Thursday, February 5, 2009

Retirement Problems

Definition of a Pyramid Scheme from the Securities and Exchange Commission website

Pyramid Schemes

In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.

The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. The chart below shows how pyramid schemes can become impossible to sustain:

Lets compare this to Social Security. Social Security works by taking the money put into it today, and using it to pay those who put money into it a long time ago. For instance, I, as a 25 year old am paying social security. This is not going into an account an earning interest. It is going to pay for retirement benefits of people that are already retired. This looks strikingly similar to the line where "fraudsters simply use money coming in from new recruits to pay off early stage investors" I am a new recruit in this, and I would like out, but I am legally obligated not to leave. The government is legally forcing us to be a part of its pyramid scheme. The amount of return on investment is also dismal. It is something like 1% or somewhere along those lines, however, for a lot of people who don't have the self control to save, this 1% roi is better than having nothing, so a forced savings account isn't that bad of an idea for them. But we are different, we understand that someday we wont be able to earn a living, so we are preparing.

Don't depend on social security for anything. Mostly likely you will have made enough money, and will have enough money, that by the time you retire you wont be able to have access to it anyway. And what do I ask is there to access, a few hundred bucks a month? That isn't the style that we want to retire in. We want to be able to do cool things, and help people, retireing and depending on social security means you are the person that needs to be helped. You don't want that, that is not security.

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