Two people walked into a bank, somewhere in California. Both individuals needed to prepare financially for their retirement. Both of them earned about $80,000 per year.

The first individual, Mr. Jones, was presented by the banker with a contract called “Social Security.” The contract read as follows:For as long as you work, you will give us 12.4% of your gross earnings, and we will invest the money. When you retire, we will pay you an annuity for as long as you live. Your annuity will be based on a guaranteed rate of interest – depending on how long you live – of about 1.5% per year, compounded! When you die, you will have nothing left of your investment to pass on to your heirs.

The second individual, Mr. Smith, was presented with a very different contract, called “Collective Bargaining Agreement.” It read:For as long as you work, you will give us 5.0% of your gross earnings, and we will invest the money. When you retire, we will pay you an annuity for as long as you live.Your annuity will be based on a guaranteed rate of interest of exactly 7.5% per year, compounded. When you die, you too will have nothing left of your investment… Read More