Samuel H. Williamson
Americans have been talking a lot lately about needing to save more money, both individually and governmentally. Without getting into the national debt questions, it is worth thinking about how tricky the process of individual savings can be and how widely results can vary, even with the best of intentions. If we look at the past, we see that sometimes making the best choice entails being knowledgeable, but other times it is just being lucky.
Let me give you an example of two people, Alex and Pat, who were 27 in 1974, which was the year the government provided us with a tax-free way to save by creating Individual Retirement Accounts (IRAs).
Both Alex and Pat planned to work for 38 years and then retire when they are 66. Both decided to put $1,000 in their IRA at that beginning of each year and they stuck to the plan.
In the beginning Pat believed the stock market was the best investment and put the annual contributions in an index S&P stock fund that reinvested any dividends received. Alex, on the other hand, bought a gold fund. Both continued this strategy until 1980.
When they compared notes that year, Patís IRA was $8,580, while Alexís had grown to $21,800. Pat then sold the stock fund and bought the gold fund, while Alex dumped the gold fund and bought the stock fund Pat just got out of.
For 20 years they stayed with this investment strategy. In 2000 they got together again. Patís IRA was worth $18,860, a good bit less than the $27,000 Pat had sequestered over the years. Alex has holdings of $695,200.
Pat then gives up on gold and moved all the funds to the index stock fund. Alex takes the opposite course and jumps back into gold.
In 2009, Pat was totally burned out by the stock market and converted what was now worth $20,550 into a money market account and leaves it there for the last two years. When 2012 arrives and after contributing a $1,000 a year for 38 years, Pat has an IRA worth $23,610 and can think of a modest retirement, with the help of Social Security.
For the eleven years leading up to 2012, Alex stayed in gold and now has an IRA worth $4,260,000 and sells it all. Following a different but perhaps no more logical investment strategy than Patís, Alex is ready to retire in style, buy a condo at a ski resort and a yacht to cruise the Caribbean.
Alex saved in the stock market for 20 years and in gold for 18 years. Pat saved in the stock market for 18 years and in gold 20 years. All these computations are made using MeasuringWorth Saving Growth Calculator.
First moral: It is sometimes better to be lucky than to be smart.
Second moral: Individual savings are good, but it is nice to be able to count on a guaranteed pension such as Social Security as well.
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