other words, saving more leads to, well, more savings. Not exactly a revolutionary idea, true, but it's surprising how big a bang you get by upping the percentage of salary you put in and how slight the payoff is from being a fund savant.

Putnam created Average Joe, a hypothetical 28-year-old who made the least of his 401(k) between 1990 and 2005. He contributed too little (just 2 percent of his pay [$800, or $15.39/wk], starting at $40,000 [$769.23/wk] ), invested too conservatively (only 30 percent of his assets in stocks) and owned funds that ranked well below their peers.

Ah, if only it were so simple! What this article doesn't take into account are the realities of modern life, minor little trifles like taxes, rent, and utilities, for instance.

According to the IRS Withholding calculator, Joe's annual anticipated $40,000 income tax for 2006 is $4,251 [$82.71/wk] for a 2% 401k contribution of $800, or an anticipated income tax of $3,999 [$76.90/wk] for a 6% 401k contribution of $2400. The standard deduction is taken in each case, as most singles don't have enough deductions to itemize.

In addition to income taxes, the Feds want 7.65% of Joe's pay for Social Security and Medicare [$3060, or $58.85/wk].

We'll say that Joe lives in San Diego. Being a citizen of California, Der Governator would have the Franchise Tax Board (California's IRS) tax Joe $1,708.00 [$32.85/wk] (2005 Automated Tax Table & Tax Rate Schedule). In addition, Californians pay an additional tax, the California State Disability Insurance (SDI):

California has a compulsory state disability insurance which is a fixed percentage of wages, up to a cutoff amount. This is an employee deduction. In 2005 the rate is 1.08% including paid family leave. The tax applies on the first $79,418 in wages.

For Joe, that would amount to $432, or $8.31/wk.

That takes care of taxes. What of Joe's living expenses?

The average monthly apartment rent in San Diego county was $1,222 [about $285/wk], which goes against the advice that one's rent shouldn't exceed 20% of one's income at the most. Unless Joe takes a roommate, this cost would equal 36.7% of his income.

We'll assume that Joe is too conservative to share his meager living space.

Thus, he alone is liable for his utility expenses. The average electricity bill for residential customers of San Diego Gas & Electric is (thanks in part to Enron and their co-conspirators) $73.56 a month [2004, the latest figures I could find]. Consumer bills for natural gas, which include distribution and other costs, average $41 a month, according to San Diego Gas & Electric. I estimate water costs, based on my own household water expense, adjusted for a single person, at about $10/mo.

There is yet no provision for a car, a phone, food, entertainment, or other personal expenses - like health care.

But I digress.

So let's see where Joe's weekly income stands at this point, planning for the smaller of the two 401k contributions:

Gross $769.23
Taxes $182.72
Rent $285.00
Utils $124.56
Net $176.95

This is already lower than the $200/wk necessary to contribute $800/mo to a 401k. There is yet no provision for a car, a phone, food, entertainment, or other personal expenses.

There is also no provision for Joe to contribute to the economic well-being of our nation.

This is an important thing to keep in mind, as Consumer spending drives two-thirds of our economy, says the Commerce Department, and holiday shopping is the biggest portion of that spending. This alone may add to the understanding of why retail sales did not meet projections.

As we know from prior posts, "Holiday sales typically represent half of retailers' yearly sales and as much as 75% of their annual profits." So if Joe is going to have any kind of a retirement for himself, he won't be able to provide profits for retailers - or feed himself - without taking a second job.

That second job isn't going to be very easy to find, because the nation is at full employment according to one of the Federal Reserve Bank presidents:

"I don't see a major movement in the unemployment rate -- it could drift down a little if anything, but not substantially, over the next year," Richmond Federal Reserve Bank President Jeffrey Lacker said in response to a question at a speech to the Charlotte Chamber of Commerce.

And, there is another wrinkle in this wrong-wing retirement funding plan. The average wage of the average Joe in America is around $16/hr. (based on a small COLA above the Dec. 2004 figure) Assuming Joe works an average of 33.7 hours, each week (preliminary Nov. 2005 figure), he only grosses $539.20 a week - a figure less than the total weekly tax, rent, and utility expenses of $592.28 I calculated above.

It's a good thing that Joe has several credit cars he can run up. It's a shame that he can't save them for his retirement, for if King George gets his way, that is all Joe is going to have - even if he lives at home with the folks, which is frankly about all he can do if he expects to have any kind of a life when he gets old!

But as I now point out, even that isn't going to work for him. It will just put things off for a while.

If anything demonstrates why America has a major economic crisis looming, Joe's economic shortfall has to be it. When the foreign debt holders come to collect their due, there is nothing available to take from except the assets of the Topper$ - and we know how willing they are to provide for the common good!

The United States will be expected to abide by the same economic rules that countries like Argentina had to endure for so many years, leading to major public unrest which seeks the toppling of the military government (and criminal trials for some of the actions they took to remain in power) and the default of their foreign loans.

When this happens to America, not only will each of your children owe more than $25,300 to pay for King George's Oil War guns-and-butter-for-Topper$ debt and have less of a future than you now have, they will also have fewer rights than you now have.

So much for leaving the family farm to the kids. Still glad you voted for King George, Red Staters? Just make sure that you thank him daily for your 'prosperity' until the end of your days.

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