Wednesday, May 19, 2010

If "Ifs" and "Buts" Were...

Create Your Own Social Security Fund

With a monthly deposit of $206 per month, you'd have $194,625 at retirement. If you continued to earn 5% interest on your money, you could withdraw $810 per month without touching your principal.

Welcome to the magical and mythical world of 5% interest rates, no inflation, and the ability to withdraw 4x your initial deposits per month until eternity. It truly does give the Social Security Trust Fund a run for the money.

If your money grew at an 8% interest rate, you could nearly equal your retirement principal from the 10.6% rate at the 5.3% rate.

If "ifs" and "buts" were candy and nuts we'd all have a Merry Christmas!

Here's an alternate scenario.

Let's say that the money you save exactly keeps up with inflation after taxes. It might not be easy in this low rate environment (especially if inflation picks up and/or taxes rise someday), but let's assume that you can actually pull it off. Who said I couldn't be optimistic?

We'll call it a Benjamin Franklin approach to saving.

A penny saved is a penny earned. - Benjamin Franklin

This makes the math so much easier and so much safer. Saving one penny and expecting it to spit out 4 pennies in the future is just asking for trouble in my opinion.

So let's do the math.


If you save $206 per month in today's dollars and do it for 32 years, then you will have $79,104 ($206 x 12 x 32) in today's dollars when you retire. That's it. Consider yourself lucky if you have more than that.

If you withdraw $810 per month in today's dollars, then it will last you roughly 8 years. You'd then be broke.

You can safely withdraw $0 of it per month if you don't want to touch the principal though. So have at it. Feel free to withdraw $0 as many times as you like.

We here at the Illusion of Prosperity blog don't believe in having your cake and eating it too. I think I can speak for the majority of the readers on this. If we save a slice of cake for the future, then we only count on having one slice of cake in the future.

That's if we are lucky. Governments of the world have been notoriously crafty at extracting cake wealth in times of economic peril. The currently pathetic 0.2% I-Bond rate is proof alone of that. Once expected inflation is factored in, it seems to come up a bit short of the 5% initial interest rate assumption.

Of course, we could simply take on more risk to fund our retirements. Although it hasn't worked out so well for the last decade, it might work again someday. Maybe. Who really knows?

12 comments:

mab said...

Stag,

We here at the Illusion of Prosperity blog don't believe in having your cake and eating it too.

Indeed. If I want a loaf of bread in the future, I have to save a loaf of bread or work for it in the future.

Preserving purchasing power wasn't easy in the past after inflation, fees, taxes, shams and population growth. Given the inane leverage in the system and resulting over-valuation of assets today, most will have far less in the future than they imagine.

I'm of the belief that there are more claims on the future than the future can deliver.

There's safety in safety!

GawainsGhost said...

If everyone in the country had to pay income taxes the way I have to pay income taxes (I'm self-employed)--that is, pay the whole nut, 12.4% social security, plus Medicare/Medicaid, plus income taxes, in one rather large check on April 15 every year--there would be a violent revolution.

Back when I was in high school, there was an election being held and the campus was the main voting booth. I was walking around and this libertarian came up and gave me a Social Insecurity card, which I have kept these many long years.

My Social Insecurity number is 000-00-0000. The back of my Social Insecurity card reads:

"KEEP this card if you wish. It entitles you to absolutely nothing. HOWEVER, it has several advantages over you Social Security card.

1. It does not force you to invest money from your paycheck or profits in a fraudulent and financially doomed retirement scheme.

2. It will not be requested or required on any school or job application, tax form, or in any business or financial transaction.

3. It cannot be used to find you, audit you, intimidate or investigate you, or otherwise invade your privacy."

I like my Social Insecurity card a hell of a lot better than my Social Security card.

By the way, when Social Security was implemented the retirement age was set at 65. This when the average life expectancy was 63. So the government never intended to pay back the taxes it took from the citizenry. The whole scheme was a fraud from the beginning.

watchtower said...

"Welcome to the magical and mythical world of 5% interest rates..."

Five percent!?!?!

Why it seems like yesterday (actually a little over a decade ago) I remember listening to Dave on the radio and thinking I was damn near owed 12% for perpetuity.

"Invest in good growth stock mutual funds that average about 12 percent."
Dave Ramsey

http://tinyurl.com/245vx3r

(I don't mean to be slamming Dave too hard, I'm 100% in agreement on getting and staying out of debt.)

Stagflationary Mark said...

mab,

I'm of the belief that there are more claims on the future than the future can deliver.

It would seem that also applied to the stock futures. Badum-ching!

Stagflationary Mark said...

GawainsGhost,

KEEP this card if you wish. It entitles you to absolutely nothing.

I like my Social Insecurity card a hell of a lot better than my Social Security card.

It certainly seems to be able to deliver what it promises! I can see its appeal.

I always saw Social Security as a safety net for those who simply live much longer than their life expectancy. That would seem like a good thing to me. How it ended up being a complete retirement plan escapes me though.

Stagflationary Mark said...

watchtower,

Five percent!?!?!

I know! We might be lucky to get just 5% of 5% (0.25%). I'm not even joking.

Let Them Eat Cake!

In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover. Yet Hayami was trying to force Japan Inc. to implement structural reforms. It didn't work and rates returned to zero in March 2001.

GawainsGhost said...

I don't get it either, Mark. Except to say that if the government wasn't taking so much of people's income, perhaps they'd be able to save for their own retirement.

My father got sick and died right when he started withdrawing social security. So all the money he poured into the system is now gone.

On the other hand, my mother has been withdrawing social security for years, $1600/mo. And she's fully employed and earns roughly four times what I do! But it's not like she hasn't paid into the system for decades.

I'm of two minds. I think that people who paid into the system should be able to withdraw from it. But I do not like paying into the system since I don't believe I will ever be able to withdraw from it.

Thus, I save money like a madman. If I could trust the current markets and invest in anything I would. But I don't, so I just save.

GawainsGhost said...

And I still like my Social Insecurity card a lot better than my Social Security card.

Stagflationary Mark said...

GawainsGhost,

Thus, I save money like a madman. If I could trust the current markets and invest in anything I would. But I don't, so I just save.

I hear that.

Every time the government tries to scare me into spending more, all I do is spend less. If everyone was like me, we'd only need one restaurant per state!

Heck, we don't even buy bread any longer. We make our own using a bread maker. It tastes better, it does all the work, and it is cheaper. I calculated that it uses 3 cents of electricity to make a loaf and we buy 25 pound bags of flour at Costco and/or Sam's Club.

Charles Kiting said...

The MBA who wrote that must run union pension funds.

The article had one-half a sentence of good advice: "Consider working towards being debt-free".

OF course, if you are banking on 8% returns, you are expecting most people not to take the advice.

Stagflationary Mark said...

Charles Kiting,

The MBA who wrote that must run union pension funds.

I take it you are not a fan of high level overly simplistic thinking as it is applied to real business problems? ;)

Skip the recession, get an MBA?

I see consultants with MBAs everyday who bring high level overly simplistic thinking to real business problems. - DMM in Chicago

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