Have They Lost Their %&#! Minds?!

Marc Lichtenfeld By Marc Lichtenfeld
Chief Income Strategist, The Oxford Club

Retirement Planning

Last week, Treasury Secretary Steve Mnuchin and Director of the National Economic Council Gary Cohn laid out President Trump’s proposal for tax reform.

Though details were scarce, there were a lot of things to like, including lower tax rates for individuals and businesses, elimination of the alternative minimum tax and a simplification of the tax code.

On the surface (which is as in-depth as Mnuchin and Cohn would get), most of it is good stuff.

But there’s a proposal out there that is so bad, it could completely wreck the retirements of millions of people.

The Trump administration is considering the removal of the pretax benefit of 401(k) and similar plans.

The news led me to blurt out the headline you see above. (Apologies to my office mates with delicate sensibilities.)

In a meeting with the Senate Banking Committee, Cohn proposed getting rid of the ability to lower your taxable income by contributing to a 401(k).

On Thursday, White House spokesman Sean Spicer said that the 401(k) pretax benefit would go away. Later that afternoon, the White House issued a statement saying it wouldn’t.

So either it’s making up policy on the fly or there is a great deal of confusion in the administration.

It’s an important detail.

Here’s an example of how it currently works…

If you earn $75,000 per year and contribute $5,000 to a 401(k), your taxable income is lowered by $5,000. So not only does the $5,000 you contributed grow tax-deferred, but you pay taxes on only $70,000 in income, rather than $75,000.

For someone earning $75,000, lowering their taxable income by $5,000 results in an immediate $1,250 tax savings.

That’s a big deal.

For many investors, that lower tax bill is a key reason they participate in a 401(k) plan.

Why would members of the government remove an incentive to save for retirement when Americans are facing a retirement savings crisis? The only answer is…

They have in fact lost their %&*#! minds.

The average household with a 401(k) headed by a pre-retiree (someone 54 to 64 years old) has just $111,000 in retirement savings.

Sorry to say, but that ain’t gonna cut it.

The average person will spend more than that on just healthcare in retirement. That doesn’t take into account things that are kind of important like food and housing.

According to Fidelity, a couple retiring today will spend $260,000 on healthcare in retirement.

When you look at all households, including those without 401(k)s, the numbers are even more dire. The median retirement savings falls to a puny $12,000 for near retirees and just $3,000 for all working households.

The government should be doing whatever it can to incentivize people to save for retirement – otherwise we’ll all be paying for it later, with more expensive dollars.

Tax reform is supposed to be revenue neutral. So the federal government is desperate for funds to pay for the tax cuts. But taking away an incentive to save is as bad an idea as sending in law enforcement to drag a middle-aged doctor off of a United Airlines flight.

Actually, it’s much worse.

Of course, your representative doesn’t care. He or she has a congressional pension that will pay them an average of $41,316 per year. Plus, Congress has a fantastic retirement savings plan. It matches 100% of the dollars that they contribute. Or I should say we match 100% of the dollars that they contribute.

So if your congressman saves $5,000 in their retirement plan, you and I contribute the other $5,000. (Think about that the next time you’re putting in long hours at work.)

In the real world, less than one in 10 companies match 100% of employees’ contributions.

It’s tough for many working families to put money away for retirement. Removing an incentive and tax break will only lower the savings rate and cause the retirement savings crisis to worsen.

We need to find ways to encourage people to save, so that taxpayers aren’t bailing them out 10, 20 and 30 years from now.

Washington doesn’t have a great track record when it comes to good ideas. But taking away incentives to save for retirement is one of the worst.

Call your representatives and senators, and make them care. Let them know that not only do you want the pretax benefits of 401(k)s and other retirement plans to remain, but you will do everything in your power to make sure they are voted out of office if they go along with this asinine idea.

They don’t want to give up those cushy pensions and retirement plans, so they might just listen.

Good investing,