one will be rich and four will be financially independent

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phartizan
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one will be rich and four will be financially independent

Post by phartizan » Fri Mar 09, 2007 1:32 pm

On p. 3 of The Bogleheads' Guide to Investing, it says,
Take 100 young Americans starting out at age 25. By age 65, one will be rich and four will be financially independent. The remaining 95 will reach the traditional retirement age unable to self-sustain the lifestyle to which they have become accustomed.
Is there a reference for this?
Last edited by phartizan on Mon Apr 09, 2007 12:18 pm, edited 1 time in total.

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Post by richard » Fri Mar 09, 2007 2:19 pm

I'm amazed that 100 25 year olds are likely to reach 65 without any of them dying.

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Post by zhiwiller » Fri Mar 09, 2007 2:25 pm

richard wrote:I'm amazed that 100 25 year olds are likely to reach 65 without any of them dying.
That's how they are financially independent. Graves have low rent.

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Post by Jazztonight » Fri Mar 09, 2007 2:27 pm

I'm amazed that 100 25 year olds are likely to reach 65 without any of them dying.
Some of them DID die.

They reached the traditional retirement age while dead, and that was one of the reasons they were unable to self-sustain the lifestyle to which they have become accustomed.

You just gotta read between the lines!

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Re: one will be rich and four will be financially independen

Post by XtremeSki2001 » Fri Mar 09, 2007 2:36 pm

A box of rain will ease the pain and love will see you through

phartizan
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Post by phartizan » Fri Mar 09, 2007 3:42 pm

Very funny, guys.

Maybe it comes from a source like
this.

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mlebuf
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Statistic

Post by mlebuf » Fri Mar 09, 2007 5:52 pm

I first heard a very similar statistic on Earl Nightingale's recording, "The Strangest Secret." I believe it was first recorded in 1958. What Nightingale said was that by age 65, one would be rich, four would be financially independent and 95 would be broke. Since that time, Americans over 65 have enjoyed increased affluence. However it has not been caused by individual initiative, prudent saving and investing. Rather, it's because of the federal government picking up much of the tab for healthcare through Medicare, long-term care through Medicaid and increases in Social Security benefits. If you take away Social Security pensions and we all had to pay all those costs out of our own pockets, it's a very conservative statement that only 5 percent would be able to keep their pre-retirement lifestyles.

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SoonerSunDevil
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Welcome Michael!

Post by SoonerSunDevil » Fri Mar 09, 2007 5:55 pm

Hi Michael,

It's about time you started posting over here. The new forum is pretty spiffy, don't you think?

John

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Re #6 Correction and Link

Post by mlebuf » Fri Mar 09, 2007 6:41 pm

After further review, Nightingale said that 54 and not 95 would be broke. My apologies for poor memory. Here's a link to The Strangest Secret:
http://www.nightingale.com/tAE_Article~ ... t~i~22.asp

I hope the link works. Not sure how to post one in this new format.

Yes, John I really like the new forum.

Best wishes,
Michael

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Post by DaleMaley » Sat Mar 10, 2007 7:06 am

Venita Van Caspel quoted a similar statistic in her 1978 book....How to Build Financial Independence......she did not give a reference to her quote source either.

She said:
We live in a country withe highest per capital income ever known to mankind: yet of every 100 citizens who reach the age of 65, 95 are flat broke! Of every 100 who reach their golden years, only 2 are financially independent, 23 must continue to work, and 75 are dependent on friends, relatives, or charity.
This was a great motivator for me back in 1979 when I read this book. It prompted me to save at least 15% of gross income and invest it in stock mutual funds.
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

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Post by frank_davis » Sat Mar 10, 2007 7:51 am


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mlebuf
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Here are Nighingale's exact words:

Post by mlebuf » Sat Mar 10, 2007 11:26 am


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Ariel
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Social security is out of our own pockets

Post by Ariel » Sat Mar 10, 2007 11:45 am

If you take away Social Security pensions and we all had to pay all those costs out of our own pockets, it's a very conservative statement that only 5 percent would be able to keep their pre-retirement lifestyles.
With all respect, it is important to keep in mind that Social Security is not a government handout. It is a retirement system in which all of us wage earners invest a substantial portion of our incomes "out of our own pockets" with a substantial match from our employers.

I find it disturbing when citizens of our country lose sight of this and thus allow our elected leaders to view it as a handout.

That said, it clearly is prudent for those with extra income to have other retirement and emergency savings, especially given the problems with government spending, in general, and this pension system, in particular.
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)

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Re: Social security is out of our own pockets

Post by XtremeSki2001 » Mon Apr 09, 2007 9:46 am

Ariel wrote:
If you take away Social Security pensions and we all had to pay all those costs out of our own pockets, it's a very conservative statement that only 5 percent would be able to keep their pre-retirement lifestyles.
I find it disturbing when citizens of our country lose sight of this and thus allow our elected leaders to view it as a handout.
Sorry to dig-up this thread, I've been busy so this is the first time I've been back. Love the forum (found it reading the bogleheads book!).

Ariel, I find it disturbing when citizens of our country WANT the government to hold retirement money FOR them and DON'T want to invest in the market themselves. I'm LOSING money by having it sit in the govt's hands!
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Re: Social security is out of our own pockets

Post by Orion » Mon Apr 09, 2007 10:23 am

XtremeSki2001 wrote:I'm LOSING money by having it sit in the govt's hands!
It's not really "sitting in the government's hands". Social security is basically pay as you go. It was created during the great depression and payouts were needed then, not in the future. It's hard to get much of an investment return out of money being spent immediately.

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About those Dead People

Post by mephistophles » Mon Apr 09, 2007 12:12 pm

Some of the richest folks I know are dead.

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Re: Social security is out of our own pockets

Post by richard » Mon Apr 09, 2007 12:48 pm

Orion wrote:
XtremeSki2001 wrote:I'm LOSING money by having it sit in the govt's hands!
It's not really "sitting in the government's hands". Social security is basically pay as you go. It was created during the great depression and payouts were needed then, not in the future. It's hard to get much of an investment return out of money being spent immediately.
Social security is even more than pay as you go. Social security is running a big surplus of taxes in compared to social security payments out. A good part of current social security taxes are going to fund other governmental operations (for which social security is accruing treasury bonds).

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Re: Social security is out of our own pockets

Post by XtremeSki2001 » Mon Apr 09, 2007 3:47 pm

Orion wrote:It's hard to get much of an investment return out of money being spent immediately.
Exactly why I should manage it and not our govt.
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Post by chaz » Mon Apr 09, 2007 5:59 pm

What is the difference between rich and financially independent?
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Re: Social security is out of our own pockets

Post by jar2574 » Mon Apr 09, 2007 6:04 pm

XtremeSki2001 wrote:
Orion wrote:It's hard to get much of an investment return out of money being spent immediately.
Exactly why I should manage it and not our govt.
If everyone invested as you do, then we would not need social security. :)

Unfortunately, as the book attests, most people don't invest like you do, and when they get to retirement age they don't have enough money. So those of us that are still working get to pay benefits to those of us who aren't.

I think the retirement age should be raised as we live longer and benefits could be lowered slightly. But Americans don't save. And I'm going to have to bail them out one way or the other. We aren't going to let them starve in the street.

The poverty rate among the eldery dropped dramatically after social security. Unfortunately, the poverty rate among young children is higher than the poverty rate among retirees. So perhaps wealth redistribution based on age has gone too far.

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Post by XtremeSki2001 » Mon Apr 09, 2007 6:44 pm

chaz wrote:What is the difference between rich and financially independent?
Good question ... it really comes down to you perspective of each. Personally, I don't care to be rich, but I'd like be able to do a certain number of things and if I can do those things and provide a future for my family, I'll be please. Being rich is over-rated anyway, right?
jar2574 wrote:If everyone invested as you do, then we would not need social security. Smile

Unfortunately, as the book attests, most people don't invest like you do, and when they get to retirement age they don't have enough money. So those of us that are still working get to pay benefits to those of us who aren't.

I think the retirement age should be raised as we live longer and benefits could be lowered slightly. But Americans don't save. And I'm going to have to bail them out one way or the other. We aren't going to let them starve in the street.

The poverty rate among the eldery dropped dramatically after social security. Unfortunately, the poverty rate among young children is higher than the poverty rate among retirees. So perhaps wealth redistribution based on age has gone too far.
True. I'm a fan of "survival of the fittest", but if those unfit for retirement and forced to lived in shambles, our economy and nation will suffer as a whole.

Personally, I think we should be given a choice whether to invest the money ourselves or let the government manage it. However, then comes the issue of those that will wish to save for retirement themselves, but will use the money to buy 10 Coach bags ... now we're faced with the same issues that would be present if SS was eliminated.

I personally think the best way is the govt should allow US citizens to invest a percentage of their SS wages. The match from our employers we won't see, but perhaps allow us to invest half of our money the way we choose. The money should be restricted and can't be touched until your at the retirement age, BUT we'd be allowed to select certain conservative mutual fund plans if we please. For those uninterested, the govt will keep their money for these worry-worts.

Wealth redistribution is really a whole additional debate. Personally, I think the US govt has thrown money at the problem far too long. Rather then creating solid programs that help the less fortunate, we simply throw money and hope these people will manage money better then they did initially to put them in the position they're in today. We're faced with parents who live off the govt and their kids see this and some may feel it's acceptable and a way of life. They grow-p and they don't know anymore about money then their parents did and then this process repeats. It's an endless circle and I don't believe wealth redistribution is the solution.

This is just my $.02 haha, sorry about the rant.
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Orion
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Post by Orion » Mon Apr 09, 2007 7:13 pm

Where would you get the money for the currently retired and soon to be retired?

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Post by XtremeSki2001 » Mon Apr 09, 2007 8:03 pm

Orion wrote:Where would you get the money for the currently retired and soon to be retired?
It would have to be incremental ... it would be slow and it may not benefit my generation directly, but it would benefit my children and their children and every generation there after.
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Re: Social security is out of our own pockets

Post by White Coat Investor » Mon Apr 09, 2007 8:08 pm

Ariel wrote:

With all respect, it is important to keep in mind that Social Security is not a government handout. It is a retirement system in which all of us wage earners invest a substantial portion of our incomes "out of our own pockets" with a substantial match from our employers.

I find it disturbing when citizens of our country lose sight of this and thus allow our elected leaders to view it as a handout.
I strongly disagree with you about this statement. It could be considered a "retirement plan" for the poor, but certainly not for those of us with an above average income. It is clearly a wealth redistribution system. I ran the numbers on this as I recently qualified for social security (finished my 40 quarters.) If I NEVER work again, I'll get something like $1026 a month starting at 67 (even though I've only paid in $9400 total.) If I work every year between now and then making $100-200,000/ year (and thus contribute something like $216,000 more), that payout will only increase by about $1000 /month. That is a HORRIBLE return! I am scared to calculate it because I don't want to know how bad it is!

Social security is a WELFARE program, nothing else. For the most part, it redistributes money from the wealthy to the poor. It is designed to keep the poor off the streets, to help the wealthy not feel guilty about not contributing to charities, and to prevent disruption of the social order. The only reason the wealthy get something instead of nothing to keep people thinking it is a RETIREMENT plan.

Now don't get me wrong; I believe we have a moral obligation to take care of those less fortunate than ourselves to a certain extent and I pay my taxes and donate my time and money to charities, but I object to calling a welfare program a retirement plan.
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EmergDoc

Post by JohnYaker » Mon Apr 09, 2007 8:23 pm

.
Social Security is way for us to avoid having millions of poor old people.

With all respect as I value and enjoy your writings here, but from the pages of SSA.GOV comes this on the origins of Social Security:

"Social insurance, as conceived by President Roosevelt, would address the permanent problem of economic security for the elderly by creating a work-related, contributory system in which workers would provide for their own future economic security through taxes paid while employed. Thus it was an alternative both to reliance on welfare and to radical changes in our capitalist system. In the context of its time, it can be seen as a moderately conservative, yet activist, response to the challenges of the Depression."
(underlines mine)

http://www.ssa.gov/history/briefhistory3.html

Is there a reasonable alternative?

John

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Re: Social security is out of our own pockets

Post by mptfan » Mon Apr 09, 2007 9:08 pm

EmergDoc wrote:
Ariel wrote:

With all respect, it is important to keep in mind that Social Security is not a government handout. It is a retirement system in which all of us wage earners invest a substantial portion of our incomes "out of our own pockets" with a substantial match from our employers.

I find it disturbing when citizens of our country lose sight of this and thus allow our elected leaders to view it as a handout.
I strongly disagree with you about this statement. It could be considered a "retirement plan" for the poor, but certainly not for those of us with an above average income. It is clearly a wealth redistribution system. I ran the numbers on this as I recently qualified for social security (finished my 40 quarters.) If I NEVER work again, I'll get something like $1026 a month starting at 67 (even though I've only paid in $9400 total.) If I work every year between now and then making $100-200,000/ year (and thus contribute something like $216,000 more), that payout will only increase by about $1000 /month. That is a HORRIBLE return! I am scared to calculate it because I don't want to know how bad it is!

Social security is a WELFARE program, nothing else. For the most part, it redistributes money from the wealthy to the poor. It is designed to keep the poor off the streets, to help the wealthy not feel guilty about not contributing to charities, and to prevent disruption of the social order. The only reason the wealthy get something instead of nothing to keep people thinking it is a RETIREMENT plan.

Now don't get me wrong; I believe we have a moral obligation to take care of those less fortunate than ourselves to a certain extent and I pay my taxes and donate my time and money to charities, but I object to calling a welfare program a retirement plan.
How about a welfare retirement plan? :wink:

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Post by DaleMaley » Mon Apr 09, 2007 9:37 pm

After reading The Roosevelt Myth by Flynn published in 1948, my opinion is that Roosevelt was a master politician. His biggest accomplishment as a politician was to tap into the Federal pot of money.......and distribute it to local political groups.....who doled out the money to local people.....as long as you agreed to vote and support Roosevelt.

Roosevelt was pushed into creating Social Security in part by Frances Townsend.

Somewhere else, I can't remember where, I read where Roosevelt's solution to the 15% unemployment during the Great Depression.....was to knock out the youngest workers by creating child labor laws, and knock out the oldest workers by creating Social Security. Once these 2 groups were removed from the labor pool, plus WWII, unemployment decreased to historic norms.

Some history trivia.......
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Re: EmergDoc

Post by XtremeSki2001 » Tue Apr 10, 2007 9:08 am

JohnYaker wrote:Is there a reasonable alternative?

John
See my post above. I think it would work and certainly give those of us who contribute a lot (but get little in return) to get more in return.
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Can the average person really invest wisely?

Post by JohnYaker » Tue Apr 10, 2007 9:28 am

.
XtremeSki2001, your proposal would be a very costly transition. Many of the older forum members were counting on spending the social security savings of younger working people during our retirements :-)

To avoid having a lot of poor elderly people, any government-mandated reitrement plan needs to restrict both the investment alternatives (to prevent the vultures from feeding on it as well as people's tendency to not invest wisely), and allow withdrawals only amortized over one's expected life. There is no way half the U.S. population can manage a lump sum of money on there own.

Further, if we think the average investor does a poor job of tming the markets now, could you imagine if EVERYONE controlled their own money? We'd be back to massive welfare spending and a lot more people living in cardboard boxes under bridges pretty quick.

John

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Re: Can the average person really invest wisely?

Post by XtremeSki2001 » Tue Apr 10, 2007 10:14 am

JohnYaker wrote:.
XtremeSki2001, your proposal would be a very costly transition. Many of the older forum members were counting on spending the social security savings of younger working people during our retirements :-)

To avoid having a lot of poor elderly people, any government-mandated reitrement plan needs to restrict both the investment alternatives (to prevent the vultures from feeding on it as well as people's tendency to not invest wisely), and allow withdrawals only amortized over one's expected life. There is no way half the U.S. population can manage a lump sum of money on there own.

Further, if we think the average investor does a poor job of tming the markets now, could you imagine if EVERYONE controlled their own money? We'd be back to massive welfare spending and a lot more people living in cardboard boxes under bridges pretty quick.

John
Haha, I wasn't advocating this change would be cheap or easy, but simply practical. I'd love to pay for your retirement, but can I hope that your grandkids will pay for mine? Even if they can, I'll get much less then what I contributed.

Why not offer an option that allows people to a.) decide if the want to invest at all b.) of those who wish to invest, offer them #x mutual funds c.) partners of the plan can not withdraw money until the retirement age is met.

I think it would work similar to 401k plans that we see in Corporate America. My company uses Vanguard and I have ~12 funds to choose from or a can choose a combination. The govt could offer pre-configured combinations or allow to do combinations on your own.

At the same time, this would only be HALF of the money you'd get for retirement. Worse case scenario, the market drops and you get half your money, but that's better then none and I think this risk is low compared to the expected return.

You're right, most of the sheep in this great country have no idea how money works even at the most fundamental level, but perhaps if they can control some of their money, they might just be forced to learn! Govt hand-holding only goes so far, the rest sits on the shoulders of our citizens.

I think timing the market is much less critical if you're shooting for long-term. We're talking 40+ years, I don't think market timing is too critical given the long-term outlook. Granted, if we're talking 5-10 years time frame, market timing is much more relevant.
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Post by Orion » Tue Apr 10, 2007 10:41 am

I've read about enough mistakes that the general population is making with 401Ks (not signing up, not contributing enough, crazy asset allocations like all company stock or all cash, cashing out on every job hop) that I'm hesitant to give "the masses" too much control of their own safety net. I think my favorite is that many employees given a choice of N 401K funds choose to put 1/N $ in to each regardless of what they are. (Sometimes about N-2 of them are the same asset class.)

In any case, I'm not sure there's much political will to implement a change that is, by your own statement, not cheap or easy. I believe the previous proposal to privatize SS, involved the government taking on a bunch more debt, thus, shifting the cost into the future. Debt seems to be the American way these days.

Plus I find it worrisome that social security was created after an 85% stock crash and now a proposed fix is to put it into stocks. A lot of the demographic issues that make people worry about social security also make people worry about the stock market. I imagine some future administration proposing "Social Security II" after the next big stock crash.

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Post by XtremeSki2001 » Tue Apr 10, 2007 11:30 am

You're right, it'll (probably) never happen, but I think there is no denying SS as we know it is "broke", especially if you were born in 80's :oops:

As far me, I currently contribute 6% with a goal of ~15%. I'm 1/3 international, 1/3 small cap, and the other is escaping me (don't have my Quicken file at work).

If I get this new job, I'll probably roll my 401k over to a ROTH IRA because I currently don't have much saved since I've only contributed a year.

Long term, I'll try to max out my ROTH and 401k.

Am I making any mistakes in your view? Just curious, haha!
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Post by Orion » Tue Apr 10, 2007 11:33 am

XtremeSki2001 wrote:Am I making any mistakes in your view? Just curious, haha!
I'm not worried about anyone on this forum. It's the other 99.9999% who worry me :)

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Post by XtremeSki2001 » Tue Apr 10, 2007 11:44 am

Orion wrote:
XtremeSki2001 wrote:Am I making any mistakes in your view? Just curious, haha!
I'm not worried about anyone on this forum. It's the other 99.9999% who worry me :)
You're preaching to the choir!

I've tried to pass around some of my PF books to friends, but everyone looks at me like I'm from outer-space :roll:
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Re: EmergDoc

Post by White Coat Investor » Tue Apr 10, 2007 3:31 pm

JohnYaker wrote:

Is there a reasonable alternative?
Here is my suggestion:

Lower the tax. Make it something like 2% rather than 6.2%. One should only pay the tax on his first $50K instead of $100K. Then we raise the age on when benefits start to say....75 or 80. Now, we eliminate all benefits for those who have other income greater than say 20-30K. Now there is no one who thinks it is a retirement plan and all can acknowledge that is a welfare plan. Now the numbers would probably have to be adjusted somewhat depending on what that did to the pot of money, but the general gist is there...less benefits=less cost and average middle class Joe doesn't get social security benefits at all.
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TSP For Everyone?

Post by yakers » Tue Apr 10, 2007 3:52 pm

How about employee and employeer contributions going into the TSP program for all workers? Defalut is a Target Retirement fund.

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Post by Orion » Tue Apr 10, 2007 4:50 pm

Isn't it kind of circular to make SS into a welfare system to make people acknowledge that it's a welfare system? :)

In any case I think you have the same problem - too many people near 65 who vote.

Another alternative: make it possible to opt out of being paid. You pay in to support today's seniors and near-seniors who have paid in all their lives and made plans, but you promise to support yourself in retirement. I already know two people who have paid in and say they will never accept payments because they have more than enough to retire on. Like XtremeSki's plan, this one requires some to pay more today, but it lets each person chose so the politics should be much easier.

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Good plan...

Post by JohnYaker » Tue Apr 10, 2007 5:08 pm

.
EmergDoc and XtremeSki2001,

I'm okay with your proposals as long as we 'grandfather' those of us who have paid most of our lives into this grand system and are now on the cusp of reaping the fruit. :-)

Also, let's be sure to add provisions to increase taxes to pay the welfare benefits of those who certainly fail as investors and end up sleeping under bridges.

John

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Re: EmergDoc

Post by Jack » Tue Apr 10, 2007 7:04 pm

EmergDoc wrote:[so that] there is no one who thinks it is a retirement plan and all can acknowledge that is a welfare plan.
There is the essence of the issue. The majority of people today prefer a retirement plan over a welfare plan. You are or soon will be in the top 3% of income for all Americans. I don't think you are ever going to see a social security system that is going to be tailored to and satisfy the top 3%.
JohnYaker wrote:I'm okay with your proposals as long as we 'grandfather' those of us who have paid most of our lives into this grand system and are now on the cusp of reaping the fruit.
And this is why it is unlikely that there will be major changes to the social security system. All of current social security taxes are allocated to those in or nearing retirement. There is no excess money available to go into an alternative system without raising taxes or incurring massive deficits.

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Post by DaleMaley » Wed Apr 11, 2007 6:06 am

I did some Googling to see if the original statistic in the beginning of this post really existed or not.

I found it on this web site:
Can You Afford to Retire?

Statistics from the Social Security Administration show that out of every 100 Americans...

* 51 have income above the poverty level, but must reduce their standard of living at retirement
* 25 die prior to age 65
* 20 have an annual income below the poverty level after age 65
* Only 4 achieve financial independence

Achieving financial independence takes planning!

Source: U.S. Department of Health and Human Services, SSA Pub. #13-11871
This SSA publication is published annually by SSA in print version, but I could not find an online version.
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

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AshKK
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Post by AshKK » Wed Apr 11, 2007 9:30 am

Thank you Dale.
I am surprised that it has been nearly a month, and the authors of the book were unable to supply their reference for that quote.
Ash | | The 82nd Boglehead.

BrianTH
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Post by BrianTH » Wed Apr 11, 2007 10:03 am

To be precise, I think it would be fairest to call Social Security a "social insurance" scheme. That is in fact importantly different from a pure "welfare" scheme, because the idea with social insurance is to have the "premiums" (what people pay into the scheme) eventually cover the benefits, but with a redistribution of benefits from the more fortunate members of the scheme to the less fortunate.

This is no different from any other insurance scheme. For example, when it comes to health insurance, those who end up more healthy get less benefits than those who end up less healthy, and therefore the more healthy get a lower return on their premiums than the less healthy. Similarly, you get less of a return on your auto insurance premiums if you have relatively few accidents, and so on. In that sense, all insurance schemes have this redistribution effect, which in fact is precisely the idea (to redistribute from the more fortunate participants to the less fortunate).

With a true "welfare" scheme, however, the idea is just to provide certain benefits from the government's general account, with no dedicated payments into the scheme (no "premiums") which are intended to provide the funding for the scheme. Of course, on some broad level one might think of all taxes as "premiums" and all government expenditures as "benefits", but for various practical or political reasons it may make sense to specifically separate out something like Social Security from the general account and operate it as its own social insurance scheme.

Anyway, I think all this is quite important to be clear about. Social Security isn't a defined contribution plan (like a 401K), but it also is not welfare. Rather, it is social insurance. And the reason I think it is important to be clear about that is that Social Security has pretty much worked, so one should be cautious about changing its basic nature into something else.

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Teetlebaum
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Post by Teetlebaum » Wed Apr 11, 2007 12:50 pm

DaleMaley wrote:
Can You Afford to Retire?

Statistics from the Social Security Administration show that out of every 100 Americans...

* 51 have income above the poverty level, but must reduce their standard of living at retirement
* 25 die prior to age 65
* 20 have an annual income below the poverty level after age 65
* Only 4 achieve financial independence
Strictly speaking, those 25 dead guys are financially independent, too.

I was going to ask if there was a way to sell theirs as a strategy, but I guess most Americans have already adopted it. :wink:

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Yuba
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Location: Orange County, CA

Post by Yuba » Wed Apr 11, 2007 2:37 pm

BrianTH wrote:To be precise, I think it would be fairest to call Social Security a "social insurance" scheme. That is in fact importantly different from a pure "welfare" scheme, because the idea with social insurance is to have the "premiums" (what people pay into the scheme) eventually cover the benefits, but with a redistribution of benefits from the more fortunate members of the scheme to the less fortunate.

This is no different from any other insurance scheme. For example, when it comes to health insurance, those who end up more healthy get less benefits than those who end up less healthy, and therefore the more healthy get a lower return on their premiums than the less healthy. Similarly, you get less of a return on your auto insurance premiums if you have relatively few accidents, and so on. In that sense, all insurance schemes have this redistribution effect, which in fact is precisely the idea (to redistribute from the more fortunate participants to the less fortunate).

With a true "welfare" scheme, however, the idea is just to provide certain benefits from the government's general account, with no dedicated payments into the scheme (no "premiums") which are intended to provide the funding for the scheme. Of course, on some broad level one might think of all taxes as "premiums" and all government expenditures as "benefits", but for various practical or political reasons it may make sense to specifically separate out something like Social Security from the general account and operate it as its own social insurance scheme.

Anyway, I think all this is quite important to be clear about. Social Security isn't a defined contribution plan (like a 401K), but it also is not welfare. Rather, it is social insurance. And the reason I think it is important to be clear about that is that Social Security has pretty much worked, so one should be cautious about changing its basic nature into something else.
The biggest reason I have trouble referring to Social Security as "insurance" and comparing it to auto and health insurance is that one has the choice to have these other types of insurance. This choice is made when you determine the cost is less than the risk of the event.

In the case of Social Security, the cost is mandatory. The benefits move from the prepared to the unprepared. It only takes a plan to remove the great majority of the "risk" for this Social Insurance program. Even someone making 30k a year, if they save and invest 10% of their income would not need this social insurance.

So again, the prepared pay for the unprepared.

Rick dba Yuba

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Orion
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Post by Orion » Wed Apr 11, 2007 3:35 pm

Yuba wrote:The biggest reason I have trouble referring to Social Security as "insurance" and comparing it to auto and health insurance is that one has the choice to have these other types of insurance. This choice is made when you determine the cost is less than the risk of the event.
Auto insurance is mandatory here. I thought that was pretty common.

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White Coat Investor
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Post by White Coat Investor » Wed Apr 11, 2007 5:55 pm

BrianTH wrote:To be precise, I think it would be fairest to call Social Security a "social insurance" scheme. That is in fact importantly different from a pure "welfare" scheme, because the idea with social insurance is to have the "premiums" (what people pay into the scheme) eventually cover the benefits, but with a redistribution of benefits from the more fortunate members of the scheme to the less fortunate..
I can agree with that. I just wish I could raise my deductible.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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