What I Wish for All My Friends in Retirement
I love all my friends, whatever their political persuasion. However, there are few things that I would rather see than all of my poor, Liberal friends retire as wealthy individuals.
This desire does not exclude my enjoyment of seeing my rich friends, or my friends who accept a “Conservative” label, retire comfortably. It’s just that I have a peculiar hope in this regard for all of my poor, Liberal friends; and it’s not all altruistic.
If You Believe That You Have No Obligation to Provide for Your Retirement . . .
In most cases, it would be unnecessary to explain that one has two basic retirement alternatives – either plan and prepare for it, or don’t. However, OS contains a number of bloggers who apparently believe that they have no obligation to provide for their own retirement.
They believe that they are entitled to federal and State care at taxpayer expense when they retire. In fact, they seem to believe that almost every citizen has this ‘right’ under the “General Welfare” clause of the Constitution, except, of course, for the well-to-do. Many justify this thinking upon their belief that the ‘rich’ have somehow stolen their ability to provide for their retirement and therefore that the ‘rich’ should be taxed to steal it back.
If you are one who believes that you have no obligation to provide for your own retirement, for whatever reason, then there is nothing for you beyond this point. Stop reading now; don’t waste any more of your time; and go do something else.
If You Believe That You Have An Obligation to Provide for Your Retirement -- But Cannot . . .
To those who wish to save for their retirement, but believe they cannot, then I am not only sympathetic; but my wish is that there is hope for you below. Keep reading.
A family illness may prevent you from saving significantly. Illness is often a progenitor of bankruptcy these days, thanks to the skyrocketing cost of healthcare since LBJ had Medicare enacted as part of his Great Society. If this is your case, then you have my admiration and empathy.
You may have assumed the obligations of others or assumed the full responsibility for something others should be sharing with you. Again, you have my admiration and empathy. You are one of my heroes.
My hope is that there is a plan for you below my rant about Social Security. If there is, my further hope is that you find that it requires an investment that you can afford. My guarantee is that any retirement plan will require a lot of hard work, and much luck, if you are a wage or salary earner.
What is a Comfortable Retirement?
This is a hard question to answer. Of course, any set of retirement objectives should include having no long- or short-term debts.
When you retire, you want a sustainable monthly income. A sustainable monthly income is one that provides you with the same buying power each month by counteracting inflationary forces. When you die, you leave the underlying principle corpus, which generated this income, to your beneficiaries.
You should have some diversity in your retirement portfolio to protect against the risk associated with any one investment. But, you know all of the foregoing in this section.
What you want to know is, “How much do I have to save in order to retire comfortably?” Let’s pretend that the answer is $500,000.
What will $500,000 do for you?
If you’re expecting $2,000 per month from Social Security, then $500,000, invested at 5%, in double tax-free municipal bonds will double your monthly income. If you can live off $3,000 per month, then $500,000 may provide a sustainable income if you reinvest what you don’t draw in interest payments back into the ‘corpus’ to protect against inflation.
Therefore, we will have this amount as our investment goal in the plans outlined below. Feel free, however, to scale the dollar amounts required to achieve this objective to any other amount you deem appropriate.
Plan 1 – Mattress Stuffing
If you have a 40-year working career ahead of you, then you might believe that it would be easy to save $500,000. All you have to do is take $1,041.67 every month and stuff it into your mattress. Correct? In forty years, you will own a half million-dollar mattress.
However, we see an immediate problem. In fact, we see at least three immediate problems:
First, where are we going to acquire this $1,047.67 to save every month? That alone amounts to $12,500 every year. Generally, the answer is that none of us will ever have this amount of funds on a monthly basis to take to our bedroom and not spend.
Second, won’t $12,500 per year in retirement contributions be subject to income tax? Generally, the answer is that it will.
Without making an explanatory excursion into the Tax Code, the presumption from this point on will be that the government will tax all such contributions, above $6,000, at a flat rate of 15%, which happens to correspond to the long-term capital gains rate for most taxpayers. Moreover, the presumption from here on will also be that the government will not tax accretions beyond such contributions, because you will be smart enough to indulge in tax shelters, like IRAs, 401ks, etc.,. Factoring these federal income taxes into account, ‘mattress stuffing’ under this plan produces a $461,000.00 sleeping pad at the end of forty years.
Third, will $461,000.00 have the same buying power forty years from now as it did on the day I began this retirement plan? The answer is that inflation (at the average 2.65 % per year rate it occurred from January 2000 to December 2010) will reduce the value of this amount by 65.80%, to $157,675.78, in terms of the buying power of the dollars at the time you began the plan.
Thus, ‘mattress stuffing’ is a stupid retirement plan. In exchange for saving $500,000, you end with a principle corpus worth only $158,000 when you retire. Taxes will have only robbed you of $39,000 of the dollars you invested in this scheme; while inflation will have robbed you of over $303,000 in post-tax buying power.
(Federal monetary policy has favored a controlled inflation rate for decades. In fact, during this time, significant measures have always been taken to avoid deflation.)
Hence, there are two significant dampeners in trying to save for your retirement by stuffing your mattress. The first is coming up with the large, monthly installment amounts to fund this kind of scheme. The second is defeating inflation. Both can be conquered by creating wealth, something our free-enterprise system allows non-public entities to do.
(Savor this moment. On this blog, this might be the rare case where income taxes aren’t the biggest problem.)
Why Social Security is a Terrible and Stupid Retirement Plan
It may be difficult to believe; but ‘mattress stuffing’ is a better retirement plan than Social Security. When you stuff your mattress, that money is yours. It doesn’t belong to anyone else. Barring some catastrophe, it will be there on the day you need it.
When you make your mattress deposits, and later, your mattress withdrawals, it doesn’t cost you anything for these transactions. You put a dollar in your mattress; you get a dollar out.
This isn’t the case with Social Security. The money you send to the federal government under FICA belongs to Uncle Sam. He will not use it for your direct benefit. This makes Social Security a Ponzi scheme, unlike mattress stuffing.
These days, Social Security is nearly cash flow neutral; and Uncle Sam is sending contributions made under FICA out, almost as soon as they are received, to current beneficiaries. Further, it is well-settled law that your contributions to Social Security do not secure the priviledge of its benefits.
Moreover, it costs taxpayer money to run the Social Security Administration. Hence, the expenses to compensate salaries and to provide government benefits to Social Security Administration employees, to keep the lights on and the water running, the telephones ringing, the rent paid, and the carpets, walls, and trash maintained in all of their offices, all go to burden your deposits under FICA, and your eventual withdrawals. You put a dollar in Social Security; you get less than a dollar out.
Further, just like mattress stuffing, Social Security depends on installment payments throughout your entire working career. Just like mattress stuffing, Social Security has created relatively little, if any, real wealth, despite having huge reserves in the form of federal debt instruments.
However, unlike the proposed mattress stuffing plan, Social Security's COLA index has not kept up with real inflation. Social Security, again, unlike our mattress, has consistently raised the installment amount throughout its history, not only to cover for inflation, but also to fund additional benefits.
Does it come as any surprise that government has produced a worse retirement vehicle than mattress stuffing? It shouldn't.
This Makes Social Security An Object Lesson
A reasonable person would not invest in poor, or risky, plans to provide for his retirement. In fact, the general goal in making any investment is to minimize the expense, while maximizing the return, all without assuming too much risk.
Therefore, making installment payments into Social Security is counterproductive to good retirement financial planning. But, what can one do?
One must understand that if government takes all of your money, for whatever purpose, then one is left without an ability to provide for one's own retirement, or for any other financial objective. Again, if you WISH government to do this, then stop reading now. What remains is only for those who insist on retaining some of their earnings with which to make choices regarding the comfort of their retirement.
Even if government does not take all of one's money, one's choices still become reduced proportionately with the amount of such takings. One can’t do as much with the $100 government leaves as one can with the $1,000 government leaves.
Plan 2 – Wealth Creation
Let’s say you have $100 to invest every month into your retirement plan. Before we go on, let’s stop to contemplate the difference between a $100 per month installment payment and a $1,041.67 per month installment payment.
Hell, let’s stop to contemplate the difference between $100 per month and the amount now collected from you each month under FICA. Remember that your employer matches a substantial portion of your contribution under FICA, dollar for dollar. He therefore cannot pay these dollars directly to you. Nevertheless, the employer contribution counts towards your future Social Security benefit; and, thus, is justifiably considered part of the amount collected from you.
Such meditation should lead all to appreciate what it means to participate in our free-enterprise system at the end of this short sub-section.
OK . . . . . .
Let’s now continue by further pretending that you invested a $100 installment payment into a vehicle that made it $101.06 at the end of one month. Then, you invested that $101.06, plus another $100 installment payment, the next month which added 1.06% value to both components to produce a total account balance of $203.18 ( = [101.06 + 100.00] x 1.0106].
Keep doing this for 12 months; and, at the end of the first year of this plan, your account balance will be $1,285.66. There will be no income taxes, since the total contributions are less than $6,000 and since the accretions will be protected in a tax shelter of some sort.
However, with 2.65% annual inflation, this amount will only be worth $1,251.54 in terms of the value of the dollars with which you started.
Nevertheless, you will lick your wounds and invest your entire $1,285.66, plus another $100 of your own, into your “1.06% per month” plan during the 13th month.
At the end of a decade of this type of investing, your account balance will be $24,256.08 before taxes, this same amount after taxes, and worth $18,549.67 in terms of the real value of the dollars with which you started. Your total investment at this point will be $12,000, made at $100 per month over ten years.
After two decades, these numbers are: $110,223.88, $110,223.88, and $64,462.49. Your total ‘out of pocket’ investment will have been $24,000, plus the work it took to find the investments that have paid off as handsomely as this.
After four decades, these numbers are: $1,494,766.20, $1,494,766.20, and $511,253.22. Your total ‘out of pocket’ investment will have been $48,000 plus the work it took to find the investments that have paid off as handsomely as this.
Yep. After 40 years, you’ll have $1.5 million in the bank, after taxes; and this amount will be worth more than $500,000 of the dollars with which you started. Your total investment will have grown by more than 30 times.
You can achieve the same results, under the same inflation and tax conditions, by investing $9,800 now; and never again having to invest cash. In forty years, this scheme will also become an account balance of approximately $1.5 million, after taxes, which will be worth over $500,000 in terms of the buying power of the original dollars.
It’s not difficult to read minds at this point. Therefore, let’s try to anticipate a few questions.
First, you don’t have 40 years left in your working career. OK. . . .
If you have 30 years left, then beg, borrow, or steal $16,000.00, post-tax, place it in your retirement account, along with an additional $100, and follow the above described monthly "Create Wealth" plan. Alternatively, make a one-time, post tax deposit of $28,000. In either case, you will wind up even better than the result of the forty-year plan, simply because you will experience ten fewer years of monetary inflation.
If you have 20 years left, then, after kicking yourself, you will have to accept a plan under which you will invest . . . $825.00 per month. At the end of this '1.06% per month compounded plan', you will have $860,000 in the bank (after tax), which will be worth more than $500,000 in terms of the buying power of the dollar when you began. Alternatively, make a one-time investment of $78,000.
If you have 10 years left, then, you had better hope that Social Security is still around when you retire. Further, you had better think about continuing to work after you retire, reducing your lifestyle, and finding a post-retirement job that you will enjoy.
Second, there’s no way you can find an investment that pays 1.06% per month, compounded. Fair enough.
This amount compounded monthly results in an annual return of 13.5%. You will not find this kind of return on most capital investments that you can hold for more than one year.
Before we directly address this problem, let’s ensure that we all understand that the same goals can be achieved at 0.88% monthly compounded (i.e., 11% annually) over
· 40 years with $200 monthly investments,
· 30 years with $440 monthly investments, and
· 20 years with a $120,000 single deposit.
This is still a high rate of return; but you get my point – the lower the rate of wealth creation, the more one has to contribute cash to one’s retirement plan.
However, there are annuities that have returned 12% per year over their lifetimes. Our “syndicate” account last year returned 26%.
Many new businesses expand at double-digit rates after they break even and before they “plateau” into a steady state condition within their markets.
However, I don’t recommend starting and selling businesses. Been there; done that. . . .
Then, there is stock market gambling. The DJIA closed yesterday at 12,086.02 after rising 67.39. As I write this today, it stands at 12,172.00 after rising 85.98.
Day trading investments in the long DJIA index would have netted a 0.57% gain yesterday and a 0.72% gain thus far today. Thus, your retirement work for the month is done in two days.
The truth is that ‘day trading’ in the DJIA would require only that you bet correctly on 128 point moves more than you bet incorrectly in the course of one month in order to realize the 1.06% return. This system works as well if the market falls as it does when it rises.
However, I don’t recommend this kind of investing unless you are well advised of index and option risks and knowledgeable of market behavior. Been there; done that. . . .
What I do wish is that my poor, Liberal friends end up rich retirees. My hope is that such rewards are the result of hard work and a realized participation in America’s capitalist, free enterprise, system.
Then, when the next crop of young socialists comes along and claims that the rich should be further taxed to provide retirements for the working young, I want to hear, read, and see the responses from all of my formerly poor Liberal friends. My guess is that they will have a few choice words for their young, progressive, fellow citizens.