Since 1971 the life expectancy of the average 65-year-old in the U.S. has improved 4 to 5 years.  By 2050, forecasts suggest, they will add another three years on top of that.  Until now, people have converted all that extra lifetime into leisure time.

Trying, but not hard enough

Living longer and retiring early may not be a problem if there were an increasing supply of workers.  In 1950 there were 7.2 people working for each person age 65 or older.  By 1980 that ratio had dropped to 4.1.  Declining fertility rates imply that by 2050 there will only be 2.6 American workers supporting each pensioner.  There won’t be enough young workers to keep the already troubled system going.  Economic growth is a function of the size of the workforce, the amount of capital employed and the rise in productivity.  If the workforce shrinks, as domography shows it will, all the growth will have to come from capital investment and productivity improvements.  In Japan, where the working population is already getting smaller, economic growth has been miniscule, despite a good productivity record.  To counteract a shrinking workforce, retirement age will need to be raised.

There are some advantages??

Working longer does have three advantages (if you want to look at it that way).  1.  The employee gets more years of wages and can save more money.  2.  The government receives more in taxes and pays out less in benefits.  3.  The economy grows faster as more people work longer.  Yet many people worry that if workers stay longer, there won’t be enough jobs to go around.  Others have concerns that older workers aren’t as productive as younger workers.  But in a knowledge based job, this isn’t as big of an issue.  Older workers have more experience and, by and large, better personal skills.  Even so, pay will need to reflect productivity.  Traditional pay based on job seniority and time on the job will likely need to change.

Pension problems

In the private sector, the pension problem is being dealt with.  Rarely are new employees ever offered a pension anymore.  But in the public sector, pensions are still a common benefit for most.  The deficits in our public pension system here in America amount to $3 trillion.  Legal and constitutional constraints prevent the government from changing what has already been promised.  But as this problem worsens, politicians are going to have to do something to change laws and constitutions.

I would welcome your comments on possible solutions to this increasing the retirement age issue.

Pay Now

When you convert part of your IRA or 401(k) to a Roth, you have to pay taxes now on the amount you convert.  Many people feel that tax rates are likely to go higher in the future (especially since our tax rates today are the lowest we’ve seen in decades).  Everyone knows about our government’s debt situation…it’s not good,  not to mention social security and Medicare.  To pay for all these things, they’re going to have to increase taxes at some point.  So to pay your taxes now may end being a pretty good deal.

Play later

Paying taxes at a lower rate today may sound nice, but the real benefits of the Roth IRA conversion are long term.  As you know, Roth IRA’s grow tax free.  That means that when you eventually pull your money out of the Roth at some point down the road, you don’t have to pay any taxes on ANY of the earnings!  This is especially attractive for younger individuals who have time to let the money grow and compound tax free.  In general you need to plan on the money growing for about 10 years or longer before you plan to use it in order to benefit from paying the taxes now.  The more tax rates go up in the future, the sooner you will “break even” so to speak, and come out ahead.

Out of Pocket, But Spread Out Over Two Years

When you convert part of your IRA or 401(k) to the Roth you have to pay the taxes out of your pocket.  You cannot have the taxes taken out of your IRA account.  This can limit the amount you may realistically be able to afford to convert.  If you have savings in an after-tax account, you could use money from that to pay the taxes also.  The best part is, you can spread that tax payment over the next 2 tax years!  So you don’t have to pay them all this year, which helps.

A Higher Tax Bracket?

Be careful as to how much you convert.  Not only do you have to pay the taxes on it out of pocket, but converting to the Roth could bump you into a higher tax bracket for this year.  Whatever amount you convert will be added as taxable income to the rest of your taxable income for the year.  So if you make $80,000 at your job, and you convert $20,000 to a Roth, your taxable income is now $100,000 for the year.  Be sure to consult a tax professional before you make a conversion so that you don’t regret doing it later.

Here are the 2010 tax rates:

Talk to your personal financial planner today to see if making a Roth IRA conversion might make sense for you in 2010.