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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 459409  
Subject: Deleted Message Date: 2/22/2014 7:27 PM
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Author: jerryab2 Big red star, 1000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445282 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 12:29 AM
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That $205k could be indexed--as many such areas already are. SS COLA is one good example. Many other tax related things all have annual adjustments for inflation (i.e. personal exemption, dependent deduction, etc).

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445289 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 9:05 AM
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Heads up from MarketWatch.com

http://tinyurl.com/khpwnnw

[One proposed budget provision] would also cap the maximum amount of money that could be held in tax-deferred retirement accounts at a level that would limit them to providing an annual retirement income of $205,000, according to a formula based on prevailing interest rates. (That level is currently $3.4 million, but could fall if rates rose higher.)

...[Another] provision would limit the total value of all tax deductions, defined-benefit plan contribution exclusions and IRA deductions to 28% of income—a move that would have the effect of increasing tax liability for higher-income people who maxed out their savings options...


http://tinyurl.com/khpwnnw

Assuming, as jerryab2 points out, that the max income figure of $205K were indexed to inflation, it might make sense to double-check the manner in which inflation is measured.

IIRC, "official" inflation figures sometimes don't seem to include food, energy or some other types of inflation that affect retirees.

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Author: MetallicaRocks One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445296 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 10:28 AM
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Why was the original post FA'd? Seems to me it was METAR in nature, what gives?

MR

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445315 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 1:21 PM
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Why was the original post FA'd? Seems to me it was METAR in nature, what gives?

MR,

I made the original post. Then, before I went to bed, I read it again and thought it might possibly be construed as too political for METAR, so I FA'd it myself. The Fool pulled it at my request overnight.

This morning, I noticed jerryab's response and decided the linked essay was the type of information that METAR folks would appreciate knowing, so I re-posted the excerpted information in a form that I thought might be less likely to be considered political.

You are right, though, changes in any of the rules pertaining to tax-deferred accounts will definitely have macroeconomic implications and effects.

I am uncomfortable with proposed caps on savings or income - even if indexed for inflation, since inflation numbers are subject to manipulation and are very subjective.

Cheers.

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Author: wasmick Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445325 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 3:26 PM
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I don't know whether this particular provision is likely to make it through the D.C. budget gauntlet. However, if it does, then many future retirees better hope that $205,000 continues to be enough to pay for a middle class retirement lifestyle (i.e. - hope that there isn't any inflation in the prices of food/drugs/insurance/heating oil/electricity/home health care/funerals, etc.). If so, then some aspiring "middle class" savers and retirees could be really hurt.


$200,000 a year puts one in the top 5% income earners on the country, hardly middle class.

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Author: namkato Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445331 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 5:07 PM
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$200,000 a year puts one in the top 5% income earners on the country, hardly middle class.
================================

With probably a paid off house, and certainly Medicare, plus maybe a pension and/or SS, and not including 3-4% or more drawdown of the $3.4 million of capital ($102,000 to $136,000/yr). I call that wealthy.

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Author: MarkR Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445337 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 5:58 PM
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You are right, though, changes in any of the rules pertaining to tax-deferred accounts will definitely have macroeconomic implications and effects.

I don't think this one will have a large macro effect. After all, it likely affects only 0.3% of the population.

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445339 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/23/2014 6:16 PM
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$200,000 a year puts one in the top 5% income earners on the country, hardly middle class.

That's what I have been thinking. I live comfortably on about 10% of that.

Another issue with a very large conventional IRA is, when you hit 70 1/2 the size of your annual distributions is dictated to run the account down according to an actuarial table. How high a tax bracket do you want to be in? As it is, I hope I can draw down my IRA enough by then so the mandatory withdrawls don't put me in a higher tax bracket than when I made the contributions.

Steve....20/20 hindsight, should have converted to a Roth as soon as it was available, never imagined the IRA would be where it is now.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445366 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 9:12 AM
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$200,000 a year puts one in the top 5% income earners on the country, hardly middle class.

If you look at how the cap is figured (and thus what it would generate) it is based on the current historically low interest rates. Yes today the cap is $3.4 mil, but let interest rates get back to normal, the cap could easily be $1 mil. What would that then generate, $40k? Which is what, the average income for the US (at least according to 2012 data).

Middle class enough for you?

Be careful of unintended consequences. So lets assume normal rates and a $1 mil cap. A young person starting out happens to buy the next Apple, Netflix, of Tesla and is soon at the cap limit. So now they have to invest outside of a tax deferred account. Ok, no big deal, but now they are paying taxes, at a high rate. Is that a good thing?

JLC

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Author: THEMATHISNEAR Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445388 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 1:23 PM
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I don't think this one will have a large macro effect. After all, it likely affects only 0.3% of the population.

HAHAHAHAHAHAHA! Thanks for the laugh! Oh, wait, you meant that? If so, I have three letters for you: A.M.T.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445393 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 2:08 PM
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Up until 1997 IRA's had a "success tax" of a 15% surcharge on annual distributions exceeding $160,000/year. The reasoning was that IRAs were designed to be retirement plans, not wealth transfer vehicles for the wealthy.

http://money.cnn.com/magazines/fortune/fortune_archive/1997/...

On the other hand, more red flags of danger should wave if Congress and President Clinton don't agree to repeal the so-called success tax this year. The 15% levy now applies to "excess" distributions from 401(k)s and IRAs (more than $160,000 a year). That extra wallop at the end alters all sorts of calculations, since it discourages accumulating wealth. But now, thanks to Sen. Phil Gramm (R-Texas), Congress is poised to repeal the tax. The Senate has passed Gramm's repeal provision, and insiders believe it has a strong chance of surviving the whole process. If the President signs a tax bill this year, the "success tax" likely will no longer be a peril for aggressive savers.

</snip>


intercst

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445396 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 2:31 PM
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Up until 1997 IRA's had a "success tax" of a 15% surcharge on annual distributions exceeding $160,000/year... thanks to Sen. Phil Gramm (R-Texas), Congress... repeal[ed] the tax [and the president signed it]...

Good catch, intercst.

I'll never forgive that man for the repeal of Glass-Steagall or for the passage of the Commodity Futures Modernization Act of 2000. Although I hate to see savers penalized (and thus should be glad the "success tax" was repealed, I would have to question anything that this particular man or his cronies had a hand in.

At least he was a consistent servant of his wealthy masters. He clearly established the future of US financial regulation and tax policy for the following decade(s).

God help us all.

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Author: wasmick Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445408 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 4:12 PM
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If you look at how the cap is figured (and thus what it would generate) it is based on the current historically low interest rates. Yes today the cap is $3.4 mil, but let interest rates get back to normal, the cap could easily be $1 mil.

I saw how it was figured and the assumptions thereof, where do your calculations put rates in order for it to fall to $40K?


What would that then generate, $40k? Which is what, the average income for the US (at least according to 2012 data).

Middle class enough for you?


Yup. Although - as previously stated in this thread - with a (likely) paid off house, Medicare, maybe a pension and/or Social Security, sure, middle class. Probably upper middle class.


Be careful of unintended consequences. So lets assume normal rates and a $1 mil cap. A young person starting out happens to buy the next Apple, Netflix, of Tesla and is soon at the cap limit. So now they have to invest outside of a tax deferred account. Ok, no big deal, but now they are paying taxes, at a high rate. Is that a good thing?

I don't know, is that actually how this proposed cap is suposed to work? If so please post the link. I'll gladldy read through it and then respond.

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445415 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 5:08 PM
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Up until 1997 IRA's had a "success tax" of a 15% surcharge on annual distributions exceeding $160,000/year... thanks to Sen. Phil Gramm (R-Texas), Congress... repeal[ed] the tax [and the president signed it]...

Good catch, intercst.

I'll never forgive that man for the repeal of Glass-Steagall or for the passage of the Commodity Futures Modernization Act of 2000. Although I hate to see savers penalized (and thus should be glad the "success tax" was repealed, I would have to question anything that this particular man or his cronies had a hand in.


One big issue was that the "success tax" described above was for distributions over a fixed dollar amount, and existed in concert with minimum distribution rules that were based on one's age and the size of one's account.

There were a surprising number of elderly folks who would be penalized if they withdrew from their IRAs any amount less than $180,000 or any amount greater than $160,000.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445430 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 10:07 PM
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I don't know, is that actually how this proposed cap is suposed to work?

Umm, if you can't save in an IRA or other deferred account, that leaves your "savings" subject to dividend, interest, and capital gains taxes. Thus, higher taxes regardless of income level.

Unless of course you think $1 million is more than enough for anyone.

JLC

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445431 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/24/2014 10:09 PM
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There were a surprising number of elderly folks who would be penalized if they withdrew from their IRAs any amount less than $180,000 or any amount greater than $160,000.

Sounds like exactly the sort of complex catch-22 that our massive and unnecessarily complex tax code was destined to generate - thanks to blind partisanship, special interest politics and cronyism.

=:-o

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Author: wasmick Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445537 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/25/2014 8:34 PM
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Umm, if you can't save in an IRA or other deferred account, that leaves your "savings" subject to dividend, interest, and capital gains taxes. Thus, higher taxes regardless of income level.


Unless of course you think $1 million is more than enough for anyone.



In order to make any meaningful statements on the above, we'd first have to agree on your calculations which drove you to the conclusion that if rates return to normal the annual payout amount would drop to $40,000.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445594 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/26/2014 3:53 PM
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In order to make any meaningful statements on the above, we'd first have to agree on your calculations which drove you to the conclusion that if rates return to normal the annual payout amount would drop to $40,000.

There this cool website called Google.

Didn't take long, 0.7 seconds, to pull up this article.

http://online.barrons.com/article/SB500014240527487043112045...

Here is the highlight. They even calculate even worse than I was talking about. How is a $100k cap for you.

BUT THAT'S NOT ALL. Since the conversion between annuities and actual dollar amounts of savings is based on actuarial assumptions, your actual cap would depend on your age. The numbers being bandied about -- whether $3.4 million one year, or $2.3 million another -- apply only at age 62 or older. Anyone younger would face a lower, and in some cases much lower, dollar cap. In an 8% interest-rate environment, for example, a 25-year-old would max out at $131,807, according to EBRI research director Jack VanDerhei.

As far as a $40k payout, simple 4% rule of thumb off of a $1M portfolio.

JLC

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Author: aleax Big gold star, 5000 posts Top Favorite Fools Global Fool Pro Community Winner Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445604 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/26/2014 4:38 PM
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Unless of course you think $1 million is more than enough for anyone.

In order to make any meaningful statements on the above, we'd first have to agree on your calculations which drove you to the conclusion that if rates return to normal the annual payout amount would drop to $40,000.


The "4% rule" for retirement withdrawals is of long standing -- see e.g http://www.forbes.com/sites/steveschaefer/2014/01/17/spendin... .

Exactly because it's been around for more than a generation, has worked reasonably well, and has become "received wisdom" among financial advisors, you'll easily find many challenges to it as well -- after all, how's a new guy on the block looking to make a name for himself to stand out except by challenging received wisdom. But as many challenges claim a lower rate is needed, as claim a higher one is feasible, so let's say they cancel each other out;-).

This doesn't mean that overall returns from a prudent balanced portfolio are 4% -- in the long run they're higher, but the extra in "fat years" is better plowed back into "the principal", so that withdrawals can be maintained (and inflation-adjusted) in "lean years" while minimizing (not all the way down to zero, alas, but, to very small probability) the chance that money will run out before the retiree's lifespan does.

So, as a somewhat approximate but sound indicator, the idea that a prudent, well balanced million dollars portfolio allows a retiree to sustainably withdraw about $40k a year, inflation adjusted (before taxes -- unless the portfolio's in a Roth account), is quite usable.

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Author: rharmelink Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445635 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/26/2014 9:49 PM
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As far as a $40k payout, simple 4% rule of thumb off of a $1M portfolio.

I seem to recall that coming out of assumptions of 3-4% inflation and 7-8% ROI on the portfolio.

Then, the 4% withdrawal rate is completely sustainable, with withdrawals keeping pace with inflation.

Those assumptions are no longer true.

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445636 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/26/2014 10:19 PM
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Those assumptions are no longer true.

There have been many occasions when they were not true in the short run - often several years at a time.

They have nonetheless held up well when looking a decade or two or three at a time.

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Author: jgc123 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445698 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/27/2014 1:06 PM
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warrl:

"They have nonetheless held up well when looking a decade or two or three at a time.

Maybe. I hope so. But....

Is that really true for the decades running from 1930 to 1950?

Have we ever had a massive bank bailout combined with trillion dollar QE and ZIRP programs before?

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Author: jgc123 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445703 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/27/2014 2:00 PM
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I do think that calculating one's safe withdrawal rate can be of value in planning for retirement. I have played with all three of these calculators and others as well, with the first being the easiest and the next two being a little more helpful overall:

http://www.caniretireyet.com/the-3-best-free-retirement-calc...

Using my present level of savings, estimated monthly Social Security and pension payments for jgcspouse and me and varying withdrawal rates, I get a better picture of how much I will need to save to justify a withdrawal rate of 3, 4 or 5% at varying retirement ages.

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Author: wasmick Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445706 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/27/2014 2:16 PM
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There this cool website called Google.

Didn't take long, 0.7 seconds, to pull up this article.

http://online.barrons.com/article/SB500014240527487043112045......


Never heard of it. But following the link it appears to be a website that simply links you to other websites that in turn speculate about things that may or may never occur. Clearly not missing anything there...


Here is the highlight. They even calculate even worse than I was talking about. How is a $100k cap for you.

I couldn't read their actual calculations, their agenda kept getting in the way. I'd still like to go through your initial assumptions. You said rates returning to normal would drive the annual payout to $40,000. I'm interested in what exactly rates need to be for that assumption to be true and what is the proposal for how they propose to manage this year over year in a changng rate environment?


As far as a $40k payout, simple 4% rule of thumb off of a $1M portfolio.

Agreed; but that's not what I was asking.

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Author: MarkR Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445766 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/28/2014 12:59 AM
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As far as a $40k payout, simple 4% rule of thumb off of a $1M portfolio.

But if the income limit is $205k, wouldn't the 4% rule imply a maximum IRA balance of $5.125M?

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445792 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/28/2014 10:03 AM
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I couldn't read their actual calculations, their agenda kept getting in the way. I'd still like to go through your initial assumptions. You said rates returning to normal would drive the annual payout to $40,000. I'm interested in what exactly rates need to be for that assumption to be true and what is the proposal for how they propose to manage this year over year in a changng rate environment?

Did you bother to read? Any of it?

They assumed rates of 7-8%. Go back and look, it is there.

Then they said exchanging cash for an annuity, BASED ON AGE (obviously worse for a 25 than a 62 year old), brings the IRA cap down to roughly $100k.

$40k annual is 4% of a $1M portfolio/annuity.

... their agenda kept getting in the way.

This is your major problem.

If you can't get your head around simple back of the envelope calculations, there is no need to further this conversation.

JLC

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445794 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/28/2014 10:07 AM
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But if the income limit is $205k, wouldn't the 4% rule imply a maximum IRA balance of $5.125M?

Since it is annuity based, highly dependent upon age. For a 62 year old and a 25 year old you'd get drastically different caps. The 4% rule is just an estimating tool.


JLC

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Author: aleax Big gold star, 5000 posts Top Favorite Fools Global Fool Pro Community Winner Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445799 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 2/28/2014 10:37 AM
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Is that really true for the decades running from 1930 to 1950?

Yes, the various "rules of thumbs" for savings, investments, and retirement withdrawal, were mostly developed based on (what we now call) back-testing for these decades (Benjamin Graham's contributions "seeding" the whole practical side of the field).

The first edition of "The Intelligent Investor: A Book of Practical Counsel" was published in 1949, so of course it more or less inevitably reflected Graham's last few decades of professional experience. (It's a pretty "immortal" text, with a new edition per decade or so, but since Graham's death newer editions may not have much added value IMHO).


Have we ever had a massive bank bailout combined with trillion dollar QE and ZIRP programs before?

Reasoning in terms of "% of GDP", more meaningful than absolute numbers of dollars (given inflation &c), the size and impact of the policies of those decades was at least as large as today's.

Of course, many details differed deeply (e.g expenses for WW2 as a % of GDP were larger than for contemporary wars, and accompanied by measures such as rationing and price/wage controls, which have not been used more recently); history does not repeat itself, though it does rhyme.

But for example the financial suppression (very low interest rates) practiced by the Fed back then (explicitly and deliberately to help control over-100%-GDP Federal debt, secondarily with some hope to stimulate economic growth, which that time worked very well) aren't all that different from today's financial suppression, even if goofy terms like QE and ZIRP were not in use back then;-)

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Author: wasmick Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445939 of 459409
Subject: Re: Do you have >$3.4M in your IRA? Date: 3/1/2014 4:31 PM
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Did you bother to read? Any of it?

They assumed rates of 7-8%. Go back and look, it is there.


I did read it, thanks. I guess I just missed the part where they state 7% to 8% rates are normal and then supported that declaration with data.


Then they said exchanging cash for an annuity, BASED ON AGE (obviously worse for a 25 than a 62 year old), brings the IRA cap down to roughly $100k.

Great. Since this seems to be the crux of your hysteria do you care to dimension it to reality in terms of actual number of folks impacted? Hint: If you're truthful you won't like (or maybe already know) what this analysis will reveal so I'm sure the answer to this one will be: no.


This is your major problem.

If you can't get your head around simple back of the envelope calculations, there is no need to further this conversation.


Funny and here I am thinking that your over-simplification is exactly why you either don't understand this or are pretending that it's much, much worse than it actually potentially may be. You see, the calculations were never the issue for me, it's the assumptions with which I have a problem. And since that goes to nuance, which is something many folks struggle with, perhaps that 's the real issue here.

That said, I can't tell you how much I appreciate your going out of your way to attempt to insult me with each reply. That kind of thing really embellishes your credibility and supports your point of view. I'm sorry that you disagree with my opinion - as I do yours - the difference is that I don't feel any need to attempt to insult you over it.

This is a presidential budget proposal. It can't be approved with a majority vote from both the House and Senate, so at this point you may be worried over something that likely won't ever occur.

Additionally, we are talking about a tiny portion of the population who might be impacted. Might.

Impacted how? They might lose tax deductibility over a certain dollar amount. Not lose their assets, not pay penalties....just pay tax on amounts over $3.4MM. And again, how many americans is that? Some? Most? A good portion? Nope, none of the above, actually; in fact it's very very few. So yeah, let's all wrap ourselves in the red, white and blue cloak of defending the middle class all while mistaking middle class for the Mitt Romneys and Warren Buffets of the world.

And not that this matters at all but I'll be directly impacted today if this passes. Yes horror of horrors, I may have to pay tax on the amounts in my retirement accounts over $3.4MM. If I don't like that I guess I could renounce my citizenship and move but I think I'll take my chances and stay in the country. For now.

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