Pension in the USA: everything you need to know immigrants
Ivan Tick in your blog tells everything you need to know about retirement in the United States. ForumDaily publishes a translated and abbreviated version of its text.
In the USA, when you pay taxes on the money you earn, some of it goes to the so-called “social security”Tax. Manages this money Social security administration (SSA) is an analogue of the Pension Fund, which we understand, which also deals with low-income and disabled people. By registering on the website of this organization (you must enter Social Security Number, abbreviated SSN - the identification code assigned by the tax), you can view the history of your work - in which year and how much it was earned and how much of this money was paid as tax Social Security. Also there you can see the amount that you can receive when you retire, and the amount you will receive from the state if you temporarily or permanently lose your ability to work (become disabled).
Employees are now paying 6.2% of all money earned in the form of tax Social Security. The same amount paid by employers, so in fact in the SSA go 12.4% of salary. If you earn more than $ 118,500 per year, the tax is only removed from this amount, thus limiting the tax amount to $ 7,347 per year (plus the employer pays the same amount).
To determine if you are eligible to receive a pension, the SSA uses a special credit system. For example, for every $ 1,260 earned in a 2016 calendar year, you get a 1 loan, the maximum you can accumulate a 4 loan per year. In order to be eligible for retirement, you need to collect at least 40 loans, that is, you need to work out at least 10 years.
Approximate calculations show that a person born in the 1955 year, who, for example, earned $ 60,000 in the 2016 year (which is higher than the average salary in the US, which is $ 51,939 per year), can retire at the age of 2017 in the 62 year and receive $ 1,185 per month. True, if you retire in 2020 year, the size of the pension will be already $ 1,644. And if you retire in 70 years, you can expect $ 2,287 per month.
It should not be forgotten that if you are entitled to one and a half thousand dollars of pension, then in fact you will receive much less "on hand". After all, a pension is no different from any other income and tax is paid on the money earned in the civilized world. Therefore, about 30% of this amount will have to be given to “Uncle Sam”. It is for this reason that many Americans, after retirement, move to live in states where taxes are lower. For example, in New York you must pay federal tax, New York State tax, and New York City tax. In Florida or Texas, you only have to pay federal tax (there are 7 states in total where there is no state tax).
Is this money enough to live in the United States? This pension may look high for residents of post-Soviet countries, but living on that kind of money in the United States is not entirely easy. Although usually before retirement age, most Americans already have their own housing, paying off a loan for it for 30 years (about 67% live in their own houses and apartments), but their housing does not always mean that you do not have to pay anything for it. If this is a private home, then almost always you have to pay also property tax (which at best will be about $ 10,000 per year). If this is an apartment, it often happens “maintenance fee“, That is, home maintenance fees, etc. Plus utilities, telephone, food and other expenses.
It turns out that even the “middle class” in the United States, which has worked and paid taxes all its life, will not have enough pension for a good life. How to be?
401 (k) is the name of a voluntary retirement benefit plan. The name is so strange because 401 (k) is a clause (and subclause) in tax law that governs this issue. The whole point of the program is that while working, you pay part of your salary to a special account. The advantage of this account is that the money deposited on it is deducted from your income, and only from the balance you pay taxes. True, when you retire, when you receive money from this account, you still have to pay tax, as I wrote above.
The deferred money does not lie on the account idle. They must be invested in Mutual Funds (mutual funds), that is, in a mixture of stocks of various companies and bonds. Usually there are several dozen different funds to choose from, which have different stock / bond ratios and, accordingly, are either more risky with the opportunity to “earn more” or more conservative, which minimizes the likelihood of losing most of the money. Depending on the financial situation on the stock exchanges, the invested funds can either rise in price or fall. Thus, during the 2007-2009 crisis, the S & P500 fell by more than 50%, that is, most funds fell by the same percentage. This means that if you had a notional $ 100,000 in your retirement account, in 2 years there was only $ 50,000 left.
The good news is that they usually don’t save money in a retirement account in order to earn some money and withdraw it in a year. Money is invested there throughout life, and every year then they withdraw the amount that is needed in order to live a year. And on average, over the past almost 100 years, financial markets have shown growth of about 7% annually (even though sometimes there are huge recessions, like in 2000 or 2008). It is often advised: the younger you are, the more it costs to have “risky” stocks in your portfolio and less “stable” ones, and with age, change the ratio in favor of bonds.
Every year a firm comes to our office to deal with our 401 (k) plan. They answer questions, give advice. And they always show a graph similar to the following. If at the age of 25 you start saving $ 5,000 a year, put it for 10 years and don’t add a single penny there (during this time you will save $ 50,000), then at the age of 65 there will be an amount of $ 602,070 on your account (assuming that on average your savings will grow by 7% per year). If you start saving not at 25, but at 35, saving $ 5,000 a year, then within 30 (!!!) years you will save $ 150,000 of your money, and your account will have $ 540,741 - that is, even less than in the previous case.
Well, in the best situation there will be a person who will start to postpone at the age of 25 and will postpone his entire working period. Until the age of 65, he will postpone his $ 200,000 and the account will have $ 1,142,811 - more than a million dollars. This is called the power of compound interest (compound interest) - when interest grows annually by the entire amount and by the interest that you received in previous years. Of course, it is advised not to save 5000 a year, but more. IRS (Internal Revenue Service, or "tax" in our opinion) limits the maximum amount that can be set aside for this account annually. As of 2017, this amount is $ 18,000. For people over 50, the IRS allows you to save $ 6,000 more annually (in case you saved little and are trying to catch up).
But even the amount of $ 1,142,811 should be enough for 20 years, if you withdraw $ 100,000 a year - and this will already be a decent pension.
401 (k) is not mandatory for either employees or employers. Many employers, in order to give one more “benefit” of work for the company, offer the so-called “matching“. That is, for every 1% deposited by me to the pension account, the employer will add something there himself. Some offer 100% match, that is, they will add as much to my account as I do, some offer half of what I put in, and some do not add anything at all.
The funds deposited on such an account are earmarked, they can be used already being retired. Therefore, simply remove them is not so easy. In general, there are a few exceptions, but if you want to withdraw your money before retirement age, you will have to pay an 10% penalty, and of course, pay tax on this amount (this is your profit). You can withdraw money from this account without penalty after the age of 59.5 is reached.
At the end of
401 (k) is just one option for saving money for retirement. There are also Roth 401 (k) accounts - when money is saved from which you have already paid taxes, that is, when you receive a pension, you will no longer need to pay taxes; Traditional IRA, Roth IRA, SEP IRA, 403 (b) (an account that employees of schools and some non-profit organizations can put aside) and others. But in reality, all this is not so important. Money can even be deposited into a regular checking account or investment account by investing in stocks and various funds and not taking advantage of the benefits of retirement accounts. It is important that in the United States, most people prepare for retirement from a young age, setting aside part of each salary in order to be sure that after the onset of retirement age they will have something to go to Europe, go to a restaurant and, in general, have something to live on.
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