So as you may know, I am a huge supporter of not only saving for retirement, but saving for early retirement. Not only does the saving have all sorts of benefits for the individual saving, such as having money for emergencies, health problems, lay offs; it also teaches just a bit of discipline which can come in handy in a financial pinch if it is ever needed. It also makes us buy less crap, and the world needs less crap.
I was thinking the other day what if instead trying to get everyone on board to do the usual, and start putting money away at 40 or 50 or whatever you want to call a typical age to start saving for retirement (probably closer to 50); well what if the reverse was the case? That is, we DID actually all start saving at a nice young age, we would all have a uuuuuggge nest egg by the time we reached 50. Let me explain further.
Let’s say we use age 23 at a starting point, since most people have graduated or are starting their working career by then. And let’s use a monthly amount of $375 per month, certainly not a small amount of money, but not really a huge amount either. Now here comes the best part: this is how EVERYONE STARTS out in life, and if you want to opt out of this, or lower your amount you can, but you need to take that ACTION, and let’s face it, people are generally lazy, actions are not taken. So basically what we’ve done is instead of trying to attempt to get people to voluntarily save money for retirement (which is working about at about a “meh” level); we have moved to a model where everything is set up for you and steps are needed to AVIOD saving for retirement. Lets also add in the further deterrent that if you opt out of savings for a calendar year, then you loose the ability to contribute the amount later. You know wile we are at it, lets make this an “ULTRA TAX FREE ACCOUNT” so you get the best of the RRSP and TFSA all in one shot. For anyone not familiar, you would get a tax deduction for the amount contributed, and the amount would grow tax free, AND the amount would not be taxable on withdraw. What’s not to like???
Let’s run the numbers and see where this gets us.
So at a kind of whimpy 4% annual retrun, here is how much money we would ALL have at age 40 ,50 and 60:
40 – $108,580 50 – $215,735 60 – $374,352
And at a 7% return:
40 – $143,179. 50 – $345,799. 60 – $744,348
And buckle your seat belts if we really knock things out of the park* and reap a 10% return:
40 – $190,669. 50 -$569,496. 60 – $1,550,000 (ok even I wasn’t expecting that)
*The average 30 year return of the S&P 500 is actually 10.98%, as per awealthofcommonsense.com. For those of you who do math at the the speed of a sloth, 30 years isn’t too far from 27 years, the time from age 23 to age 60, so these numbers are not unpossible.
So looking at those numbers, yeah I think everyone would be fairly set, unless you CHOOSE not to be, instead of having to take the initiative to choose to be.
Some final thoughts and questions:
Don’t forget that under the “ULTRA TAX FEE ACCOUNT” you pay no taxes on any of these funds!
I hope you take away the power of compounding interest. The biggest one is probably the 10% return has over QUADRUPLE the returning power of the 4% return over the 27 year period, even though 10% is only 2.5 times 4%.
$375 a month, that’s a lot of money I can’t afford that!
Look at those results, you can’t afford NOT to afford the $375. But seriously go and read a few of my other posts on saving money or any of the other great personal finance sites about saving money, it’s much easier than you think.
What if someone wanted to take their money out or stop paying into this?
Well they can. But it would be unwise if you stop early…again look at those numbers. And you would also loose the ability to contribute more in the future to catch up.
This isn’t fair…what if I got a 4% return on mine, and my friend got 10% on theirs, they would have more money!
Yes, life is not fair. I don’t get into actual investing much on my site, but take on some risk and reap the rewards. Again search around for investment originated sights.
I wish this was in place now so I can do it!
YOU CAN do it now, call your bank, seriously, like right now, and talk to them about putting away $375 per month. Of course this won’t be the ULTRA TAX FREE ACCOUNT, but it will be the next best thing.
How could the government afford to not collect taxes on all that money?
Well the government would SAVE money in the form of lower OAS and GIS payments they make now. I will fully admit that I’ve not done any research on this, so maybe it would be a loss..maybe it would be a gain? Please feel free to conduct your own research.
Thanks for tuning into The Fake Cheap and taking a few minutes to listen to a little of my outside the box thinking. I think the world needs more outside the box thinking.
What do you think? Could a system like this ever work? Are there more ways this could be improved? Please share your thoughts or comments below.