Investing For The Future
While events of recent times (such as Katrina and the now unpopular war in Iraq) have made the proposed shift of the United States Social Security program into the private sector a ďback burnerĒ issue, ďsecurityĒ in the future is, nevertheless, still and issue everyone should consider.
Iím talking special senior reduced rates for telephone service (everyone else pays $55 you pay $35), senior subsidized apartments (where available) starting at $200 per month (while everyone else pays $500 in the outside world). Iím talking no luxuries. No movies. No buying a new toaster or TV set. Just food, utilities, telephone and a roof over your head.
This amount, $500 a month, is about half of what a young person would pay if they lived in the right place (and New York City or Los Angeles is not the right place, because rents there start at $800 a month)!
In order to afford this you must be making $8.50 an hour gross, which is about $17,000 a year in income. This is about 35% more than current minimum wage.
Now, if youíre young and have a great job that pays, say $50,000 a year and you live a Spartan, minimalist life you can save for retirement in a matter of a few years and then go out and live high on the hog without worries! By this I mean sticking as much as you can into an IRA and putting the rest into Certificates of Deposit (CDs) or Treasury Bills. If you make $50,000 a year and it costs you $15,000 to live a bare life (to which Iíve added a car so you can drive to work, thatís another $5,000 a year over the $10,000 minimal living expenses in the ďghettoĒ world) you can easily pack $25,000 into saves per month.
Outrageous, you say! Stop and think! Packing money into investment accounts lowers your tax burden from 35% to 15 or 20%! Thatís money you get to keep for the future!
Since you are limited as to how much you can put into an IRA (say $2,500 per year) tax free youíll need to keep investing in that for at least 15 or 20 years (thatís $50,000 without interest). After that the IRA will build without further investment.
Your CDs and T-Bills, however, would grow at astronomical rates if you popped $20k into an account for just 5 years! Do it for 10 years and you have your retirement ready! Youíre 25 now by age 35 youíre set for the future or a medical emergency will $200,000+ in savings. If you donít touch it, by age 55 it will be close to $400,000 after all that interest builds!
You donít have to be rich to do this. On a smaller scale anyone can save for the future if youíre making a decent wage, live a frugal life in a low cost area of the modern world.
One person we talked with lives far from the madding crowd, yet in a town large enough to support decent working environments with all sorts of ďlargeĒ businesses around the area. You know, Home Club, Staples, Wal-Mart, K-Mart, chain grocery stores, little clothing stores like Fashion Bug, etc. Places where anyone can make between $9 and $15 an hour after a few years.
This personís living expenses amount to under $900 a month. They are making about $1,100 a month. Whatís left over after paying the bills goes into a saving account, which is paying dismal interest at this point in time (under 2%), but if youíre not rich thatís the best you can do! They put between $100 and $200 a month into this account and that comes out to about $2,000 a year in savings.
After someone like this reaches $5,000 in savings they can put half of that into a CD (Certificate of Deposit) has far better interest (closer to 4%) but you canít touch that money for 6 months to 2 years, which is why you only put half into that account.
All right. Letís say you pack $100 into a regular savings account. After 4 years you have enough to split it between a CD you canít touch and a savings you can in an emergency. After 2 more years of adding $100 to that low yield savings and keeping your $2,500 in a higher yield CD you have another $5,000 in savings, which is enough to live on for about 5 months should you lose your job or to pay off a deductible if a medical emergency occurs. Your $2,500 CD has become $2,700. You go another 2 years and you have $7,500 in savings and almost $3,000 in CD. Now you put enough into a CD to make $5,000 and keep close to $6,000 in your savings account. Two more years you have $8,000 in savings and $5,500 in CD money and itís only cost you $100 a month to do this.
Putting away $100 a month for 10 years at an average interest of 3% gives you $14,000. For 30 years this gives you almost $60,000. Packing away $200 a month gives you well over $100,000, which yields $5,000 in interest each year you keep it in a current CD, possibly more.
By then minimalist life will cost closer to $20,000 a year and youíll be around 60 years old if you start young. Thatís enough to pay for things for about 8 or 9 years if you have no other retirement accounts. If Social Security still exists you can supplement that by withdrawing your interest and keeping about $95,000 in the CD for another year. You can use part of this money to take a good vacation and still have $85,000 in the bank when you come back!
If you have a baby and you put $100 a month away in an account at current interest, it will generate about $30,000 by the time that child is 20 years old. Thatís enough for a state college tuition, plus a car to get to and from school. Thatís enough for a down payment on most homes with enough left for furniture. Thatís enough for a new car, paid in cash.
Today rough estimates for 25 years of retirement (starting age 65 and living to age 90) at a minimalist lifestyle (which means you own your home free and clear or live in a retirement subsidized apartment, should they still exist) requires $400,000 to $500,000 saved up in the bank. This would be enough to pay $20,000 a year in expenses for 20 to 30 years. To save up this much requires you putting $300 a month into a modest yield account for 45 years. This amount is still not outside the reach of someone making a salary of $50,000 a year, provided you donít blow you wad on having too much fun and good times.
Right now 7% of you income goes into forced retirement in the United States with Social Security. Your employers pays another 7%. This is about $100 a month in forced savings from you and $100 from your employer. Thatís $200 a month and the government wants to get out of this forced savings business and turn it over to a private enterprise. Employers are also looking to get out of this business which they do under the terms of ďindependent contractor.Ē Those who do work under this concept have to pay their own way in the world. No disability, no social security, no retirement fund, no withholding of income taxes. You make $25,000 this way at the end of the year you must pay the government $2,800 in back taxes out of your pocket.
For those of you under the age of 40 you may face an uncertain future and if you donít plan for it now you may end up being a ďpeople greeterĒ at a store like Wal-Mart until the day you die, because there might not be any ďSocial SecurityĒ around to pay your bills after age 67 or 72 (which is what the retirement ages are for those of you under 40 years of age Ė thatís right no more 65 for retirement, President Reagan and Congress upped the age for young people as a stop gap measure to shore up Social Security).
Planning for the future is up to you and the future is arriving faster than you think!