Stocks vs Bonds, Equity Premium

Imagine a new mandatory government savings plan as follows :

For every social security number ending in the same digit as the current calendar year, the government contributes $2000 to a restricted private savings account for that individual. In every year after the first, the $2000 contribution is adjusted higher to match the total return of the accounts established in the first year of the ten year cycle. Each ten year cycle reverts to a starting point of $2000, adjusted only for inflation.

The rules are that the $2000 is to be split 50/50 between purchasing an S&P500 stock index fund and a government bond fund. This account must be held to age 65 at which point it must be liquidated and the proceeds must be used to purchase a lifetime annuity. No re-balancing or trading is allowed and no additional funds can be added. The only activity that occurs within the accounts is that the bonds are rolled over on maturity. No cash can be held. The mix of maturities in the bond fund must match the mix that exists at the time of purchase on the secondary market.

If the earnings of the S&P500 prove to be flat over time, with no growth, what would be the expected stock/bond value split at liquidation? (This has no right answer.)

Share this

Why are you asking questions

Why are you asking questions with no right answer?

:juggle: Forced savings

:juggle:
Forced savings without direction will probably lose money.

:dizzy: Ponder this: the

:dizzy:
Ponder this: the negative savings rate of the average American household might actually be rational behavior.

If you presume that the median household income in Seattle is 32000 and a poll taken where the question "how much money do you need to be rich?" is asked and the answers you can give are: < 500000, 50000-1000000, 1000000-5000000, 5000000+, and the median answer was 1000000-5000000, then assume 30 years to save money, assume they can save 10% of their money (3200), then they need to earn 12.5% interest on their investments to make it worth their while.

If they *cant* earn 12.5% with average risk (they could probably get 8.5% right now), then what's the point of saving or investing? The opportunity costs of not using the money today for something else (like education, a house, getting married) are looking like a better bet to an average person.