Last week I ran across a couple of interesting stats. One, the National Institute on Retirement Security reported that half of U.S. households have saved no more that $3,000 for retirement. Two, the Bureau of Labor Statistics reports the average household spends $2,600 a year eating out each year. So when people say they don't have enough extra to save for retirement, that is not true, they are just eating it up.
My idea is to take advantage of the power of compound interest over a long, long period of time. There is nothing like it when it comes to growing your wealth. As an extreme example, last month there was a news story about a couple that found a treasure of 19th century gold coins with a face value of $27,000 buried around 1894. It said the coins could have a value of $10 million. However, if this $27,000 had been invested in a diversified stock market investment for 120 years at a reasonable 8%, you would get $276 million.
Here is my idea that could potentially result in people reaching age 70 with a million dollars of their own money, tax free, to spend at retirement.
1. Create a new Roth IRA type account for citizens age 20-29. Each year allow an investment of up to $2,400. The government will contribute a 33% match which could either be added to the account or taken as a tax return. This would be entirely voluntary, not a requirement and would require earned income, just like any other IRA.
2. If someone takes the $800 back as a tax return, he or she would have invested a net $16,000 of his/her own money over 10 years. Assuming a 8% rate of return and a retirement age of 70, the result would be $881,000, tax free.
3. If someone adds the $800 to the $2,400, the 8% rate to age 70 would result in $1,175,000, tax free.
4. The amount available at retirement could be converted to an annuity, or set up on a withdrawal schedule such as 4% of principle each year.
5. If someone cashes out their account before age 62, the government would assess a 33% penalty to recoup the amount it contributed to the investment. After all, the whole purpose is to encourage retirement savings. If you decided that is not what you want to do, you lose the match.
6. Investment choices would be limited to indexed mutual funds. This will keep fees low and avoid the higher fees and unpredictable returns of managed mutual funds. No individual stocks. No commodity investing. With a 40+ year investment period, you don't need to beat the market rate of return, the market rate of return should be enough and it would be safer.
7. The max cost to the federal government over 10 years would be $8,000 per participant. How much does the government spend on food stamps and other welfare payments and what do we get from those results? This $8,000 would create millionaires.
8. Future Social Security is not funded for anyone now in their 20's. As is, the money we pay in Social Security taxes will be gone by the time this generation retires. My program would reduce the need to rely on Social Security for this generation.
9. Social Security can be vastly unfair, especially to single parents. Someone could work from age 16 to age 70, contributing every year, and if he or she drops dead the day of retirement, all the money they paid is lost to his/her descendants.
10. If people get into the habit of investing during their 20's, they are likely to keep investing even after the extra $800 each year goes away after age 29. The amount they have by retirement could be much more than $1,000,000.
11. $2,400 is not that much to set aside each year, even for a young single 20 year old. It is less than $50 a week. How many young people spend that much on Starbucks, clothing, beer, and pizza?
Is there a better way to encourage young people to save when it can make the most impact?
