There’s been a lot of talk recently about the U.S. social security system (How to save it? How to make it better? Etc., etc.). To Heck with social security (to Heck, I say!). I don’t count on social security and neither should you. Today, I’d like to tell you a few truths about the “fund” and explain to the young people reading how they can retire as millionaires!

First, the truths: there’s no such thing as a social security trust fund. All money seized from your paychecks for social security goes to the general fund of the federal go’ment. From the general fund, senior citizens receive their monthly checks. This is what’s known as a “Ponzi scheme.” That is, no new wealth is being created. For the initial investor to receive his interest payment, new members must be recruited so their investments may be used to pay off the original investors. If you try this in the business world, you are arrested and sent to prison. Thank God all of our wonderful politicians are protected from such unjust prosecution!

So, let’s get to the meat of this discussion: how can you young people retire as millionaires? There’s no trick and nothing about this involves the words, “get-rich-quick.” In fact, it’s just the opposite and involves diligence, perseverance and will-power. How do you retire as a millionaire? You save.

I can see the young people in the audience already rolling their eyes (I teach almost 300 college students each year… I know what teenaged eye-rolling looks like). “Save, you say? You sound like my grandparents.” Maybe your grandparents deserve a little more credit.

Save! And no, you don’t have to work 80 hours per week for 50 years as the CFO of a large corporation. I’m talking about average folks, working 40 hours per week and preparing for the future. When I first heard about this, I too was a little skeptical. Sure, I thought, I can save some money and have a little more when I retire… but millions?

That’s right, millions. I was taught this by a rather learned fellow named Sven Thommesen. One day over coffee he whipped out a calculator and showed me how this was true. I was floored. I had a college degree… I had a master’s degree… I was working on a doctorate and no one, in any class, had ever shown me just how much money could be earned by simply saving your money. So now, I share with you.

The key is to start saving when you’re young (sorry older folks; while saving at any time is a good thing, to really accumulate millions, one usually needs to start when young). Here’s how I explain it to my college freshmen:

First, we assume that over the long run (from age 18 to age 65) you will earn, on average, a 10% return on your investment. Some years (like now) will be terrible and you’ll only earn 3% or 4%. But other years will be great and you’ll earn 18% or 19%. In the end, it averages out.

Start putting money away when you are 18 years old. $25 per month is adequate, $50 per month is preferred. This is when I usually hear the initial outcries from my students. “$50 per month!? What college student has $50 per month to save!?” Ah hem… first of all, how many of you belong to a fraternity or sorority? Those dues are usually more than $50 per month. How many of you spend several hundreds of dollars each year buying clothing which, unfortunately, looks like they have been drug behind a cement mixer for several miles down a gravel road? How much money do you spend each month on beer? It’s not that the students don’t have $50 to save, it’s that they would rather use the money for other things. Since I know that no amount of persuasion will get the average college student to save $50 per month, I’ll use $25 in my calculations.

At age 22, you’ve graduated and are now working your first job. Bump it up to $100 per month for the next 4 years. Your progression might look something like the following (which is not set in stone. You can change these numbers to fit your income and lifestyle. I supply a “how-to” section at the end of this article):

Age

# of Years

# of Payments

$ Payments

18-21

4

48

$25

22-25

4

48

$100

26-29

4

48

$300

30-39

10

120

$500

40-49

10

120

$750

50-59

10

120

$1000

60-64

5

60

$1500

As I tell my students, once you’re in your 30’s, you’ll probably be married and may have children. If your family is like the average American family, you and your spouse will probably both be working. Between the two of you, set aside $500 per month. Is it hard? You bet. But what will you have when you retire at age 65? Your savings will be worth $3,339,088.38. You can see the progression below.

Age

# of Years

# of Payments

$ Payments

Ending Value

18-21

4

48

$25

$1,468.06

22-25

4

48

$100

$8,058.71

26-29

4

48

$300

$29,619.02

30-39

10

120

$500

$182,602.41

40-49

10

120

$750

$647,946.03

50-59

10

120

$1000

$1,958,861.77

60-64

5

60

$1500

$3,339,088.38

Next we guess how long we’ll live. I assume that I’ll live until age 95 (hedging my bets, so to speak). We now start taking money out of our account each month (while the rest continues to earn interest) so that when we die at age 95, there will be zero dollars left (the kids can fend for themselves!). This will give us a monthly income during retirement of $29,302.89. If we assume that the government will seize 40% in capital gains taxes, that leaves us with $17,581.73 to live on each month during our retirement. That doesn’t include any social security payments (naturally).

17 thousand dollars a month during retirement. Have you seen the commercials of seniors enjoying black tie dinners aboard exotic cruises? Playing golf in the Bahamas? Traveling around the world? You can’t do this on a social security income, but you can after a lifetime of careful saving.

Why is it so important to save when you are young? Because that little wad of cash which you save during your teens and twenties earns interest for the next 35 years. If we used the same numbers as above but only start saving at age 30, then our monthly income during retirement (after taxes) would be approximately $12,500 per month. $5,000 per month less throughout our retirement years simply because we postponed saving until later in life.

Are there other benefits of saving early? You bet! Let’s say that you are 30 years old and want to buy a new car. There are many commercials which say, “BUY NOW AT ZERO INTEREST!!!!” Here’s a little secret for you young people; the only folks who are allowed to buy a car at zero interest are the ones who could pay cash for it. Most people will never qualify for that deal. However, if you are a saver, and at age 30 your retirement portfolio is worth almost $30,000, then you (yes, you!) will qualify for a zero interest car loan.

What about buying a house? If, at age 30, you have $30,000 in your retirement account or, at age 40, $180,000, then you will almost certainly receive the very best terms of any mortgage available on the market.

So where do you invest all of your money? This is the absolute easiest part. Go on the internet and find a no-load, S&P 500 mutual fund and put your money there. That’s it. There are many no-load, S&P 500 mutual funds so just choose the one you like best and which charges the least amount in managerial fees. The beauty of this plan is that your money will follow the market and in the long run the market always rises. I’ll say it again: In the long run, the market always rises. Will there be some times when the market falls? Sure, but you’ve planned for that.

How then can you custom plan your own savings? I’ll illustrate using the Texas Instruments BAII Plus financial calculator. It’s one of the cheapest financial calculators on the market and can be found at any Wal-Mart or Target for around $29. (Allow me to thank my students, Daniel Seuzeneau and Mike Mustian, for assisting me in putting together this simple how-to).

(Note: the remainder of this article is simply a guide in using your financial calculator).

First, let’s set the number of decimal places to two. We do this by pressing: “2nd” key “Format” (which is also the decimal key) 2 Enter (top of the calculator). Next, we tell the calculator that we are making twelve payments per year into our retirement accounts. “2nd” key “P/Y” (which is also the I/Y key) 12 Enter Now for our calculations. Across the top center of the calculator, you’ll see five keys surrounded by a dark, gray strip. These are our financial buttons. We’ll be using the same information in the tables above, so if you get a different answer, check your inputs. For our 18 to 21 payments. Type the following: 48, “N” key, “=” (bottom right hand side) This tells the calculator that we are making 48 payments into our retirement account over the next 4 years. 10, “I/Y” key, “=” Our expected interest rate is 10% per year. (Remember, this is an average). 0, “PV” key, “=” Our beginning balance (or Present Value) is zero dollars. –25 (actually type 2, 5, –), “PMT” key, “=” The calculator is performing an amortization. Since we are removing money from our pockets, the $25 is a negative. “CPT” key (top left-hand corner), “FV” key This computes the money we’ll have at the end of the four years (the Future Value) which amounts to $1,468.06. Notice that it is positive because it is money we are receiving (should we remove it from our portfolio). Step two. 48, “N” key, “=” 10, “I/Y” key, “=” –1,468.06, “PV” key, “=” What’s happening? Now, we take the $1,468.06 which we earned from the first four years and (just like our payments) remove it from our pockets. So make sure you use that negative sign! –100, “PMT” key, “=” “CPT” key, “FV” key. This gives us $8,058.71 at the end of the period. Now, continue in this way until retirement. Don’t forget to change the number of payments at the appropriate times. At age 65, you’ll have $3,339,088.38. How do you figure out how much you’ll have to spend each month? Well, if you retire at age 65 and plan to live until age 95, that’s 360 periods. 360, “N”, “=” 10, “I/Y”, “=” –3,339,088.38, “PV”, “=” 0, “FV”, “=” Remember, you want zero dollars left at the end. “CPT”, “PMT” And you have $29,302.89. Multiply $29,302.89 by 0.6 and, after taxes, you are left with $17,581.73.

Happy investing and good luck!