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Create Your Own "Social Security"

The Huffington Post The Huffington Post 18/10/2015 Terry Savage

Take a look at your paycheck. I'm willing to bet there's a huge deduction on every paycheck stub for FICA. And I'm also willing to bet that most people don't know what that is and can't tell you what "FICA" stands for! Yet they allow the company to take that money right out of their take-home pay!
Give it a thought. I ask that question at most of my speeches: "What does FICA" stand for?" And I almost always get an audience of blank faces and wrong guesses.
OK, FICA stands for Federal Insurance Contributions Act. And that's the official name of the legislation that established Social Security. Those huge withdrawals from every paycheck are your "contribution" to Social Security.

Not your own Social Security check -- but the money that is being paid out to today's retirees. The time has long passed when people believed there was a "shoebox in Baltimore" with money in it for their eventual retirement. (Yes, ask your grandparents, that's what they thought.) Now we know that the Social Security trust fund is a giant shoebox filled with "special purpose" Treasury bonds.
All of the money that comes into the government from your Social Security "contributions" pays for current beneficiaries, with any excess funds going into the trust funds in the form of government IOUs. But since, for "counting" purposes, the "surpluses" that are supposed to be building up in Social Security for your retirement are co-mingled with the Federal budget deficit, the concept of a trust fund is a bit of a fiction. Even so, according to the latest government projections, the Social Security trust fund is expected to be depleted around 2033.
So where will the money come from for your Social Security check -- the one you expect to start receiving in 20 years? It's a frightening thing to contemplate. And it should make you start thinking about hedging your bets on your future Social Security income. You can do that by creating your own "social security fund."
Matching FICA

In 2015, your employer will take out up to $7,347 during the year for FICA. (And the employer will make an equal contribution, and send it to the government.) That maximum amount is taken out of income up to $118,500 in 2015. If you make less than that amount, the total deduction for your contribution will be proportionately less.
You have no choice. You can't tell the HR department that you "can't afford to contribute this year" because you have other pressing needs, like paying off credit card bills or saving for your child's college. The FICA deduction is the price of employment -- and it's not optional.
But will it be worth much when you retire? And don't you think you owe it to yourself to hedge that bet?
Perhaps your company has a 401(k) plan that is voluntary. The easiest way to hedge your FICA bet is to contribute an equal amount, automatically, to the 401(k) plan as you do for FICA.
That's a tough decision to see that money disappear from your take-home pay. But really, it's no tougher to swallow than the original FICA deduction. And look how much better you could do with that money than the government!
Suppose you take that annual $7,347 "contribution" and invest it in your retirement plan, in an S&P 500 stock index fund. According to Ibbotson, the statistical division of Morningstar, the historic average return of the S&P 500 (or its equivalent), including reinvested dividends and dating back to 1926, is 10.1 percent.
So let's suppose you start work in your early 20s, and invest an amount equal to the current $7,347 annual deduction in that diversified stock market mutual fund. Do it every year -- the same amount -- for the next 50 years, and your retirement account would be worth approximately $10 million!
In fact, if you work for a company that matches your retirement plan contribution dollar-for-dollar, you would have to invest only half that amount out of your paycheck!
Yes, there are a lot of caveats. Inflation will eat away at that nest egg, and your FICA "contribution" is likely to rise each year. And who knows what the United States will look like in 50 years, when today's twenty-somethings retire?
But, still, young workers are letting the government take that FICA contribution out of each paycheck. They have no choice but to hope that it will provide at least a basic retirement income. There will no doubt be changes in Social Security in coming years. Benefits are likely to be "means-tested" -- with those who have done a good job of saving other assets receiving less in benefits. That's all the more reason to hedge your Social Security bet.

The only way the government can "means test" your own savings is to tax it away. And at least you'll get a vote on that! That's the Savage Truth.

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