I read an interesting post on Free Money Finance – one of my favourite blogs in the ‘Making Money 101’ space – the other day; FMF said:
Here’s an interesting report on the value of Social Security :
The average monthly benefit for retirees is $1,045 in 2007. A 65-year old who wanted to buy a guaranteed income of that size – with payments that go up with the cost of living and continue for a widowed spouse — would need to pay an insurance company about $225,000.
Firstly, if you are rubbing your hands and thinking “I need to save $225k LESS” for my retirement now, you have rocks in your head!
Relying on a government hand out is always bad advice … as the population ages there will HAVE to be changes in Social Security – none of them good … for you!
My advice is simple: PLAN to go without, GRATEFULLY ACCEPT what you are given.
But, there is an even more interesting lesson to be learned here:
The government is prepared to pay you 2% of that ‘invisible’ $225,000 that they have effectively put aside for you, each year … and INCREASE it each year to keep up with the cost of living … nice.
How would you like to be able to set up your own plan that works exactly the same way?
There is a way!
It’s safe … it’s legal … and, it’s easy … and it’s all covered in this book by a highly respected professor.
Here’s what you do …
You invest your lump sum at (or before) retirement in special inflation-proof government bonds called TIPS.
TIPS are as safe as Social Security because they are US Federal Government Treasury Bonds … the difference is that you put up your own money so, unlike Social Security, the government can NEVER get out of it’s obligation to:
a) Pay you back your Principal (the amount you put in) plus the value of inflation! And,
b) Pay you a 6-monthly dividend (call it your ‘social security check’) also adjusted for inflation each year.
This is not financial advice, as you will need to see your own financial adviser to determine:
1. If this strategy can work for you;
2. How much to expect in bond interest each year; and,
3. Whether you should substitute inflation-protected MUNI’s for the TIP’s that the author recommends … useful if you are investing outside of a tax-shelter (e.g. ROTH IRA).
Let me know what you think?
Good advice. I never looked at it from this point of view
Thanks MoneyMonk … I enjoy your blog.
Well-written! I’d not heard of Zvi Bodie before, but checked out his credentials and would have loved to have taken some classes from him. This new book (Worry-Free Investing) looks designed for folks like me on the tail end of the Baby Boomers who won’t have Social Security (tho we really shouldn’t perhaps). It gives a lot of his wealth of knowledge watered down from the techno-speak we’d get from his textbooks to something I can read and understand on a plane. Found one within my price range – used – at $16 and ordered it. I do enjoy your blog!
Diane: Just remember, like Social Security, this is a low-risk, low-return approach … but, could be very good if we have extended ‘stagflation’ (high inflation, poor economy). To accelerate returns (albeit at some increased risk, consider Zvi’s advice to add call options … sounds scary but get a good full-service broker to help you). Also, check with your financial advisor re tax implications of investing in TIPS or using the Inflation-Protected MUNI alternative.
Thanks for that advice – part of what drew me to the book was he did get into call options. I know based on where I am age-wise and financially, that I have to take more risks. I just like to make them a bit more educated, so I know I have to understand calls better than I do. Appreciate the extra advice!!
Checkout The Tycoon Report, Diane, (they have some Free and Fee Option courses available) and Tickerhound.com (in case you want to ask other members some questions). If you are serious about speculating in Options (greater risk, greater reward), you can subscribe to sites like Investools.com – they have tools and online courses – but, they don’t come cheap!
The problem with TIPS is that the government has every incentive to under-report inflation. Every added point of inflation means more money they have to pay to government employee pensions, social security recipients, and holders of TIPS.
Did you know that the federal government’s definition of inflation has been changed several times over the last two decades? Each change has caused the number reported to be lower than before. If you use the same metric that was used before Clinton took office, you get a current inflation rate of 8% vs today’s official rate of 4%! That makes a huge different in whether TIPS are a good idea or not.
Anyone who has paid close attention to their expenses can see that the real inflation rate is higher than 4% today. Look at food, healthcare, education, energy, housing. These are the things people have to spend money on, and they’re all going up much faster than 4%.
The bottom line is, the government doesn’t need to default to cheat holders of TIPS, or any other treasury debt. They just need to let the dollar fall fast enough and not let the official statistics catch up until it’s too late for you.
Hi Ed … no trust in Uncle Sam? Hmmmm … but, I do trust Zvi Bodie … he a well credentialled, highly respected, and independent professor. You can ensure the upside by throwing in the Call Options that Zvi also recommends in his book … I may cover this part of his strategy in a later post.