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A provision in President Barack Obama’s 2014 budget, recently submitted to Congress, would limit the aggregate balance of all your combined retirement accounts to “an amount needed to fund reasonable levels of compensation in retirement” currently identified as $205,000 per year, or an aggregate balance of $3.4 million.
Unlike most pension limits which adjust upwards over time, this amount will adjust downward as historically low interest rates rise. So, if you have been smart, diligent or lucky enough to accumulate a large retirement-account balance, then you really won’t like what happens once interest rates inevitably rise from their current historically low levels and that limit comes down!
For example, some estimates are that if interest rates rise back to their 2006 levels, the aggregate balance limit could drop from $3.4 million down to $2.2 million.
There have always been limits on retirement-plan contributions, but if this provision passes it would place limits on accumulations for the first time.
American workers have always been told: “work hard, start saving early and invest wisely.” This proposed limit sends a contradictory message at a time when retirement saving needs to be encouraged not discouraged.
The provision focuses on the wrong thing: The current “crisis” in retirement plans is not people saving too much, it’s people saving too little. According to The Employee Benefit Research Institute (EBRI) only 66 percent of workers today are saving for retirement versus 75 percent in 2009.
Confidence in retirement savings
EBRI also noted that 28 percent of workers have no confidence they’ll have enough money in retirement, the highest number in the survey’s 23-year history. It’s no wonder: According to Fidelity’s annual retiree health care costs estimate, a 65-year-old couple retiring in 2012 will need an estimated $240,000 just to cover health care costs during their retirement.