To Get Your Money Back, You Need to Make 4.8% !!!!????

[On the Road]

Here are some simple numbers I did on the Bush plan. Since the government keeps the principal of a private account as well as the first three percentage points of returns (compounded), you have to make a high enough return OVER three percent to recoup your original investment. From the numbers here, looks like the breakeven over 40 yers is about 4.8%:

Value of Private Account Under Bush Plan										
2/3/2005										

	                             			   	 Nominal 		          Threshold			
Year	Contrib Cumulative	%Return	Fees	 GrValue 		%	Value		Net Value
1	 1,000 	 1,000 	4.8%	 $20 	 1,028 		3%	 1,030 		 -   
2	 1,000 	 2,000 	4.8%	 $20 	 2,105 		3%	 2,091 		 14 
3	 1,000 	 3,000 	4.8%	 $20 	 3,234 		3%	 3,184 		 51 
4	 1,000 	 4,000 	4.8%	 $20 	 4,418 		3%	 4,309 		 109 
5	 1,000 	 5,000 	4.8%	 $20 	 5,658 		3%	 5,468 		 189 
6	 1,000 	 6,000 	4.8%	 $20 	 6,957 		3%	 6,662 		 295 
7	 1,000 	 7,000 	4.8%	 $20 	 8,319 		3%	 7,892 		 427 
8	 1,000 	 8,000 	4.8%	 $20 	 9,747 		3%	 9,159 		 587 
9	 1,000 	 9,000 	4.8%	 $20 	 11,242 		3%	 10,464 		 778 
10	 1,000 	 10,000 	4.8%	 $20 	 12,810 		3%	 11,808 		 1,002 
37	 1,000 	 37,000 	4.8%	 $20 	 99,956 		3%	 68,159 		 31,796 
38	 1,000 	 38,000 	4.8%	 $20 	 105,781 		3%	 71,234 		 34,547 
39	 1,000 	 39,000 	4.8%	 $20 	 111,887 		3%	 74,401 		 37,486 
40	 1,000 	 40,000 	4.8%	 $20 	 $118,286 		3%	 77,663 		 $40,622 

I wanted to put the spreadsheet up, but freespaces.com is locking me out. (PM me if you'd like a copy to look at.) The formulae are not exact (eg, returns are calcuated end-of-year rather than mid-year), but the basic picture should be the same.

The most important thing is that EVEN if you make 4.8% for 40 years, you get zero return -- you might as well keep your money in a mattress. Since the funds will mix stocks and bonds and be conservative, it is extremely likely that they will underperform that amount and the accountholder will have all their investment wiped out.

Please tell me where I'm wrong

[tk2kewl]

1. Newsday reported 3%

but w/o any backup analysis.

Funny how the SS bankruptcy analysis is based on a pessimistic annual growth of 1.8% while the success of the private accounts is based on 4.8% annual growth of individual investments

[rkc3]

2. How can I do math when Survivor is on?

[On the Road]

4. 3% is the Threshold

but since the government takes your original investment back, you need to make a higher retun to cover the principal plus financial management fees.

If I misunderstood it, please correct me. I can hardly believe that the administration is proposing to keep the money you put into the accounts and only give you the excess returns. But that's what the Washington Post article appeared to be saying.

[seventythree]

3. say what?

the government keeps the principal and the first 3%?????

[On the Road]

5. That is How I Understand It

Here's a thread from earlier today that referred to an article in the Washington Post. It's what prompted me to do the numbers. Here's a quote:

"...retirees who opt to divert some of their payroll taxes into private accounts would ultimately get to keep only the investment returns that exceed the rate of return that the money would have accrued in the traditional system."

This is what completely floors me. Whatever chances they had of getting away with something are completely gone as far as I'm concerned. And it's not only a cruel joke, it's so transparent. I can't believe enough educated people will buy it for any reason.

[Pepperbelly]

6. the article has been corrected by the Post.

For what that's worth.

[On the Road]

7. Thanks, I Just Saw That

That version would never have flown. I would almost rather the administration offer something so extreme -- it would never fly.

Or maybe it was a calculated mistake to make the actual proposal, bad as it is, look more reasonable. Who knows?

[jswordy]

8. If you make 4.8% you LOSE MONEY....

...because as far as I can see, your figures do not factor in inflation.

Private retirement plan investors are currently being told a 10 percent average gain over the next 40 years ought to result in a nominal 4-6 percent return on investment for the period when inflation and market factors are considered. Those figures blow the Bush plan out of the water.

Next, factor in that as you pile up years in the president's plan, your risk increases, because your contributions make up less and less of the total accrued, and compounding makes up more and more of it. Therefore, if the market dives and you lose half of your account, you are shit out of luck to rebuild using contributions.

In a nutshell, the plan foists the risk onto the individual and removes it from the government, while providing a short term windfall for the financial markets through the individual accounts and a boost to bond market rates when the $2 trillion conversion cost is financed. The risk to the indivodual is heightened over that which would have been shouldered by the government had the program remained the same.

Further, the program advocates a reversal of common investor advice. Private investors are told to risk one-third of their money and invest the rest in risk-free environments. But this plan risks two-thirds of the individual's SS funds, leaving only one-third secured.

Like usual, we common folks get screwed.

[jswordy]

9. LINK TO POST CORRECTION AND DISCUSSION THREAD

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=1209192&mesg_id=1209192

[KansDem]

10. Certificates of deposit now have a 3.62% yield...

Certificates of deposit
Rate: 1.61 percent (1-year CD yield); 3.62 percent (5-year CD yield)
Yields on short-term certificates of deposit continue to rise. The average one-year CD yield increased from 1.58 percent to 1.61 percent, and is now the highest since November 2002. Yields on CDs with maturities of one year and less have posted consistent improvement in the past seven weeks, even as longer-maturity CDs have been at a standstill. The average five-year CD yield is currently 3.62 percent, unchanged in the past three weeks, and up only slightly from 3.6 percent on June 23. The same trends generally hold on jumbo CDs -- those requiring initial deposits of $100,000 or more. The average jumbo one-year CD yield is now 1.75 percent, and the jumbo five-year yield is 3.74 percent, up from 1.64 percent and 3.7 percent, respectively, on June 23.
http://origin.bankrate.com/brm/news/bank/20040806a1.asp

Certificates of deposit are considered safe (so I understand), yet financial institutions are offering less of a percentage than the Bush plan.

Does this mean I would have to earn 1% more than the "jumbo 5-year yield" described above to break even (4.8%)? If the Bush Plan is so solid, why don't the CDs have a higher rate? Do I understand this correctly?

I understand the higher the yield, the greater the risk. Is Bush's plan riskier than a CD? And, if so, do we really want it for a social safety net?

[Nederland]

11. I think that's right

...but even if you're off by a little it doesn't matter. Making an average gain of 4.8% per year over your entire working lifetime is trivially simple. Any broad based index fund will exceed that by a significant margin.