Replacing Social Security for $43 Per Month


$8 Bottles of Water
$8 Bottles of Water

Social Security was every bit as controversial when it was passed in the 1930’s as Obamacare is today.  When it started, it was  a very small tax (a couple percent of pay) that provided a very small benefit – just enough to keep people from starving to death.  Over time the benefit remained low but the cost increased.   Today individuals pay 6.2% in Social Security taxes and their employers pay 6.2%, for a total of 12.4% of your paycheck.  If you are self-employed, you pay both sides.  Actually, you pay both sides in either case since you would receive higher pay if your employer didn’t need to pay Social Security taxes, but you pay it directly if you are self-employed.

When Social Security was first being debated back in the 1930’s, there were two options.  The first option – the one chosen – was to have individuals pay into a big kitty and then have the government pay out of that kitty to those receiving benefits.  Anything left over could be spent as the government saw fit, so long as they left an IOU.  The second option was to have individual accounts where each person would have a private account to which he/she would contribute and then withdraw from at retirement, kind of like the 401k of today.  The issue with the second method was that it would take a few years to get going – those who were retiring immediately would still need to find a way to make ends meet.  With the first option, they received a windfall since they paid in almost nothing and then got benefits for the rest of their lives (lucky folks).

The issue with the first option is that it ends up being a giant Ponzi scheme.  Initial investors are paid by later investors with the left-over money going to those running the scheme.  This works fine until you don’t have enough money coming in to pay the earlier investors.  This happened in the past, which is why the rates have risen so dramatically over the years.  Even still, the fund is running out of money, so benefits have been cut – by raising the retirement age – and there is talk about raising taxes yet again.  Of course, taxes were raised in the 1980’s to “save Social Security” with the goal to pile up more money for the retirement of the babyboom generation now retiring,  but the extra money was just spent leaving the solvency of the program in doubt.  There is absolutely no reason to believe this would not just happen again.

There is a much better option and that is to return to the private accounts.  I was wondering how long it would take and how difficult it would be to transition today’s workers to such a plan.  I found out the answer was: not that hard.  Here’s some of the math:

1.  I estimated the average amount an individual living in retirement from age 65 to 85 would collect in Social Security payments, assuming a monthly payment of $1500.  They would receive about $179,331.  Assuming a 5% interest rate over that period ( Social Security would actually be closer to 1 or 2%, so I’m being generous here), the total benefit would be about $230,000.

2.  I assumed an 8% rate of return for money invested in private accounts.  This would be a good estimate for the after-inflation rate of return for a mix of index mutual funds held for a period of ten or more years.

3.  I assumed a steady paycheck of $60,000 per year and then assumed different savings rates (paycheck deductions) and determined how long it would take to amass $230,000 at the different savings rates.  The results are as follows:

Savings Rate Monthly Payment Years to $230,000
5.00% $250.00 24.5
10.00% $500.00 17.4
13.00% $650.00 15
15.00% $750.00 13.9
20.00% $1,000.00 11.6

So, if you were making $60,000 per year started putting away 5% of your paycheck in a private account, you would amass enough money to replace your Social Security payments in just 24.5 years.  That would only be a payment of $250 per month.  If you contributed 13% – close to the 12.4% rate you pay now – it would take just 15 years.  We could phase out Social Security right now for everyone 50 or younger without paying any more just by directing payments to private accounts instead of the public system.   Today’s 56 year-olds could contribute 20% of their paycheck, which they would probably be able to do with the kids gone and the mortgage paid, they would be able to replace Social Security by the time they reached 65.

No what about the young people?  I wanted to find out how much a person starting today at age 20 would need to put away each month to replace Social Security payments by the time they were 65.  This is how much people should be paying today for the benefit they receive, instead of the 12.4%, or almost $650 per month for someone earning $60,000 per year.  And the answer (drum roll please): $45 per month!  Yes, that’s right.  You’re paying $600, $700, or even $800 per month for a benefit that is worth at most $45 per month.  And that is assuming that you retire at age 65.  Today’s workers actually won’t be eligible for full Social Security benefits until they reach age 70, so it is even worse.

It is possible to unroll the system we have and stop paying $650 per month for something worth $45 per month.  In fact, if we had private accounts instead of the public system, there would be no need to fund an IRA or a 401K because you’re contributing enough to fully take care of your retirement already through Social Security.  The problem is just that the trustees – Congress – are spending the money instead of investing it.  If this doesn’t sound like a good plan to you, perhaps your Congressman needs to hear about it.

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.

A Warning to Minimum Wage Workers: The Kiosks are Coming


I warned you.  Several months ago when the calls for raising the minimum wage and the strikes at fast food restaurants started, I warned that those participating were going to cost themselves and many other minimum wage workers jobs.  By increasing the cost of labor, you are making automation more competitive.  At $7 per hour, it is much less expensive and easier to hire cashiers than to install and maintain an automated system.  Now with calls for $15 per hour, the kiosks become more attractive – even critical.  This is because for $15 per hour, you should have the skills needed to fix the kiosks, not just punch buttons on them.

It all comes down to simple math.  If your standing at the register taking orders results in the fast food place making $12 per hour in revenues (about the amount they make), they can afford to pay you about $7 per hour, pay for the food and the building, and still make enough of a profit to justify the trouble.  If you demand $15 per hour, and especially if you have laws passed forcing them to pay you $15 per hour, they will need to cut the number of people they employ back as much as they can so that they can still make a profit despite the higher labor costs.  This means going to kiosks and cell phone apps for taking orders, and maybe even automating making the food.   Someday soon you may go to a fast food place, enter the order yourself, then place your burger on a conveyor belt to be cooked.  You’d then go to a condiment stand to add toppings and many customers would think this was just great.

And that’s the other sad thing.  I generally hate automation because it means doing everything myself.  I hate paying just as much for airline flights now, despite the fact that I now need to key in my own flight information and bag information.  I even often need to take my own bag over the TSA agents and hope they don’t steal anything out of them.  I miss just being able to tell the ticket agent my name and where I was going and have him or her do the rest of the work for me.

Still, many in your industry aren’t helping your cause.  The last time I went to a McDonald’s, two people were standing at the counter texting, including the person who took my order.  This presented a terrible image and made me wonder how much the employees cared about getting orders out.  You make yourself more valuable by providing a service to the customer and doing everything to improve her experience.  If the person taking my order is just going to stand there texting, rather than doing everything possible to get my order quickly and presenting the best possible image for the restaurant, there might as well be a kiosk standing there.

So if you want to make more money, learn new skills.  Do things to help your employer make more money – like serving customers faster and making their experience as good as possible so that more people come to the restaurant.  Make yourself more valuable by generating more money per hour so that there is more money to pay you with.  Try to get more money through force, and you’ll find that the laws of economics can’t be changed just because you want them to.  Prices will rise so that your paycheck will buy the same amount as it does now, you will be automated out of a job, or the restaurant will close down and you’ll again be out of a job. Trust me.  

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.

A Financial Mistake Wealthy People Don’t Make and You Shouldn’t Either


Probably reading no phrase causes me to shout out into the room and bother my wife and sleeping cats more than, “I cashed out the 401k.”  I usually see this in Money magazine when they have a story about a reader starting a business at age 50 as a second career.  (The worst one was in 2009 from a lady who added speaking about the money in her 401k, “It wasn’t doing anything anyway.”  I wonder if she ever looked back after 2010 or the years since then, during the period where she probably would have seen her 401k double, and realized mow much she gave up.)  I’ve also read it in blogs when people are talking about getting out of debt.  Thankfully I haven’t heard it in real life or I might commit homicide, shaking them and yelling, “WHAT WERE YOU THINKING?!!”

Why does this simple phrase give me so much frustration?  Three reasons:

1.  By cashing out before retirement, these people are going to give away about half of the money to the government for taxes and penalties.

2.  More importantly, they are giving up about $8 for each dollar they cash out.  If they had held the money in their 401k from age 50 and retired at about age 70, that $150,000 they took to start a coffee shop would be worth about $1.2 M – enough to finance a good portion of their retirement.  Instead it all now rests on the fortunes of a small business that very well may fail as most do.

3.  Now, when they reach retirement, they’ll probably get there with no money and everyone else will need to support them because they decided to leave a six-figure job to “pursue their dream” or because they used their retirement savings to pay off credit cards that they’ll probably run the balance right back up again within a year because their behavior hasn’t changed.

Don’t get me wrong – I think it is great to pursue your dream or to get out of debt and stop paying credit card companies 18% interest.  It is just that using your 401k to do so means that you’re throwing away the one thing that, no matter how badly you screwed up your budgeting and savings while you were working, would nearly ensure you have a comfortable retirement.  If you want to start a business, start living like a college student and direct some of that six-figure income into a savings account until you save up enough money.  If you want to get out of debt, change your spending and start down Dave Ramsey’s “debt snowball.”  If things really are impossible – like you have $100,000 in medical bills and $50,000 in credit card debt but you only have a $60,000 per year salary, maybe a bankruptcy is the right path for you (not something I say lightly).   Don’t give up your retirement assets.

This brings us to the next item in the list provided in 10 Dirt Simple Rules of Money Management.   (Note, as always, you can find all of the posts in this series by choosing Dirt Simple from the category list in the sidebar or searching for Dirt Simple in the site.) Today we cover the eighth rule:

8.  Once money becomes an asset, it stays an asset unless an emergency happens.  This is especially true with money in retirement accounts.  Never borrow against a 401K or take money out unless you are retired or facing homelessness.

As discussed in the seventh rule, you should spend part of your money building up assets.  These are things like stocks and bonds, a reasonable personal residence for your needs, and maybe a rental property or two.  These are your “pipelines” that will keep you from needing to carry buckets for all of your life.  They are hard to build and it takes some sacrifice to build them, so don’t go ripping them out on a whim just when they are starting to flow water.  

A huge, critical asset everyone should have is a 401K account, with maybe an IRA account on the side.  If you work for the government or are self-employed so that you don’t have a 401k option, use whatever options you do have, even if it is an account at a mutual fund invested in index funds called “Sam’s Retirement Account.”  People talk about how wonderful pensions were while they bad-mouth 401k plans, yet you were never able to go up to the pension fund manager and ask to take out your portion at 45 to start a doughnut shop.  It wasn’t happening.  Leave your 401k alone and compare the outcome with that of a defined benefit plan and you’ll find the 401k isn’t such a bad route after all.

Beyond the 401k, if you want to become financially independent, you need to be building up assets.  As discussed in the 7th rule, Rich People Buy Assets,  you should always be putting some of your paycheck away into investments since those investments will add to your income.  When you have enough assets that your investment income equals your work income, you’ve become financially independent.  

You should also be looking at buying assets to pay for things rather than pay for them directly with your salary.  For example, rather than just paying for a vacation each year from your salary, start putting money away regularly into a mutual fund designated for vacation funding and then use a portion of the proceeds from that mutual fund for vacations each year.  You can do this for car purchases, meals out, and even donations to charities.  You then scale your spending based on the revenues generated by your assets.  As your assets grow, so does your lifestyle.

The beauty of this technique is that you get to have your cake and eat it too.  You get to go on the vacation, but then you come back and instead of having a big credit card bill to pay off, you still have the assets, producing more income and replacing the money you used.  You work to pay for your vacation once and then you’re done.  You never have to work to pay for vacations again.  Kind of like growing an apple tree and then getting apples every fall for the rest of your life with little work on your part once you’ve done the work of digging the hole, conditioning the soil, and training and pruning the tree as it grows until it is fully established.

But you don’t take out a saw and start cutting off limbs from the tree for firewood.  If you start selling off assets and using your principle instead of the interest you’re generating, you will reduce the amount you get next year.  This builds on itself, requiring you sell more assets to pay for things because you reduce the number of assets you have and the income they provide.   

So once you buy an asset, do all you can to avoid using the principle.  Instead, limit your spending to the income produced, minus a little bit to allow your assets to reinvest and grow bigger while your net worth is still fairly small.  Especially leave your most important asset alone – your retirement funds.  The time when you will not be able to work anymore is coming, and you owe it to yourself and everyone else to be prepared.

Got an investing question?  Write to me at VTSIoriginal@yahoo.com or leave a comment.

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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.