Why Social Security doesn’t work for young people
Rusty: What up, world? Today is May 17th. I just want to talk to you a little bit about Social Security. Save yourselves!!! I have discovered in some little pond something rather interesting that you might want to know. I was doing some taxes with a buddy of mine just for fun. I wanted to correctly identify his tax withholdings. I am not a tax professional. I do it for the fun. But all the information does exists out there; through the IRS, the financial calculators from different websites, you can go and calculate your own withholdings through the Internet. Technology is awesome.
Let me just tell you it took me 2 hours. Shouldn’t be that hard to calculate and project what your taxes for the year are going to be. Gross income, you’ve got tax deductions, tax credits, mileage rates, Medicare, Medicaid, gift tax and household indexing, individual retirement accounts, non-cash distributions, non-cash contributions, asset loss rules, Social Security taxes. You got traditional IRAs, Roth IRAs, 401k IRAs, retirement deferrals, tax deferrals. If you’re a self employee you got your own little tax. It’s ridiculous.
Add all these different deductions… if you’re an employee you get like 3 or 4. Certified self-employed, you’re a business… there are a million other deductions. But yet we still, for whatever reason, want to use this system. Are we masochists? All the Obama voters out there raise your hands, together now. YES WE CAN!!! YES WE CAN!!! YES WE CAN!!! But we shouldn’t. Bad Obama voter, bad bad, no. No.
For the purpose of this discussion I am going to be using Dave Ramsis’ personal financial software. You can go check him out at DaveRamsey.com. He has this thing called FPU, Financial Peace University, from which you can learn all kinds of cool stuff, everything you need to know about money.
Now, after I’m done plugging him lets go through and do this calculation here. There is no present balance in the Social Security argument. You’re not going to have any principle, so let’s put a zero there. Now, the annual interest rate that you’re going to be incurring is 12%. 12% is what the stock market has incurred since its inception. It’s easy to obtain that in a growth stock mutual funds. So put that in.
Years: my buddy was 25 years old when we were calculating his current taxes. He’s going to retire at 65, so that’s 40 years of contributions and incurred interest, so put 40 there.
Monthly Payments. His salary – I did get his permission to use these numbers – is $45,400. So we’re going to multiply that by 12.4%, which is what we contribute to Social Security. 6.2% is contributed by your personal paycheck deducted through withholding. 6.2% more is paid by your employer, also referred to as the payroll tax. That is $5,518 per year, when you divide that by 12 months, you get a contribution of $459.83 per month, so plug that in here, which is going to the government per month for retirement. Now this is not magic, you can get these formulas, these calculators online at different financial investment sites, so don’t think this is something that is magic. Because when I hit this button you’re going to be blown away.
5.4 million dollars. By contributing to Social Security instead of essentially a growth stock mutual fund at a private firm, you are losing out on 5.4 millions. Excuse me, not you but my friend is losing out 5.4 million dollars. You’re losing something else, that’s dependent upon what your salary is.
But when he hits 64 at year 2039 and retires at year 2040 at the age of 65, that difference is almost $600,000 per year in growth. It’s powerful, this is compound interest. That’s how it works. The total contributions when you add up $459.83 over 40 years, you have only added 220,000 dollars. But the interest is 5.2, 5.1 million dollars. This is compound interest. This is why our government sucks. This is why Social Security needs to be ended.
5.4 million dollars. 5.4 million dollars. You understand what just happened here? We are not going to see Social Security. We’re contributing to it as workers at our age. I’m 26 years old, I have been putting money in since I was 14 and started working. I’m never going to see this money. So, you have this scenario: forced government deductions called Social Security stealing 12.4% out of your paychecks. Then you have a choice of privatized investing into a retirement account: Roth, IRAs, 401Ks, whatever. You want to put it in growth stock mutual funds.
With Social Security you get nothing, with privatized investment you get 5.4 million. Hello! No brainer. Nothing with the government, 5.4 million. What if I’m half wrong. Nothing with the government, 2.7 million. Do you realize that most people at the age of 65 at their retirement can’t even cut a $600 check? These same people are on Social Security. Nothing with the government, millionaire. I want to be a millionaire.
Okay, here’s the deal. I’m not that type of guy who just wants to tell you all this information and not give you information to do something about it, to change your life. Well, go to DaveRamsey.com, he has a three hour radio show which you can listen to on the site. You can find out when local radio stations in your area are playing his show. He talks about everything financial, he’s awesome. He also has a course called FPU, highly recommended, which stands for Financial Peace University. It’s like 13, 14 weeks it covers everything about money.
But with that said, I have a gift for you guys. The first people to comment [on Youtube] and request gets a choice of either his book, “My Total Money Makeover” or his software. This software is the exact same software that you saw me use in the blog, the video podcast which I used to calculate Brian’s (my friend’s) opportunity cost for not being able to invest in a growth stock mutual fund.
You get your choice. First person to comment [on Youtube], can get either the software or book. Can’t go wrong with either. Peace out guys.
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