Lord have mercy. Teaching finance to the uneducated is pretty frustrating. But I'll give it a shot. Stay with me, Raymond.
You are 21 yrs old and have a savings account earning 2% per year to which you are contributing $1,500 per month. You expect to have about $1,000,000 in 37 years, after which you will live off the $20,000 per year in income.
As your financial planner, I tell you that if you cut your contributions to your savings account down to $500 and put the rest in the stock market in a horizon fund, you will earn closer to 8% on that money. The trade off is that you will only grow that savings account to $333K instead of $1 M, which means you'll only get about $6,670 in income from the savings account instead of the $20K.
However, that will allow you to retire in 37 years with a combined savings and stock market amount of $3,146,000 instead of just $1,000,000. So instead of living off of just $20K per year, you can live off of $63K per year, if you took all your stock market money and put it back into the savings account at the end of 37 years.
This is exactly what the Bush admin is proposing. They will let you divert some of your contributions from the SS Trust fund to your own personal account where you can invest in the stock market. The tradeoff is they will cut your benefits. Why? Because you aren't contributing as much. It's a fair tradeoff because the amount you divert will grow faster than the amount you contribute to SS Trust Fund.
Why would any sane person not do that? Sure it's more risk, but there's more reward. Modern finance tells us that the longer your horizon, the more risk you should take.
Anyway, I can't make it any simpler than that. If you and others don't get this basic finance example, then I'm afraid you are doomed to continue believing what you currently believe in ignorance. |
