Edelman Financial Engines Founder Ric Edelman joins the Yahoo Finance Live panel to discuss how ‘baby bonds’ can help close the racial wealth gap.
ADAM SHAPIRO: Let's talk about retirement because all of us are headed that way. Ric Edelman from Edelman Financial Engines founder is joining us right now. I just want to let you know, our retirement segment is sponsored by Fidelity.
Ric, good to have you here. There's a proposal out there, which seems like it would be great, which, very simply, at birth, I guess, we give a bond. We purchase a bond that we sell to investors. And the amount gets assigned to each child born in the United States, who can then cash out at 70. I don't know if I've done it justice. But fix what I've said and tell me why this is a good supplement to retirement down the road for a lot of people.
RIC EDELMAN: So you're not far off. You've got it pretty good. The basic premise is this. Why is it our American retirement system says we can't save for retirement until after you get a job? Well, most folks don't join their 401(k) until they're in their 30s. If you don't get a job till your 20s, you're not contributing to Social Security until then. We are squandering two or three decades of compound growth by forcing people to wait until they're adults to start saving for retirement.
Let's start when the baby is born. And if you do the math, thanks to the power of compounding, all it takes is a one-time deposit of about $5,800. Leave that money alone for 70 years, invest it and get market-based returns, and you'll have enough money in that piggy bank to generate an annual income that is more than you get from Social Security. So that's what the RISE proposal is all about-- retirement income security for everyone. And it's an idea that I think policymakers really need to consider.
SEANA SMITH: And Ric, I mean, when you explain it like that, it makes a lot of sense. And you make it sound very feasible and something that almost everyone can do. But when you take a look at our current system right now, I know you're saying that there's a lot of problems with what's currently happening right now. It's something that can be fixed that needs to be fixed. What would you say that number one priority should be?
RIC EDELMAN: In terms of retirement savings, what we have to fix more than anything else is the emphasis on income and wealth inequity. We have a huge problem in our country, as we all know, as we have minorities earning dramatically less, accumulating far less wealth. And what the academic data tells us is that this is intergenerational. If you're born into a low income household, you will probably stay there your entire life. We've seen the data for the past five or six decades showing this. We've got to break that pattern.
And the most effective way to do it is to provide income at birth, targeted so that those who are born into lower income households get more than those who are in higher income households, instead of equal amounts, because not every baby is born into an equal family circumstance. That is the most important compelling way that we can eliminate this wealth gap in America.
ADAM SHAPIRO: OK, so Ric, let's assume no taxpayer involvement because these bonds would be sold to individual investors. Here's the question I have for you. Good intentions, but when you say market-based returns, which market? Equities? I mean, pensions used to be heavily in fixed income. But they also expected a discount while they expected a return. California was smoking the crack pipe. I mean, they were expecting 8%. Not going to happen. So which market are you talking about?
RIC EDELMAN: Well, the broad financial markets, generally speaking. Clearly, how you would invest the money today but in a diversified portfolio would be very different from what you had done 20 or 30 years ago, and likely will be very different from what you will do 20 or 30 years from now. And that is why the money is going to have to be managed. And it will likely be managed similarly to the way endowment funds, pension funds, institutional assets are managed-- dynamically, evolving over time based on current market conditions and economic environments.
And that is the key-- to have the money professionally managed the way our nation's pension funds and endowments are managed, so that the accounts can be expected to produce returns that are enough to allow this thing to grow in value to the level that it needs to. But you're right, it's going to have to evolve and very over time.
ADAM SHAPIRO: Ric, I wish we had more time because there's a lot to digest here. And when you talk about the way pension funds are managed, I keep thinking CalPERS, and I keep thinking I don't know if I want to go there. We'll get you back because this is a fascinating idea, which we should be looking at. Thank you so much, Ric Edelman, Edelman Financial Engines founder.