This will be my final post on the subject, since I’m sure some are bored with the topic. I wanted to provide some final information, however, to hopefully convince those reading this blog that private Social Security accounts would be a great idea.
Using the equations of compound interest and the historical returns, I calculate that at age 65 one would have an inflation adjusted $9 million dollars if one invested $10,000 in a broad basket of stocks at age 20 and did nothing else. In Social Security, with it’s after-inflation return of 0.5%, one would end up with about $12,500.
Further, the money in stocks is there. The money in Social Security would need to come from others and may not be there, or the rates could be changed, etc…. It is up to the politicians who are elected, and those of the last 50 years have clearly shown that they cannot manage money – note the current national debt that would stretch out past Saturn if converted to $1 bills placed end to end. Yes, the entire financial system could collapse, or there could be a nuclear war and wipe out stocks, but then one wouldn’t receive Social Security either.
Further, if the 20-year old died at age 64, he would receive nothing. With a private account, he could leave his stocks to his heirs or his favorite charity.
Let’s say stocks don’t do as well as they have and my interest rate assumptions are off a little. Let’s also say that it would be stupid to leave $5 million entirely in stocks when one is 60 and will need the money in five years, so some would be shifted to cash and bonds starting at about age 55, decreasing the return somewhat. Even so, $9 Million is a lot more than $12,500. $5 million is a lot more than $12,500 too.
I think it is a great idea to have people save some of their income for retirement. After all, everyone will need to retire someday and will need money for food and necessities. The current system is broken, however, because the money is not able to build up over time and is subject to the whims of the political class. The current system with the subtle tweak – of changing from a public system to private accounts – makes sense. I’ll admit that limiting investment choices to ensure proper diversification and asset mixes based on age would also make sense. You could even automate the distributions if you so chose.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.