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Uncle Sam – Investment Counselor?

February 3, 2014

On January 29, accompanied by the usual obligatory shutter-snapping, President Obama used his pen to create another payroll savings/investment vehicle that will hopefully bring in more money to the treasury. Perhaps he thinks or wants us to think he is “helping” Americans to invest or save. Is the government a good investment partner?

The so-called MyRA (strangely, this name makes me want to buy NSAIDS) purports to offer a way for people to save and ultimately invest painlessly. Everyone agrees we should all put away money for a rainy day or retirement. This plan purportedly allows people to do that with a minimum  investment that no one would probably miss when it comes out of their check. It also caps at $15,000, when it must be morphed into something else of the government’s choosing.

The President is also offering you free investment  counseling, using a money manager that the government will select as a contractor  from a closed pool of some thirty or so qualified bidders, using a “competitive” bidding process. That’s if thirty firms would even agree to be in the pool. Given how the insurance industry is faring right now as a partner in Obamacare, that might be a tough sell.  

Statistically, two-thirds of American workers already have access to some form of retirement or savings plan, yet fewer than half of those people actually participate.

Why don’t people save? One popular notion is that we are just too into instant gratification to faithfully put away that money every month. That was the justification for our current Social Security system. The government feels we just can’t be trusted to save and invest. Since Social Security has been around long enough to evaluate it as an investment strategy, let’s take a look at that mandatory savings plan.  How’s that working out for us?

In spite of all of the hype that says all those greedy old leeches are getting WAY more than they are entitled to via  Social Security, actually the reverse is true. If the government paid interest on those mandatory retirement savings at just 5%,  retirees might be unable to spend it before they obliged everybody and just …left.

Don’t believe it?  Just plug some figures into any online investment calculator and see what 12.4% (6.2% from you, 6.2% from your employer) of your wages would be worth if you put into a bank CD at 5%. One example looks like this:

Assumptions: 24-year old wage earner averaging $12.00 an hour for 45 years and working the full 2080 hours each year.

  • Available funds – 12.4% of all wages earned over 45 years:  $139,271.40
  • Rate of interest 5% compounded
  • Total growth after 45 years                                                       404,414.36
  • Value of fund after 45 years                                                      546,780.46

The government gives you credit for only the initial $139,271.40. To make matters worse, they constantly influence the interest rate you can earn on the money, so getting 5% is a struggle. Obviously this is a static model, but it gives you an idea of why investing your retirement funding with the government is not that lucrative. The problem is, you don’t have a choice. If you want more retirement money, you have to carve it out of whatever is left over after the government “helps” you to save.

Actually, since inflation is seemingly built into our system, you might need every cent of that $526K to live comfortably for twenty years after retiring. 

A quick visit to the government website at http://data.bls.gov/cgi-bin/cpicalc.pl allows you to see what a dollar saved by your dad in 1970 would need to equal today to buy the same item.

To buy something that cost $1,000 in 1970, you would need $6004.05 in 2013 dollars. In other words, even by government math, that 1970 dollar is worth only about 16% of what it was when your baby boomer parent saved it. Think about that the next time you berate the older generation for not saving enough.

 As a election-year PR stunt, MyRA sounds good. As an actual answer to retirement income, not so much. People are motivated to save when (a) they have more money than they need for day-to-day living and (b) when they believe that the money will still be there when they need it. Neither situation is true today

The government is not a money-maker, it is a money taker, and right now it needs a lot of money. As a money manager it fails miserably at every level.  

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