Coming soon: The State of the Portfolio
Mike Lynott: ‘I was once invited to speak about the then Soviet Union to my daughter’s high school class. I took a number of books with me and passed them around. At random times during the hour, I asked who held a book (say, Doctor Zhivago, or Cancer Ward). I then explained to that student that if they owned a copy of that book in the USSR they would have been subject to arrest. It was a great lesson and really hit home to the kids.’
It couldn’t have happened to nicer guys. I’m never thrilled losing money, and there’s still a month and some before my March googapuss (Google puts) expire. But with Google profits up eightfold and its shares at 205, my bet against the stock certainly looks like a wipeout. My apologies to any of you who may have taken the same flyer on my account. And yet it’s very hard not to cheer for Google, which has added real magic to our lives, and seems likely to add more.
(Which does not mean the stock is a buy here. GOOG seems to be earning money at the rate of about $3 a share per year, so sells at about 70 times annualized earnings. Not cheap.)
Bruce Foerster: ‘I took my latest SS statement, looked up the SS tax rates (excluding Medicare taxes) since 1964, looked up S&P 500 returns since 1964 and deducted .18% for Vanguard expenses, and plugged it all into a spread sheet to see what my SS taxes paid would have grown to if I had invested them in the Vanguard 500 Index fund. Since I am only 58, I assumed I could earn 6% for the next four years until age 62, and would pay no more SS taxes since I am retired. I also assumed all funds were invested in a Roth IRA. The results: At age 62, I would have $607,851. My SS benefit statement says I will receive a projected $18,216 at age 62. With my $607K, I can, at today’s interest rates, buy a life annuity paying $45,048. If I then live on an amount equivalent to SS and increase that by 4% per year, and invest the difference at 5% and pay 15% tax on the earnings, in 30 years I will still have $602,841, and still be drawing $45,048 from the annuity. My SS payment in 30 years would be $56,809 but I would have plenty of investment income from my $602K to make up the difference. Clearly, I would come out well ahead by investing my social security taxes.’
☞ Of course you would!
- What do you do about the 80 million (?) folks now retired or soon retiring who expect to receive benefits? If you divert worker contributions from retirees to private accounts, you either let lots of old folks starve or else have to come up with the same revenue some other way, such as by borrowing trillions of dollars.
- If we did shift the Social Security surplus from Treasuries into stocks, who would buy those Treasury securities? How high would we have to raise interest rates to attract investors to roll over our National Debt? What would that higher interest rate mean for the taxpayers who have to shoulder its cost? And for the consumers who would see otherinterest rates rise?
- What about the administrative cost of setting up and maintaining 200 million new retirement accounts?
I totally agree with President Bush: people should invest at least 2% of their income in private retirement accounts. We call these IRAs, Roth IRAs, SEPs, SIMPLEs, Keogh Plans, 401Ks, and 403Bs.
It’s nuts to divert cash away from Social Security if you’re worried it will run out of money. Instead, we just need to make some pretty tiny course corrections — see my December 21 column, for example — and we’ll be fine.