How Not to Become a Member of the 28%
The story you're about to hear is true.
It started around six years ago...
When I first read about it, I thought to myself it would never happen. But now I'm convinced it will happen — and very soon.
I'm talking about something we here at Wealth Daily have dubbed the "Obama IRA."
Before I go any further, let me take you back to 2007. That's when a progressive think tank called the Economic Policy Institute issued a paper under its Agenda for Shared Prosperity banner.
The title of that paper was, "Guaranteed Retirement Accounts: Towards Retirement Income Security."
The thesis of the paper was threefold:
1) Tax breaks given by retirement vehicles like 401(k)s and IRAs are unfair because they favor the wealthy;
2) Tax breaks offered by 401(k)s and IRAs prohibit the government from collecting more tax revenue; and
3) The middle class and poor need a better retirement savings system (of course, run by the government).
This is verbatim from the report:
This paper proposes a rescue plan for the American retirement income security system, based on a mixed system composed of Social Security, employer defined-benefit pension plans, and a new type of personal retirement savings account called a Guaranteed Retirement Account (GRA). This rescue plan will not work without a strong defined-benefit pension system and a strong Social Security system. Tax breaks for 401(k)-style plans and IRAs will be converted into flat tax credits to offset the cost of these new accounts, so the plan will improve the retirement security of most Americans without costing taxpayers more than the current system.
The plan calls for all workers not enrolled in an equivalent or better defined-benefit pension to enroll in a GRA, a plan that borrows the best features of defined-benefit and defined-contribution plans, including guaranteed retirement benefits that last a lifetime, low administrative costs, and steady contributions. With GRAs, workers will accumulate savings in investment funds that earn a rate of return guaranteed by the federal government. These funds will be converted to life annuities upon retirement. Along with Social Security benefits, these will replace approximately 70% of pre-retirement earnings for the typical retiree.
Guaranteed Retirement Accounts eliminate the regulatory and tax law favoritism that not only gives 401(k)-type plans wide discretion and little scrutiny, but does so at the expense of the defined-benefit system. Most defined-benefit plans yield a much higher benefit than even Guaranteed Retirement Accounts, though they typically also require average contributions of over 6% of payroll for sustainability.
Let me translate: Progressives think you're either too stupid or don't have the discipline to save enough money for retirement. So they'll do it for you.
As far as I can tell, the GRA will yield a measly 3%. So for every $1,000 the government confiscates from you to put into these GRAs, you'll receive $30.
Moreover, your hard-earned dollars the government takes from you will be invested in — take one guess...
That's right. U.S. Treasuries.
Since China is no longer buying our debt and financing our spending, the American taxpayer will do so instead.
Now as I said, seven years ago, I thought this idea didn't have a snowball's chance in hell of seeing the light of day. Now I'm convinced it will.
Here's why: Back in January, the Washington Post ran an article about how more than one in four Americans are tapping into their retirement funds to pay for their mortgages, car loans, and to buy food:
A large and growing share of American workers are tapping their retirement savings accounts for non-retirement needs, raising broad questions about the effectiveness of one of the most important savings vehicles for old age.
More than one in four American workers with 401(k) and other retirement savings accounts use them to pay current expenses, new data show. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans.
And for course, this cause for concern has renewed the idea of GRAs.
But it doesn’t have to be this way.
As I said in last week’s Wealth Daily, there's a way to structure your portfolio so you are receiving a steady stream of dividend checks every month and/or every quarter. In fact, my folks are collecting dividend checks every month that help pay for their retirement.
It’s easy to do, if you know which investments to make...
The average dividend yield of my parents’ total portfolio is roughly 11% to 12% — a lot more than a GRA promises to yield.
And many of the investments my parents are enjoying are the exact same investments I’ve included in The Wealth Advisory portfolio, so I’m eating what I cook.
Brian is a founding member and President of Angel Publishing and investment director for the income and dividend newsletter The Wealth Advisory. He writes about general investment strategies for Wealth Daily and Energy & Capital. Known as the "original bull on America," Brian is also the author of the 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. In addition to writing about the economy, investments and politics, Brian is also a frequent guest on CNBC, Bloomberg, Fox and countless radio shows. For more on Brian, take a look at his editor's page.