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Tuesday, November 4, 2008

18. Jack Makes An Investment

On June 15th, Jack graduated from high school and also turned eighteen. For a graduation present, Jack’s uncle gave him a book on money and investing to help secure Jack’s financial future. Unsure of his career path and whether or not it included college, Jack decided to take advice from the book and immediately set up a long-term investment program.

Jack contacted two insurance/investment companies and asked them to present their retirement annuity and investment plans to him. Jack is very risk averse and told both companies he wanted only to invest in vehicles in which no principle could be lost and in which all funds were insured by the U.S. Government. Jack told each company he intended to invest $161.20 a month, starting immediately, a continue investing the same amount until retirement at age 65. At that time, Jack would need monthly income from the annuity or investment plan.

Not wanting to be influenced by any element of the two companies, Jack asked that their plans be submitted only as Company A and Company B.

Company A’s proposal projected a monthly retirement income of $380, but warned it could be less based on market fluctuations. Company B’s proposal projected a monthly retirement income of $2,400 but said it could be more, much more actually, and also depending on market fluctuations.

Jack was puzzled at the extreme difference in the two plans. So, he asked about other features and limitations of the programs.

Company A responded to Jack’s request stating that should Jack die at any point prior to retirement, all money in the account would be the property of the insurance company. After retirement, the monthly income would only continue until Jack’s death at which time any money remaining in the account would again be the property of the insurance company. There was one exception though, should Jack marry, his wife would receive some retirement income whether Jack died before or after age 65. No money would be available at any time to pass on to friends, family or charities.

Company B’s response was quite different. At any time during the life of the program, Jack could pass the balance of the account onto any designated heir, both before and after age 65, married or not.

Jack, a prudent lad, chose Company B.


Would you think anyone in their right mind would ever choose Company A? I would think everyone would at least want Company A investigated for fraud. Yet a very large percentage of Americans not only believe in Company A, they will defend it as if it were a religion. Hillary Clinton even proclaimed Company A as one of America’s greatest success stories.

Company A is Social Security. Company B is any private investment or insurance company specifically investing in either government insured bonds or government insured certificates of deposit.

I chose $161.20 as the monthly investment because it is approximately 12% of the monthly income of someone working full time at minimum wage. The 12% is the 6% non-Medicare contribution of each the employee and the employer combined, the total amount currently paid into the system.

In spite of these numbers, leftists will defend Social Security and will attack any attempt to privatize the system. They scream that proponents of privatization want to let old people starve and die in the streets. Hmmm…. Which plan has old people starving? I think anyone can purchase much more food and comfort with $2,400 a month than $380 a month – don’t you?

There are other elements to Social Security such as income for dependent children until age eighteen, should one or both parents die. This could easily be included in Jack’s plan as well. For about $20 a month for 20 years, Jack could purchase a term life insurance policy of $500,000. Should Jack die the policy would provide Jack’s family with about $3,500 a month. This additional insurance would drop Jack’s retirement income from $2,400 to $2,200 a month. If Jack never marries, he never needs to worry about this additional insurance.

Considering that both investment approaches include only investments insured by the U.S. Government, this takes away the argument that people could lose everything in a private system, one investing in the stock market or other non-insured investments. Should the investments earn a higher rate of return, Company B could increase Jack’s monthly income by over $1,000 a month for every additional point increase in his average investment return.

Social Security is in trouble – big trouble. Promises made will soon be broken. The age of retirement will undoubtedly increase in the next few years and the likelihood of anyone under the age of 40 receiving any benefits is almost zero. Yet, the left continues to defend the system as a success and fights all efforts for American’s to retire in comfort, having full control of their retirement funds.

This is the same government that now wants to take control of our health care. I’m guessing under that system, we won’t have to worry about retirement income at all since none of us are likely to live long enough to need it.