Social Security and Qualified Plans | Allstate

Updated : Aug 29, 2019 in Articles

Social Security and Qualified Plans | Allstate


Now let’s look at two anticipated sources
for funds, sources people traditionally rely heavily on when planning for retirement—Social Security and employer‐provided qualified retirement plans. Social Security is structured to provide basic
benefits. That’s why it’s safe to assume that Social
Security alone will never provide much more than a day‐to‐day existence during retirement,
if that, in fact. This is why most workers rely heavily on qualified
retirement plans to help build a sufficient retirement nest egg. But these plans have their own strict limitations. As generous as the tax code is with deductions
and incentives, Congress still strictly limits contribution amounts and participation. What’s equally
concerning is that the rules clearly do not favor highly compensated business owners,
executives and successful professionals. Let’s see why these people in particular should
not rely exclusively on this source of income if they hope to sustain their accustomed lifestyle
during retirement. Suppose a highly compensated 50‐year‐old
executive estimates she will need 75% of her current compensation to create a comfortable
retirement beginning at age 65, an income she hopes will last at least 22 years. With a current salary of a hundred fifty thousand
dollars and a retirement income target of 75 percent of that amount, she’ll need about
one hundred twelve thousand five hundred dollars a year, lasting from age 65 to age 87. To accumulate a fund that will pay one hundred
twelve thousand five hundred dollars for 22 years, assuming a three percent increase to
offset inflation, this executive will need a stunning 2.2 million dollars at age 65. And this assumes eight percent after‐tax
earnings and twenty‐four thousand dollars of income from Social Security. If she starts from scratch at age 50, that
would require a contribution of almost 75 thousand dollars every year for the next 15
years.

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