Pension in the USA: everything you need to know immigrants

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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 US, when you pay taxes on the money you earn, part of it goes to something calledsocial security" tax. Manages this money Social security administration (SSA) is an analogue of the Pension Fund that 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 as SSN - an identification code assigned by the tax office), you can view the history of your work - in what year and how much 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.

Pension

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.

We should not forget that if you are entitled to one and a half thousand dollars in pension, then in reality you will receive much less in your hands. After all, a pension is no different from any other income and in the civilized world they pay tax on money earned. 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 have to 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 USA? This pension may look high for residents of post-Soviet countries, but in the United States it is not entirely easy to live on that kind of money. Although most Americans usually already have their own home before retirement age, paying off a loan for it for 30 years (about 67% live in their own houses and apartments), having your own home does not always mean that you don’t have to pay anything for it. If this is a private home, then you almost always need to pay property taxes (which, in the best case, will be about $10,000 per year). If it's an apartment, it often happens "maintenance fee“, that is, fees for maintaining the house, etc. Plus utilities, telephone, food and other expenses.

It turns out that even for the “middle class” in the United States, who have worked and paid taxes all their lives, the size of their pension is clearly not enough for a good life. What should I do?

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401 (k)

401(k) is the name of a voluntary retirement plan. The name is so strange because 401(k) is the clause (and subclause) in the 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 benefit of this account is that the money you put into it is deducted from your income, and you only pay taxes on the balance. True, upon retirement, when receiving funds from this account, you will still have to pay tax, as I wrote about above.

The deferred money does not lie on the account idle. They must be invested in Mutual Funds (mutual investment funds), that is, in a mixture of shares of various companies and bonds. Typically, there are several dozen different funds to choose from, which have different stock/bond ratios and, accordingly, are either riskier with the opportunity to “earn more” or more conservative, which helps minimize the likelihood of losing most of the money. Depending on the financial situation on the stock exchanges, the invested funds may either rise or fall in value. Thus, during the crisis of 2007-2009, the S&P500 fell by more than 50%, that is, most funds fell by the same percentage. This means that if you had $100,000 in your retirement account, after 2 years you would only have $50,000 left there.

Фото: Depositphotos

The good news is that people usually don’t put money into a retirement account in order to earn some money and withdraw it within a year. Money is invested there throughout life, and every year then the amount needed to live for a year is withdrawn. And on average over the last almost 100 years, financial markets have shown growth of about 7% annually (even though there are sometimes huge declines, like in 2000 or 2008). It is often advised that the younger you are, the more “risky” stocks you should have in your portfolio and the fewer “stable” ones, and as you age, change the ratio in favor of bonds.

Every year, the firm that handles our 401(k) plan comes to our office. They answer questions and give advice. And they always show a graph similar to the following. If you start saving $25 a year at age 5,000, put it away for 10 years and never add another penny to it (during that time you save $50,000), then at age 65 you will have $602,070 in your account (assuming your average 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 have saved $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 starts saving at the age of 25 and will save throughout his working period. Until he turns 65, he will save his $200,000 and have $1,142,811 in his account—more than a million dollars. This is called the power of "compound interest" (compound interest) - when interest increases annually on the entire amount and on the interest you received in previous years. Of course, they advise you to save not 5000 a year, but more. IRS (Internal Revenue Service, or “tax” in our language) limits the maximum amount that can be deposited into 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 haven't saved enough and are trying to catch up).

But even $1,142,811 should be enough for 20 years if you withdraw $100,000 a year - and this will already be a decent pension.

A 401(k) is not mandatory for either employees or employers. Many employers, in order to give another “benefit” of working for the company, offer the so-called “matching". That is, for every 1% I put into my retirement account, my employer will add something there himself. Some offer 100% match, meaning they will add the same amount to my account as I do, some offer half of what I put in, and some add nothing 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.

Фото: Depositphotos

At the end of

A 401(k) is just one option for saving for retirement. There are also Roth 401 (k) accounts - when money on which you have already paid taxes is set aside, that is, when you receive a pension, you will no longer need to pay taxes; One Traditional mode IRA, Roth IRA, SEP IRA, 403(b) (an account into which employees of schools and some nonprofit organizations can save), and others. But in reality, all this is not so important. You can even save money in a regular checking account or an investment account, investing in stocks and various funds without taking advantage of retirement accounts. The important thing is that in the United States, most people prepare for retirement from a young age, saving a portion of each salary in order to be sure that after retirement age they will have enough to travel to Europe, go to a restaurant, and generally have something to live on.

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