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Start saving early and the Social Security

February 13, 2005|by TIM ROWLAND

Policies promoting longer working life could ameliorate some of the potential demographic stresses.

- Alan Greenspan




No, I don't have any idea what that means either. But it doesn't sound good, especially if you have any idea of retiring before you reach the age of 85.

Today's column deals with issues so ensnared that no adult fully comprehends them, but it is targeted to kids. Young adults can gather 'round too, but frankly I've found that by the time a person hits 30 he has become so set in his ways he is beyond meaningful redemption.

But if you're in your teens, no doubt you've heard mom and pop, or the "dude" on the news or some political hack blowing steam about this little thing called "Social Security."

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People are wondering whether it will still be around when they retire. They wonder if the system will go bankrupt. They wonder if their benefits will be cut.

Here's what the whole Social Security debate should mean to you:

Zip.

Ignore it. If you see a newspaper story on it, immediately turn to the sports section. If you see it debated on television, turn the channel.

Remember, no one is trustworthy on the subject. You cannot confidently trust one word that comes out of the mouth of the president of the United States. You cannot confidently trust one word that comes from the mouths of the Democratic opposition. Both sides have clearly demonstrated that they will say anything to get their way. So ignore them.

Politics is OK for people who want to manipulate the lives of others, but when it comes to your own life you should give politics a wide berth.

Even people who have no intention to deceive will deceive nonetheless, because in the final analysis they don't know, can't know, the answers.

So what can you do when there is so much conflicting information and so many conflicting opinions? The same thing you should always do when you can't rely on others: Rely on yourself.

It's probably safe to say that the young people who will really need the safety net of Social Security when they retire are not reading this. The fact that you are reading shows you have a glimmer of awareness that will prove useful as you age, and eventually allow you to spit in the government's eye.

Keep in mind, relying on government for anything is a bad idea. Just turn on C-Span some time and listen to some of the goofs in Congress. If you still want to trust your future happiness to them, you need more help than Social Security is ever likely to provide.

But there is one person you can trust and rely on: You. You, with a little help from mathematics. Here's the deal: If, between the ages of 20 and 65, you put just $70 each month into a stock market index fund, you can expect to retire (based on historical stock market returns) with just over $1 million in your account.

Social what?

I don't have any strong feelings about smoking one way or the other, but I know this. You can buy one pack a day and it's no big strain on your budget. But if you saved the money instead, at the end of 45 years you would have $1.8 million.

Of course if you have a college degree, you can certainly expect to be able to save more than $70 to $120 a month. So here's the math: Supposing you enter the work force at age 22 and retire early at age 59: Save $200 a month and you wind up with $1.23 million. Keep working until 65 and you'll stand at $2.1 million. Are you still going to care about "demographic stresses"? You are not, because Social Security will have about as much relevance to you as your change jar.

Obviously, things aren't quite that simple, although they're close. The numbers assume a tax-deferred account and a historical market return of close to 11 percent. And there's always the risk of some calamity we cannot foresee. But the odds will be greatly in your favor. In fact, the greatest risk is that at some point you may fancy yourself a great stock picker or day trader and blow a big chunk on a silly investment instead of leaving well enough alone.

If you are young, time is your friend. That $70-a-month investment that will make you $1 million if you start at age 20, will only net you $345,000 if you wait until age 30 to begin saving. On the other hand, if you're a go-getter 17-year-old with a part-time job, those three extra years of investing will bring your total to nearly $1.5 million.

The key is to start saving early and to save steadily. If you do this, the amount that you save each month is relatively insignificant and will, in the end, only be the difference between being wealthy and being real wealthy.

Money will not guarantee your happiness - there are other areas of your life to work on for that, and it is critical that you do. But with that in place, I see no advantage to being happy and poor over being happy and rich.

And if it spares you from having to pay attention to old coots talking about ameliorating potential demographic stresses, isn't that itself more than worth the effort?

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