(Money magazine) -- I have a friend in his 20's who earns more than I do but doesn't participate in his 401(k). I've told him this is a mistake, but he won't save because he's worried that government policies will decimate the future value of any money he puts away. How can I make him realize he needs to save? -- Richard F., Alameda, Calif.
Yes, government decisions on everything from taxes to fiscal spending could erode the eventual value of your friend's retirement savings. But just because that's a possibility doesn't mean that he shouldn't be saving and investing for retirement.
After all, if your friend retires without a nest egg, he will effectively be placing his retirement security in the hands of the very government he seems to have so little faith in.
While it's not possible to completely insulate one's self from faulty government policies, there are a number of moves you can make to minimize the potential fallout.
One strategy is tax diversification. By keeping savings in a variety of accounts that receive different tax treatment -- think tax-deferred dollars in a 401(k), tax-free savings in a Roth, assets subject to long-term capital gains rates in taxable accounts -- you can at least assure that the spending power of your retirement nest egg isn't tied to a single tax rate.
Similarly, if you're concerned that government spending and borrowing might re-ignite inflation and send the dollar into a tailspin, you can hedge against rising prices by including Treasury Inflation-Protected Securities, or TIPS, and REITs in your portfolio, and capitalize on dollar weakness by diversifying into foreign stock funds.
If your friend doesn't find these arguments compelling, there's another way you may be able to convince him to contribute to his 401(k) -- namely, show him what his retirement might be like if he doesn't.
Go with your friend to the Social Security Quick Calculator and have him plug in his salary, date of birth and future retirement date to see what sort of benefit he might qualify for come retirement time.
So, if your friend is 25, earns $40,000 a year and works until he reaches Social Security's full retirement age (67 in this case), he would be on track to receive just over $18,000 a year in today's dollars in Social Security benefits when he retires in 2054. That assumes there's no cut in Social Security payments between now and then, which is hardly a given considering the shape the program is in.
Then ask your friend how he'd feel about living on $18,000 a year, as that's what he'd have to do if he decides to forego saving for retirement.
If you want to really hammer the message home, have him speak with current retirees who are living on Social Security alone. I suspect most of them will tell him it's a challenge to say the least.
You can then show your friend how much better off he might be if he contributes even a modest amount -- say, 10% of his income annually -- to his 401(k) and/or other retirement accounts.
Assuming his salary increases by a percentage point more than the inflation rate and his retirement investments earn a reasonably achievable three percentage points above inflation, he could be sitting on a nest egg of roughly $400,000 in today's dollars by the time he retires.
That's enough to generate an inflation-adjusted lifetime income of $16,000 to $20,000 a year, more or less doubling the income he'd get from Social Security alone.
Granted, there's no assurance his nest egg will grow that large. And whatever its eventual size, it's possible that future tax hikes could result in more of his stash being diverted to government coffers than he'd like.
But that shouldn't be a surprise. We all know that there are no guarantees in life. The real issue is whether your friend is taking a bigger risk by saving or not saving for retirement.
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