Instead of myRA Accounts, How About Privatizing Social Security?


I thought President Obama was slurring his words during the State of the Union speech when he spoke about “myRA” accounts.  It turns out it is a new program he is proposing, saying that it does not require new legislation to create (not sure how that works).  Some details on the program are given in this Reuters article.

It certainly is a great thing to get people saving for retirement.  Almost everyone will need to have money for retirement and almost everyone makes enough during their lives to provide for a comfortable retirement if they would save and invest.  Still, with a limit of $15,000 and yields of 2% or less, I’m not sure that this new myRA is the best way to go.  With that low a limit, and that low a rate of growth, someone might only be able to pay for a year of retirement expenses before the funds were depleted, and that is assuming no large medical bills

A better alternative would be to allow workers to direct their Social Security payments to a traditional IRA or a Roth IRA instead of the money going into the abyss of the general fund as is currently done.  All workers currently contribute about 13% of pay per year, which is about $3900 per year, or $325 per month, for someone making $30,000 per year.  Over a 45 year career, even assuming no raises, that would create a $1.7 M account (in current dollars) at retirement if 8% were earned per year after inflation.  That could provide about $68,000 in income per year (in current dollars) for life if invested in an annuity at retirement or 4% were simply taken out each year.

A common argument against this is that this would be risking money in the stock market, while traditional Social Security and the proposed myRA accounts would be in safe, guaranteed investments.  The ability for both of these programs to provide the specified benefits, however, relies on the government’s ability to continue paying benefits.  This capability will come very much in question over the coming years as the national debt soars and the number of retirees drawing Social Security and Medicare grows.  Even if the national debt doesn’t become unwieldly and the US Government’s ability to borrow at very low interest rates continues, the income of the Federal Government is directly related to the prosperity of the economy.  If enough US businesses fail to cause a risk to IRA plans, there won’t be any revenues going to the Federal Government either.  The converse is not true, in that a default of the US Government will not necessarily result in a crash of US company stocks.

So how would individuals who are not familiar with investing be able to manage a portfolio of stocks?  The answer is that they would not need to do so.  Deposits could be invested automatically in a total stock portfolio when a worker is 20-30 years old.  At age 30, 10% of the funds would be shifted into a total bond fund.  This would continue, with 10% of funds shifted into bonds with each passing decade of a worker’s life.  At age 70 a worker would have an appropriate portfolio of about 40% stocks and 60% bonds.  Simple.

Note that in some ways this would be what Social Security was supposed to be – young workers paying in while older workers pull money out.  As older workers are selling stocks and using the money for their expenses, younger workers will be buying stocks and supporting the prices of the funds.  The only difference is that the value of the funds will increase automatically with inflation, since the value of the companies will increase with inflation, and the growth in the value of the companies owned by the funds will result in a wealth compounding effect.  The existing system does not have this wealth compounding effect since all funds are spent as they are received.

So, instead of creating myRAs, how about we look at improving the existing government retirement program – Social Security.  It already collects plenty of money to provide a comfortable retirement for even workers just above the poverty level.  The secret is to allow workers to invest the money they already contribute.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


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Are Corporations and Business Owners Taking Advantage of Consumers?


In a previous post I asked advocates of “economic justice” to respond to a set of questions.  These were:

1.  How often do you buy something and not think it is worth at least what you paid for it?

2.  How do business owners come to “control the means of production?”

3.  Who pays the salary for the CEO of corporations?

4.  How much money does the average McDonald’s employee make for the company per hour?

5.  If the salary of the CEO of McDonald’s were split equally among all employees, how much of a raise would they get per hour?

6.  What return on investment do current shareholders of McDonald’s get?

7.  How does the salary of the CEO affect the salary of the workers?

So far none have taken up my challenge.  Note that this is a critical issue for debate since economic justice is a buzz word you’ll be hearing a lot about in the coming election cycle.  The idea is that the poor and middle class are being taken advantage of by the wealthy and that the government needs to step in, take some of the wealth from the wealthy, and distribute it more fairly.  Remember all of the “1%” talk from last year.

I want to have an open and frank discussion of the merits of their arguments from a simple logical perspective.  Thus the reason for my questions.  Since none have chosen to defend the economic justice side, let me provide what I see as the answer to the first question:  How often do you buy something and not think it is worth at least what you paid for it?

There are times when you feel ripped off when making a purchase.  An example is the $7.00 bucket of popcorn at the movie theater.  In that case, however, the theater owner has set up a monopoly where, if you want to have popcorn, you’ll need to buy it from him.  I’ve also noticed that some theaters have taken out the drinking fountains so you’ll need to spring for a $4.00 soda or $3.000 bottle of water if you don’t want to drink from the bathroom sink after eating all of that popcorn.  A monopoly causes prices to be set at the level at which consumers will pay if it is a choice between having something and not.  A bottle of water in the desert that would save your life might go for $1,000 or $1,000,000 if there is one supplier.

In most cases, however, there is no monopoly and different vendors are competing for your business.  In that case the prices are set at the minimum level the suppliers of the item are willing to receive, i.e., at the price where they can cover their costs and still make enough money for it to be worth the trouble.  Food is a critical item, and yet the profit margin on food in grocery stores is about 2% because there is so much competition.  Competition also drives the cost of items down over time as suppliers find ways to cut costs.  Look at where the price of computers and pizza have gone over the last ten years!

So personally, I would say that most of the time I feel what I pay for an item is fair.  In some cases I can’t believe I am able to get an item as cheaply as I get it.  Case in point, there is a Chinese buffet near me that charges $12.00 for a dinner that includes all the crab legs you can eat.  I don’t know how they do it.

So how do these business owners get so wealthy if they aren’t ripping people off?  The answer is they serve a lot of people.  A grocery store may only make $3.00 on your hundred-dollar grocery bill, which does not seem to be worth all of the trouble of renting the building, stocking the shelves, and advertising and cleaning the place. But they serve millions of people each year, so they make millions of dollars.  They also provide hundreds of thousands of jobs in doing so, including both those who work at the stores and in the corporate offices and those who provide the products for the stores.

So, strike one for the economic justice crowd.  Maybe the huge inequity they site will lie in one of the other questions.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Invest $10,000. Simple Starter Portfolios


Money magazine has a great article in their Jan/Feb edition called the Money  50 which lists its recommended top 50 mutual funds and Exchange Traded Funds (ETFs).  The nice thing about the article is that it provides some great, low-cost funds and breaks them down by category into things like large stocks, emerging markets, and so on.  The writers also provide a guide on how to use the Money 50 to build a portfolio.

One of the first suggestions is a very simply portfolio consisting of just three funds/ETFs.  These are:

Vanguard Total Bond Market Index – Bonds

Schwab Total Stock Market Index – Stocks

and Vanguard Total International Stock Market Index – International Stocks.

An option, if you just wanted to stay with Vanguard, would be to use their Vanguard Total Stock Market Index as well.  You could also invest through a brokerage account in the ETFs for these funds, which would have lower costs each year but cost some money in commissions when you purchased them.

With just these three funds, one could build a well diversified portfolio just by allocating money to these three funds appropriate for one’s age.  For example, if you were 20 years old, you’d need little exposure to bonds, so you might set up a portfolio that was:

50% Total Stock Market

40% International

10% Total Bond Market

To perhaps improve performance a little bit, you could also mix in some of the other funds to give yourself exposure to real estate (the Vanguard REIT Fund) or small-cap stocks (the Vanguard Small Cap fund or the iShares Core S&P Small-Cap ETF).

So what if you had $10,000 to invest?  How could you use this information to build a portfolio?  Here are some different, no fuss portfolios you could build with this information and $10,000:

Portfolio 1:  The Simple High Growth, Low Tax Portfolio

$6,000 Vanguard Total Stock Market

$4,000 Vanguard Total International Stock

This portfolio might be appropriate for someone in their 20’s or 30’s with a strong stomach who won’t need access for the money for a long time.  This portfolio is all stocks, which is what you want for low levels of interest and dividend payments – and therefore low taxes until you sell – and the highest rate of return over long periods of time.  Including some international stocks will help cushion the blow when things are bad in the US and will also help if the currency gets inflated.  This portfolio, however, could be a wild ride at times, with gains or losses in the range of 30-50% some years.  Remember also that the world economies are connected, so bad times in the US won’t necessarily be offset by good times in France.  This portfolio is therefore only for those who have the conviction to stay the course even when things get bad, or at least the wisdom to stop looking at their portfolio balances for a while when they are declining.

Portfolio 2:  The Simple Growth and Income Portfolio

$4,000 Vanguard Total Stock Market

$2,000 Vanguard Total International Stock

$4,000 Vanguard Total Bond

This portfolio is suitable for those who are getting closer to retirement and can’t take a 40% market drop.  This wouldn’t be for someone who is 64 and ready to check out tomorrow, but it would be appropriate for someone 50-60, maybe.  It could also be for someone younger who just doesn’t want the gut-wrenching changes in value and is therefore willing to give up some growth for better sleep at night.  (A younger person should reduce the percentage of bonds, however, perhaps to 20-30% when 30 years old since you’d be giving up a lot of growth by being too conservative.)  The portfolio still spreads stock market risk by including international stocks, but also includes a good portion of bonds which will pay income and help smooth out the dips in the market.  Normally this would be a good portfolio, but unfortunately bonds are so overpriced right now due to the actions of the Federal Reserve trying to keep down interest rates, a substitution for bonds is needed.  Instead, see the next portfolio and look to change to this portfolio when interest rates rise back to normal levels.

Portfolio 3:  The Alternate Growth and Income Portfolio

$3,000 Vanguard Total Stock Market

$2,000 Vanguard Total International Stock

$1,000 Powershares International Dividend Achievers’ ETF

$3,000 Vanguard REIT Index

$1,000 SPDR S&P Dividend ETF

Here, to make up for the inability to buy US bonds, we’ve added a couple of dividend-focused funds and an REIT (real estate) fund.  These funds have the ability to gain both appreciation and generate current income, although not as much as bonds have traditionally been able to do.  These funds may be hit a little bit as well if interest rates rise, causing the price of fixed-income assets to fall, but it has a little more diversification than just bonds.  Note that we had to back off on the stocks a little bit since the minimum investment for the REIT fund is $3,000.  Still, there is more stock exposure in the dividend funds, and there is some capital appreciation potential in the REIT fund.

Portfolio 4:  The Maximum Growth Portfolio

$3,000 Schwab S&P 500 Index

$3,000 Vanguard Total International Stock

$3,000 Vanguard Small-Cap

$1,000 Vanguard Small Cap Value ETF

This portfolio is invested in all equities and leans towards the small-cap side, which is where you want your money to be for long-term growth.  (The small stocks have more room to grow than the large ones).  Adding a little bit of value investing will help balance the portfolio a little bit when it becomes a stock picker’s market.  The small investment there ($1,000) is due to the limited amount of funds.  Saving up another thousand and investing $2,000 there would cut the percentage you’d give up in brokerage commissions.  Note that the all equities and small-cap leaning nature of this portfolio could mean a wild ride, so this portfolio isn’t for the faint of heart.

Portfolio 5:  The Steady Growth and Income Portfolio

$4,000 Vanguard Total Stock Market

$2,000 Vanguard Total International Stock

$1,000 Powershares International Dividend Achievers’ ETF

$2,000 SPDR S&P Dividend ETF

This portfolio is for someone in their thirties or forties who wants to reduce volatility a little but still get good growth.  This portfolio is 70% growth assets and 30% income assets.  The dividend ETFs could be replaced by the Total Bond Index if interest rates were to return to more normal levels and the risk of holding bonds were not so great.  The ratio of income to growth could be decreased when starting and then increased as one got older, perhaps holding a percentage of bonds/income assets equal to your age minus 10%.  For example, this portfolio is 30% bonds, and therefore might be appropriate for some one who is 40 years old (40% – 10%).

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.