The Future of Social Security

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The following is excerpted from Common Sense, by © 2020 Joel Greenblatt, available from the link on this page. Used by arrangement from the publisher. All rights reserved. This article appears in that book as chapter 6, Saving Time and Social Security: Now Everyone Can Be a Long-Term Investor.

So, a few years ago, I was asked to teach a class on investing once a week to a group of ninth graders from Harlem. I eagerly said yes and immediately began to have second thoughts. For over two decades, I’d been teaching a course on investing at an Ivy League business school. After teaching for so long, I knew what I was doing (more or less). Making things even easier, the MBAs knew what they were doing too, with an average age of 27 and three or four years of work experience before getting to me. Teaching a bunch of ninth graders was going to be tougher.

With no money to invest and still years away from a good-paying job, most teenagers don’t care about investing. I wanted them to. I’m pretty sure they just wanted to go to lunch. Undaunted, the first day of class I handed out looseleaf binders with two charts on the front cover.

One chart had a column of numbers labeled “Investor A” at the top. In this first chart, Investor A invests $2,000 each year into a retirement account starting at age 26. This same investor continues to make annual contributions to his retirement account until age 65, achieving a return of 10 percent per year on his investments. That works out to 40 annual contributions of $2,000.

In the next column, “Investor B” begins at an earlier age. Investor B starts investing $2,000 each year at age 19 and also achieves a 10 percent annual return on his investments. But Investor B only contributes $2,000 each year for 7 years and stops contributing at age 26 (just when Investor A is getting started). That’s only 7 annual contributions of $2,000.

At age 65, who ends up with more money? Investor A or Investor B? The surprise is that Investor B, the one who made just 7 annual contributions when he was young and then never contributed again after age 26, ends up with more money at 65 – $930,641 to be exact. Investor A, who diligently made contributions each year for over 40 years, ends up with less – $893,704. Not bad for Investor A, but not my point.

The point is this: When it comes to saving, investing, and the power of compounding, starting earlier is better – a lot better. But most people don’t. And it’s pretty obvious why.

Adults have lots of expenses – rent and mortgage payments, children, food, clothing, student debt – and saving for retirement doesn’t usually make the list of immediate needs. According to Monique Morrissey, an economist at the economic policy Institute (epI), nearly half of all working-age families have zero retirement savings; the median family between the ages of 32 and 61 has saved only $5,000. The typical working-age, lower-income, black, Hispanic, or non-college-educated family has no retirement account savings at all. Almost 40 percent of Americans, according to one well-publicized study, can’t meet a $400 emergency expense without borrowing or selling something.