This week, President Bush sketched out his plan for privatizing social security. But will the numbers add up?

While the vast majority of Americans believe social security should be high on the federal government’s legislative agenda this year, they’re divided on whether the president’s plan will help or hurt their retirement years, and how the money should be invested.

Your social security check may only be a few dollars bigger this month, but at least you’re getting it. By 2018, social security will take in less than it has to pay out, and it is estimated that benefits could be just 70 percent of what they would otherwise have been.

“The system wasn’t designed for what it is being asked to do. There have been a lot of changes along the way, not the least of which is an increase in our payroll taxes,” says Tim Schlindwein, Schlindwein Associates.

In the last few days, more details about President Bush’s plan to privatize social security have been released. Workers would be allowed to divert 4 percent of their payroll taxes into private accounts the rest would go into the current social security system. But private payroll account contributions would be limited to between $1,000 and $1,300 per year. And it will be up to you to decide what to do what to do with it.

Diverting some of the cash into private social security accounts means your monthly social security check might be $1,000 less per month. What kind of investment return would you have to generate to make that up? Tim Schlindwein, a financial advisor who manages more than $100 million ran the numbers for us.

If you invest the maximum amount the president is talking about, you’ll have $1,300 per year to invest. If you put 75 percent into stocks and 25 percent into bonds and the stock portion earns the average market return of 10.5 percent over 35 years, there is a 90 percent chance you’ll be able to withdraw $1,000 per month, or $12,000 per year for your 14 years in retirement.

But that scenario doesn’t account for inflation. Add in 2 percent inflation and you’ll have just a 70 percent chance of getting $12,000 in income over your 14 years in retirement.

And if you manage to spend 24 years in retirement, there’s just a 57 percent change your money will last. While fixing social security isn’t going to happen overnight, investment advisors agree the sooner you start thinking about securing your own retirement, the better.

“If you haven’t even thought about it then it’s going to wake you up in the dead of night when you’re age 55 and then time is clearly no longer your friend, that’s for sure,” Schlindwein says.

The Wall Street Journal today reported that the Bush administration wrote a memo to key congressional conservatives that basically says privatizing social security won’t be enough to save it. The memo apparently calls for significant reductions in benefits as well. The Bush administration declined comment.


Tim Schlindwein
Schlindwein Associates

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