The Future of Investment: Reasons for Optimism

There are two reasons that I am optimistic about the future of stock investments. The immediate future looks a little scary. Fueled by the Federal Reserve Bank and the U.S. Treasury, the market is at or near historic highs, even though the underlying economy is threatened by unemployment, underemployment, and debt (both public and private). Almost everything seems overpriced. However, I am trying to visualize how the world might change in the remaining years the Lord may give me.

There are reasons for hope.

First, consider the nature of investing in stocks. I don’t remember where I first came across this idea, but it is true of investing in any climate. If you buy shares in an individual company or for that matter shares in a mutual fund, there is a limit to how much you can lose. That would be all of your money. If you are even reasonably careful in your stock selections this is extremely unlikely. Most well managed companies providing a good service or product tend not to go bankrupt. They are built to outlive their creators. Even when monopolies are taken apart by the law, there successors seem to do OK. Consider, the children of Standard Oil include Exxon (XOM). The Baby Bells include Verizon (VZ) and a merger of the children of Ma Bell is now renamed with the name of its parent, AT&T (T).

Diversification, less than 3% of your net worth in any given company and less than 10% in any sector will protect the investor from catastrophe. Even if you had 5% or your holdings in WorldCom and Enron, their bankruptcies would hurt but it would not be the end of the world. Even in really bad cases, like the BP gulf platform disaster, it is not likely that you will lose more than ½ of your money. BP is a great well managed corporation, critical to the future of the British pension system. Their resources are located all over the world. It is likely that in ten years the patient investor will be rewarded.

Even major meltdowns such as occurred in 2008 will not destroy the patient well diversified investor. Some estimate that as much as ½ of the World’s total wealth disappeared in that debacle (really). The U.S. markets dropped about 40% in a year. Again diversification is key. Consider a portfolio 50% in bonds and 50% in stocks would have lost 20% of its value. However the first quarter of 2009 was a historic buying opportunity. Money shifted from bonds (this process is called rebalancing) back into the stock market at that time rewarded investors with eye popping profits over the next few years.

Now for the really good news, although you are limited to losing all your money in a single investment, there is no upper limit to your returns.

Perhaps after you losses in WorldCom and Enron you came into possession of the All Seeing Eye of Agamotto. You bought Apple (AAPL) at $6.00 a share and sold at $700.00 a share for a hundredfold return on your investment. That would be enough to make you forget about your mistakes.

I am not at all pleased with what is happening in my country. However, the United States is no longer the only game in town. Right now, today, Coca Cola (KO) derives 80% of its sales from outside of the United States. Even though I am a happy shareholder of this beverage giant, I was shocked when found this number on the Internet a few minutes ago. Jeremy Siegel reports in his valuable book “The Future for Investors” that computer programmers in India like to buy bottled water sold by Coca Cola. They trust the brand. He also noted that Carrier air conditioning units seemed to be favored by his Indian hosts.

Many iconic American brands are no longer limited to doing business in this country. They have become creations that exist beyond the boundaries of the traditional nation state. GE is developing entirely new big box medical instruments such as MRI machines for the developing world in the developing world. Their Chinese engineers are designing and building a different kind of product in a Chinese facility for the Chinese market.

In twenty years Carrier may not be an American company. All those dollars we are shipping to China and India are not going to sit still. Their new owners will use them to buy assets both in their own countries and in my country. Eventually, a lot of that money will find its way home. The Chinese are attempting to buy Smithfield, the nation’s largest pork producer. The announcement of this $4.7 billion deal jacked the share price 31% in a single day! Although great American companies may be ultimately be classified as FOCI (Foreign Ownership, Control, or Influence) by our government, there is potential for great profits in owning potential targets of these foreign takeovers.

The key takeaway is that even if the United States continues to diminish as a great creator of surplus wealth, the World market is not shrinking, but it is growing. Great corporations like KO or GE will find ways to profit in new markets, whether those markets are in my country or in some distant corner of the World.

The great wheel is in spin. It is hard to say whether the ball will land on black or red. One thing is certain. No matter what the future may hold, someone will figure out how to make a profit. Keep your eyes and your ears open. That someone may be you.

Yes, They Are Out to Get You

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So What’s Not to Like?

Well, Amazon is hoping you will forget about the 30 days. Then they will hit your debt card for $79.00. Maybe that will kick in your overdraft protection, hitting you with another $30.00 fee causing you to pay $109.00 for a thirty day free trial. They are called “gray charges.” Last year American consumers were hit with $14.3 Billion in unwanted charges. That would be approximately one in three American card holders for an average of $215.00 per card. Gray charges are big business. The practice is not illegal but it is deceptive and unethical. Mostly these charges are generated by free trials that then turn into paid subscriptions. These companies really want to lock into your credit card or debit card with something that allows them to bleed you again and again without ever selling you anything.

The charges are usually small enough that it isn’t worth the considerable effort it will take to get your money back. The company is hoping you will not notice the charge or just let it slide. That is why it is absolutely essential that you go through your credit or debit card charges at least once a month. Just like when you balance your checkbook, make certain you can account for every charge on the statement. Credit card thieves suggest checking your card charges on a daily basis. That is a little too hardcore for me, but these experts remind us, “Just because you’re paranoid doesn’t mean they aren’t out to get you.”

Plastic money makes it all too easy for companies to engage in these questionable practices. The Consumer Financial Protection Bureau is collecting data on gray charges in a hope to encourage what they term “consumer-friendly innovation” in the financial services industry (card issuers) to flag potentially abusive charges for the card holder. I have a better idea; require 30 day free trials to end automatically unless the consumer opts in to the subscription.

Moving the Goods (Choosing a Moving Company)

I approached the prospect of choosing a company to move my possessions to my new home with a great deal of dread. I have heard the horror stories of bad service as well as outright criminal practices. These generally fall into two categories bait and switch and the hostage move. It is estimated that about 5% of moving companies account for almost all of the consumer complaints.

Bait and switch might be the result of criminal intent or it just might be the result of incompetence. The cost of moving is primarily driven (a pun?) by weight and distance. The distance of the move can be quickly determined with great accuracy by Google Maps. Guessing the weight of a house full of junk strikes me as something of an art form. What is under that bed? How much does it weigh? How about those storage boxes in the basement? Hmm… Surprisingly all three of my weight estimates were very close. Either those guys all know what they are doing or they are all wrong. Once the estimated weight and the distance are determined a computer program generates the estimate in seconds. Generally, you will be presented with a non-binding estimate. That means if the estimator guessed low it will cost more. If he guessed high it will cost less. You will pay for the actual weight and distance. One of my estimates was a binding estimate. That means the cost of the move is capped. If the guess is high it will cost less, but if they guess low they eat the difference. I had to go back to one of the vendors and get a binding estimate. The third vendor’s non-binding estimate was higher than either of the binding estimates so I saw no point in asking him for a biding estimate. Some vendors intentionally low ball their estimates. If you see one vendor that is way out of line on weight with the competition, that ought to throw a flag.

I have heard two variations on the hostage move. In the more common version, your property is stored in a warehouse or on a truck. The company refuses to deliver until you pay more than the contract requires. In the second version, the low bidder shows up on the day of the move and demands extra cash. These practices are extremely illegal. They should be immediately reported to the appropriate authorities.

Another concern I should mention is insurance. Your home owners insurance only covers fire, storm damage, and the like, whatever is written into your policy. It does not cover the actions of a clumsy mover who drops Aunt Matilda’s porcelain gravy bowl. The law requires the moving companies provide minimal, nearly worthless insurance. I believe it is 60 cents a pound. This would place a value of about 30 cents on the aforementioned porcelain gravy bowl. The cost of the optional insurance, like all insurance, is driven by the total amount of the coverage and the size of the deductable. I selected the minimum recommended policy which given the weight of my move was $68,000 with the $250 deductible. The price seemed OK.

The three vendors I selected were supplied to me by realtors with whom I have long standing relationships. It turns out the major real estate offices maintain both a recommended list and a black list. Some realtors actually have established relationships with the employees of favored moving companies they trust.

Of course that generates the next question, “How does one select a realtor?” Let’s save that for another day.

My wife and I have made our decision, put down our deposit, and scheduled the move. I will let you know how it all turned out.

Here is a website dedicated to avoiding and putting an end to crooked moving companies and their practices.

MovingScam.com

Real Estate: The Dave Ramsey Way

Dave Ramsey loves real estate. He was born into a real estate family. He held his first real estate license at 18 years old. He made a fortune using borrowed money to buy real estate and then he found himself in bankruptcy court over real estate. Today he still loves real estate. He buys rental property, but he hasn’t sold anything in more than ten years. His real estate holdings act as very large illiquid bonds that are owned for the income they produce. They counterbalance his stock holdings in mutual funds. Dave Ramsey only invests in three things the Lampo Group (his privately held company), stock mutual funds, and real estate.

There are only four rules to buying real estate the Dave Ramsey way.

I)Buy Slowly and Pay Cash:

The burned child fears the flame. Dave Ramsey never borrows any money for any purpose, period. He pays cash for every property he purchases. This is a slow way to start, but those rental incomes start building cash. Then the snowball gets bigger and bigger as it rolls down the hill. Dave Ramsey observes that real estate requires enormous amounts of cash not only to buy property, but for taxes, insurance, and the cost of rehabilitating distressed properties. If you don’t have the cash, stay out of this game.

II)Make Money at the Buy:

Never buy anything that you can not immediately sell for more than it cost. Don’t think about the future value of the property. Don’t fall in love with a house. You will not be living in it. Buy it because it a bargain. Buy it for the income it will generate, but don’t consider any possible capital appreciation when making your decision.

III)Pay no more than 70% - 80% of Today’s Market Price:

This answers the question, “How do I make certain that I will make money at the buy?” Dave Ramsey primarily buys foreclosures, distressed property, and bank owned property. He consistently offers cash today. Because he will not pay market price, he hears the word, “NO!” quite frequently. That’s OK. He has time and he has money. Eventually, he will make the deal that he wants.

IV)Buy in Your Area:

Dave Ramsey believes that long distance management of rental properties is a recipe for disaster. It fills his mind with visions of biker gangs changing the oil in their Harley Davidson Motorcycles in one of his living rooms. He wants to be able to visit his properties on a regular basis so that he can see what is happening with his own eyes. He also wants his renters to know that he is watching them.

That is all there is to it.

So far I have chickened out every time I have thought about buying real estate other than a primary residence. The first few times I thought about buying rental property or vacation property, I just couldn’t make the numbers work. But in those cases I would have been using borrowed money. This frightened me. Later on I found an opportunity in another city that made sense. I had the cash (barely). But the visions of broken toilets in the middle of the night in another city caused me not to pursue this potential investment.

Watching the Submarines Race

Once every two years my former employer hosted the International Human Powered Submarine Races. Teams from various universities and even an occasional high school, from the United States as well as other countries came to our tow tank to compete in two different classes.

The employees viewed the arrival of this troop of budding naval architects and engineers as an attractive nuisance. While it was interesting to go down the stairs and watch the excitement, we lost our parking places for a week. We couldn’t run our own tests for a week and going to the cafeteria became a logistical impossibility.

The first time this merry band showed up on our door step I thought that finding the right athlete to power the boat would be the key to victory. I was wrong. While the cardiac conditioning of the athlete or athletes in the two man vehicles was a factor, the key to victory was control, especially control at low speeds. Until the little submarines get up to some critical velocity there is not enough water flowing over the control surfaces to give them sufficient bite to steer the vessel. Once the boat reaches its critical velocity the control surfaces provide enough force to effectively steer the course.

The problem of low speed control effects many areas of life. We can’t steer the course we want to follow if our boat isn’t in motion. Once our submarine is in motion, it is a lot easier to find the path of lights on the bottom of the basin that mark the course and the finish line. Before we reach that critical speed the boat might point down and hit the bottom of the basin or point up and broach the surface of the water. This is also true of finding the right job, getting out of debt, investing for retirement, or even dating. We can’t find the right direction until we start moving. Once in motion it is much easier to find the path.

Of course the winner of these races has it all good hydrodynamic design, an efficient propulsor, a sturdy drive train, and the right human at the controls. Not surprisingly the best teams have faculty mentors as well as mentors from their corporate sponsors, but one year second place was won by a local high school with no money and no faculty mentors. They did have one of our employees helping them (no brag just fact).

Ecole de Technologie Supérieure Université du Québec is the 800 pound gorilla in the world of human powered submarines. For some reason excellence in this competition has become a tradition at that school. These are very serious people who always bring their A game to the races.

Go ahead get started. Put on your scuba gear. Your friends will help you get into your boat and point you in the right direction. Then it is up to you. Start turning those bicycle pedals. Once that propeller on the back of your boat starts turning, you will start moving. Once in motion look around the bottom of the tank. You will find your way to finish line, but only if you start moving.

Now enjoy some really cool videos from the International Human Powered Submarine Races.

International Submarine Races

The Investment Pyramid

It was one of those back to the future moments. Recently I was studying some new material and for the first time in years I came across the venerable old idea of the investment pyramid.

Turn back the clock to 1979 or 1980. A very much younger version of yours truly and one of his drinking buddies were sitting at an all night diner sometime around 3:00 in the morning. This is not as suspicious as it sounds. Back in those days, we were both working the third shift. For God knows what reason, my buddy was all wound up about investing in the stock market. He pronounced it America’s game. He stated that all real Americans are obligated by birth to indulge in that great American pastime.

Although my friend has never played the game, I was suitably inspired by his speech to visit a broker with a small amount of what today I would consider emergency fund money in my hot little hand. The broker pulled out a flip chart lecture on the investment pyramid and proceeded to sell me $1,000 worth of a growth stock mutual fund that managed to break even about five years later.

The base of the classic investment pyramid consists of bonds, cash, and cash equivalents. The idea is that the closer to the base the larger the position; the closer to the capstone, the smaller the position. I think I would change this slightly. I would consider your primary residence as the base of your pyramid; then put bond funds, cash, and cash equivalents at the next level.

For the third level, I would include low cost index funds such as I hold in my Thrift Savings Plan or conservative hybrid funds such as Vanguard’s Wellesley Income (VWINX) or Vanguard’s Wellington Fund (VWLEX). I have been building positions in both for a couple of years. So far so good.

The next level above funds would include conservative dividend paying stocks such as my favorite happy story, Chevron (CVX). Most people consider positions in individual companies to be somewhat risky. This is true. However if you are holding positions in a pretty decent number of quality companies and no single position is more than 3% of your liquid net worth (excludes your primary residence), you’re probably going to be OK. I would put gold and other precious metals on this level. Most people would put gold closer to the capstone.

The fifth level would include your positions in small cap stocks, stocks or funds from the BRIC countries (Brazil, Russia, India, and China). If you like to dabble in technology, this would be a good level for your high tech positions.

The capstone, the smallest volume would consist of your hot tip and story stocks. If you would like to play with options, this is the kind of money you might use. These are goofy investments that might pay off big or might drop to zero (or close to zero). This is definitely gambling money, money you can afford to lose. I have consistently avoided high risk investments. It is a weakness in my style. That broker that sold me the crummy mutual fund, also tried to sell me a $500 position in a bankrupt mobile home manufacturing company that was in trouble with the Feds for selling solar water heaters that didn’t heat water. I wouldn’t touch it with a ten foot pole. It six months it was up 5 fold. Oh, well.

The rest of the story?

I decided mutual funds were for suckers. The salesman got his money up front. Then I had to pay a fund manager to lose money for me. I decided I would buy stock like I bought stereo equipment, the best product quality at the lowest cost. I bought $3,000 worth of Exxon. That was the last thing I bought for a long time. I lost my job at the saw chain factory, returned to engineering school, graduated, and paid off a house before turning once again to the great American game. During this time I was contributing to the Government version of a 401K but nothing else.

The Exxon dividend helped me with my college expenses. When I ran out of cash, I sold my shares in Exxon for a nice profit. This money also helped fund my education. As I mentioned at the beginning of the story, the mutual fund did eventually return my money and a bit more. After I graduated from engineering school, I sold it to help fund a damage deposit for an apartment near my new job in Maryland.

However you construct your investment pyramid, remember it is nothing more than a useful metaphor.

One more thing before you leave, Let’s be careful out there today.

What! Annuities Are Not Guaranteed?

I want to be upfront about my biases. I don’t like annuities and I tend not to trust the people who sell them. This is based on the personal experience of my mother-in-law. After the death of her husband, she sought the counsel of a “financial advisor,” a member of her church. Since he sells annuities for a living, it should surprise no one that his solution to my mother-in-law’s problem was an annuity. While the product that he sold her met the current test of law, suitability, he enjoyed a very large payday at the expense of a frightened old lady. She would have been much much better off just buying 10 year treasuries.

The term ethical commission salesman is not an oxymoron. I personally know a few salesmen I trust. The problem is their commission structure and your interests are diametrically opposed.

I have explored different kinds of annuities in “I Don’t Understand Annuities.”

I Don’t Understand Annuities

The main reason I don’t like annuities is that they violate the prime directive of investments, “Never buy anything that you don’t understand.” Variable annuities that allow the customer the option of selecting their own mix of stock and bond funds from a menu are particularly complex and difficult to understand. Some of these contracts, especially those written prior to the melt down of 2008 contained rather generous optional riders that allowed guaranteed income to increase in good times, but would not result in a decrease of guaranteed income when the market tanked. Honoring those commitments is no longer in the interest of the insurance company so they are changing the terms of their contracts.

Yep! They can do that. It is buried in the fine print. The Hartford Insurance Company has warned its variable annuity investors they must hold a minimum investment of 40% in bonds or they will unilaterally revoke the guaranteed income clause in their contract. From Annuity Guarantees “WILL BE REVOKED” by E.J. Smith. The words in all caps were printed in all caps in the insurance company’s letter.

In a Wall Street Journal article entitled They’re Changing Our Annuity! By Kelly Greene and Leslie Scism, I learned that there are services that will read your annuity contract and tell you what you bought. One financial advisor, Mark Cortazzo, has started a website offering this service. The charge for providing you with a ten page report that explains the terms and conditions of your annuity contract? $199.00 Just think about that for a minute. You need to pay an expert to provide a ten page report explaining what it is your annuity contract!

The article suggests that if you receive a letter from your insurance company, read it. If you don’t understand the implications of its content, pay an expert to explain what is happening to you. The first person that comes to my mind in such situations is my wonderful CPA, may she be blessed for holding my hand throughout all the tax problems with my mother-in-law’s estate.

If your insurance company is playing Three Card Monte with your annuity contract, be very careful. You may need to make some tricky decisions. The Wall Street Journal notes that sometimes the insurer will offer the annuity holder the option of paying a larger fee to keep the guaranteed minimum income clause in effect at a specified minimum rate that can be superseded by a higher rate if the market does well. Determining whether or not the increase in the fee is worth while can be a pretty tricky decision.

Finally, insurance companies are offering holders of these particular contracts buyout offers. Again determining the present value of a buyout as compared to potential future value of your annuity contract is a question best handled by experts. Unless you really need that money right now, you might be inclined to believe that the insurance company is not making you that offer because they are an altruistic organization.

Now just for grins, how the card trick is done.

The Three Card Monte Street Hustle Explained

The Most Important Financial Decision of Your Life

Back in March of this year Susan Patton wrote a letter to the editor of the Daily Princetonian, the independent student newspaper of that great institution. Susan Patton was one of the first women to attend Princeton after the school went coed. There were only 200 women in her class.

Oh by the way, Susan Patton is the president of the class of 1977.

That letter has created a firestorm.

Advice for The Young Women of Princeton: The Daughters I Never Had

In the letter Ms Patton wrote, "For most of you, the cornerstone of your future and happiness will be inextricably linked to the man you marry, and you will never again have this concentration of men who are worthy of you.

Here’s what nobody is telling you: Find a husband on campus before you graduate."

Man or woman, who you marry will be the single most important decision you make in your life. It will certainly be the most important financial decision you will make in your life. Who you marry will significantly impact the amount of money that you (as a couple) will earn. Who you marry will determine your spending habits. Who you marry will determine how you will invest money and plan for your future together.

Interestingly Proverbs makes a similar observation about wives:

A good woman is hard to find,
and worth far more than diamonds.
Her husband trusts her without reserve,
and never has reason to regret it.
Never spiteful, she treats him generously
all her life long.

Susan Patton goes on to write the ugly truth about us men, "Men regularly marry women who are younger, less intelligent, less educated. It’s amazing how forgiving men can be about a woman’s lack of erudition, if she is exceptionally pretty. Smart women can’t (shouldn’t) marry men who aren’t at least their intellectual equal. As Princeton women, we have almost priced ourselves out of the market. Simply put, there is a very limited population of men who are as smart or smarter than we are. And I say again — you will never again be surrounded by this concentration of men who are worthy of you."

Proverbs let’s know a little more about the kind of woman that impresses our Lord:

She’s up before dawn, preparing breakfast
for her family and organizing her day.
She looks over a field and buys it,
then, with money she’s put aside, plants a garden.
First thing in the morning, she dresses for work,
rolls up her sleeves, eager to get started.
She senses the worth of her work,
is in no hurry to call it quits for the day.

For most of us male or female, who we marry will indeed be the cornerstone of our future happiness. Hopefully, like Susan Patton, we will choose wisely. Her husband Kendal has been her best friend for 40 years. Together they have raised two sons, both Princeton men.

This letter has caused so much commotion that it led to a book deal. Next spring Gallery Books is scheduled to release, Smarten Up! Words of Wisdom from the Princeton Mom.

One more word about a good wife from the Book of Proverbs:

Her children respect and bless her;
her husband joins in with words of praise:
“Many women have done wonderful things,
but you’ve outclassed them all!”
Charm can mislead and beauty soon fades.
The woman to be admired and praised
is the woman who lives in the Fear-of-GOD.
Give her everything she deserves!
Festoon her life with praises!

Investing in Utilities

Let’s talk about something boring, utility stocks. Typically they don’t do very much but sit there and spit out dividends. I am holding pat until I have bought my new house and sold my old house. Then I will have to figure out where to put that money. One of the places I am considering is utility stocks. There are basically three kinds of utilities, electrical power generation and distribution, natural gas distribution, water companies that distribute clean water and clean up your sewage. Phone companies are kind of sort of utilities, but are generally not included in this class of stocks.

Currently I own both shares in an electrical and a natural gas utility. They could both be classified as solid base hits. Let’s consider Piedmont Natural Gas (PNY), a regional distributer located in the Carolinas and Tennessee. About seven years ago I bought 550 shares at $24.27 for a total investment of $13,348.50. Today after reinvesting dividends I own 702.4431 shares valued at $34.50 a share. That totals out to $24,234.29. Nothing to write home about, but a pretty decent return over a period of time that included the crash of 2008. Schwab provides its clients with reports predicting the future growth of most companies. Generally, they rate PNY as a D. On a scale from A to F a D is a recommendation to sell. PNY doesn’t grow very fast, but it is a well managed profitable little utility that has provided me a decent return without a lot of risk.

Utilities are by their nature monopolies. Try and open a new natural gas distribution network in Charlotte, good luck. There would be no point for a competitor to put that kind of capital in an investment that could not possibly be profitable. Because utilities are monopolies, they are regulated by law. This means that they are guaranteed a reasonable profit by state governments. A reasonable profit includes a respectable dividend. These companies typically pay out 60%-80% of these guaranteed profits to me, the shareholder. If I continue to hold on to these shares for at least 60 days during the 121 day period following the ex-dividend date, my dividends are classified as “qualified dividends.” This means I will pay long term capital gain taxes on this income rather than the higher tax rate applied to ordinary income.

Because utilities have a captive clientele, they rarely go out of business. Because their profitability is guaranteed by governmental agencies their dividend tends to increase with inflation.

Are there reasons not to invest in utilities? The big reason is that you are not likely to see much growth in these stocks. There is risk to your principal. If there is an accident at one of your nuclear power plants, you can kiss a good portion of your money goodbye. If your company has too many aging coal burning power plants it is likely that company will have to raise large amounts of money to modernize their equipment. The cost of that capital (bonds and new issues of preferred shares) will come out of your hide, unless you buy some of those new issues. Hmmm….

Of course, governments may get feisty and uncooperative about granting rate increases when the electorate is screaming bloody murder. Governments that are powerful enough to guarantee a return on your investment are powerful enough to take it away.

I have owned shares in a water company on two separate occasions. Both times I made money. It seems that some jurisdictions that currently have publically owned water distribution systems are exploring the privatization of these assets. This may be an opportunity for regulated water utilities to expand, if the price is right. I will be looking into some of these opportunities once the dust settles from my impending move.

As always: Please. Please. Please. Let’s be careful out there today.

The Quick and Dirty Retirement Quiz

I am often asked the $64,000 question by people from my generation, “Should I retire?”

Like any good salesman, I answer this question with a question, “Are you still having fun?” If the individual making the inquiry still enjoys their job I answer, “If you are still having fun, keep doing it.” If the answer is no then I proceed to the next question, “Can you afford to retire?”

For new readers, here is a fast way to get a ball park answer to that question.

Take your current combined household income before taxes. For this example let’s use $100,000.

Multiply that number by 0.8. According to the best studies I have found, retired folks spend about 80% in retirement compared to what they spent during their working lives. This multiplier can be lowered by moving from a high cost, high tax area to a low cost, low tax area or by consciously simplifying your life.

$100,000 X 0.8 = $80,000

From this number subtract any guaranteed income such as pensions, social security, or annuities. For this example let’s give the couple contemplating retirement $30,000 in pensions and $25,000 in Social Security.

$80,000 - $55,000 = $25,000

The remaining number, in this case $25,000 a year needs to come from your 401-K or other savings or investments. Take this number and divided it by 0.04. It has been demonstrated in a number of highly regarded studies that if you draw an amount equal to 4% of your retirement savings (assuming 50% in stocks 50% in bonds, CDs, and cash equivalents) in the first year of retirement; then continue to draw that amount adjusted for inflation until you die there is a very high probability (about 98%) that you will not outlive your money.

$25,000 ÷ 0.04 = $625,000

In this example the couple would need to have $625,000 in savings to maintain their current lifestyle in retirement. Ten years ago most people assumed about half that money would be in liquid investments and about half would come from the sale of their house. First they would downsize to a smaller inexpensive house or townhouse. Then when they were unable to maintain their retirement home, they would sell it and move to some form of assisted living.

Following the real estate crash of 2006 and the stock market crash of 2008, things have become a little more complicated. Be wary. Seek the counsel of more than one wise professional. Err on the side of caution, before making this decision.

There are many retirement calculators on the web. Some of them are very friendly. Some of them will tell you need to work until you die. Some of them will even run a monte carlo simulation on your data and give you dozens of possible outcomes based on a hundred years worth of data. I probably used all of them before making that fateful, nearly irreversible decision only five months ago.

If you can not afford to retire, you need to have a plan to reach your goals. Get out of debt! Do not carry a mortgage, car loans, or a credit card balance into retirement. It took me a good ten years of concentrated effort to make all the retirement calculators, even the really unfriendly calculators that I didn’t believe, tell me, “It’s OK. You can retire.” It may take some time and some effort, but you can get there too.

Now, Let’s be careful out there!

Choosing a College Major

So don't go to war without wise guidance; victory depends on having many advisers.
Proverbs 24:6

Once upon a time, choosing a college major was an opportunity to explore the world as well as your own talents, likes, and limits. Even your parents, who in those days were footing the bill, thought if you managed to graduate you would find a decent job and/or an acceptable spouse. Today it is different. Choosing a college and a major is a business decision with serious long term consequences. A high school student needs to find a viable career path that is congruent with their dreams and abilities. A mistake can be very costly.

Consider, if you choose not to go to college, it is quite possible that you could find a job paying $30,000 a year. In this case the lost opportunity cost of going to college would be $120,000. In addition the cost of attending the college of your choice could easily run another $120,000. If your choice of a major is a bust, you have made a quarter of a million dollar mistake. If you floated $60,000 in student loans add $43,166.40 in interest (20 years at 6%).

So how do you make this decision or any important decision? I took the idea for this post from a recent article by Ramit Sethi. As I read it I thought, “Yea, that’s pretty much how I make decisions.” I strongly recommend “I Will Teach You to Be Rich,” by Ramit Sethi to intelligent well educated young people. This book puts a different spin on financial literacy basics for a new more computer savvy generation who will be facing a different set of challenges in this new century.

First of all, look into your own heart. What do you want to do? What are you good at? What makes you happy? What is it that brings you pleasure?

If you are like most of us, this kind of exploration of endless possibilities will generate a list of options. Almost no eighteen year old is sold out and focused on only one possible career. At that age, life is still an exploration.

At 62, I still wonder what I will do when I grow up, but let’s save that conversation for another day.

At this point in the process things should begin to converge. Look at each possibility in depth. List the known pros and the cons of each path. If I choose this major, I will want to attend something from this list of schools. What are the financial consequences (cost, available scholarship or grants)? What are the possibilities of finding a job in that field? What do these jobs pay?

Next, if you are a normal person, you will discuss the remaining possibilities with your immediate circle of family and friends. If you have a decent collection of people in your life they will give you advice they honestly believe will help you make a good and wise decision. However, there is a weakness in seeking advice from your immediate circle. They are just like you. Even if they are older and wiser, they still live in your box. When I began to learn about investments, I was learning from other Federal employees. While some of them were pretty knowledgeable and helpful, you don’t find the financial equivalent of a fifth degree black belt working in Government research laboratory.

If you really want to excel, reach out beyond your comfort zone. Seek the advice of people who do not think like you think. Seek people from different worlds. The easiest way to do this is at the library and on line, but don’t stop there. I am still learning how to network upwards and outwards. For me, it is not a natural talent, but it is a key skill both in finding future business opportunities and developing yourself as a human being.

Get out of your box!

If you want to explore a particular major, find a professor at an appropriate school. Send him or her an email or make a phone call. With a little work you can discover that particular person’s interests. What research papers have they published? If you are even a little familiar with their work, you can stroke their ego a bit as you explore their life. By the way, this is an excellent way to get special tutoring in difficult subjects. It won’t always work, but it is a good tool to help improve your grade point average.

Call up a company in your area that does business in your field of interest. Ask to talk to someone who has the job you want some day in the future. Again, it is likely that you will find someone who likes to mentor intelligent motivated young people. Some enlightened organizations really promote this kind of contact. You are also adding a node to your network who might find you a co-op job during some future semester. That in turn could lead to a real job four years from now. Also, be thinking how you could bless this person who is mentoring you. Perhaps two years from now you get wind your school wants to buy something that person is selling. Your tip might get your mentor a promotion.

How might that improve your career possibilities?

Bar Rescue

With the exception of football, I really don’t watch much network TV any more. Most of it isn’t particularly interesting and the shows I want to watch aren’t on when I am in the mood to watch them. What I have discovered is Internet TV. Although my selection is still somewhat limited, I can watch what I want to watch when I want to watch it. Why every network isn’t jumping on the opportunity to broadcast over the Internet is just beyond me. They can put commercials on Internet broadcasts. They can even delay the Internet broadcast by a couple of weeks so not as to compete with their own network affiliates. Even if network TV is not as lucrative as it was in the 1960s, the opportunity to make money is still there.

One of the Internet TV shows that entertained me for a month of so is Bar Rescue, a reality series. Jon Taffer, a bar management expert with the soul of a Marine Corps drill sergeant walks in to a bar on the verge of bankruptcy with the goal of giving the owners a new bar and a new lease on life. Every story is different and every story is the same. A couple of friends decide running a bar would be fun. They found a niche in their market; cheap booze, good music, or an entertainingly novel theme. They enjoyed success for a short time until the realities of running a business caught up with their bar and their employees. Now they are desperate enough to look like idiots on reality TV to save what is left of their investment. All of these owners and managers have excuses, lots of excuses, none of them want to fess up and say, “I made mistakes. I have to take responsibility for changing this mess into something better.”

As I talk with people about money, I think I have heard just about every excuse in the book. A few of them are perfectly legitimate. Terrible things do happen to good people. Most of them are just excuses. No one held a gun to your head and made you take out a Home Equity Loan in order to take your family to Disney World. No one but you ran up a $7,000 balance on your VISA card buying shoes and clothing you never wear. In 2008 when the market tanked, it was your decision to cash out at the bottom rather than hanging on for the ride. Now your 401K is a 201K.

Money is just a tool. Seth Godin observed, “If money is an emotional issue for you, you've just put your finger on a big part of the problem. No one who is good at building houses has an emotional problem with hammers. Place your emotional problems where they belong, and focus on seeing money as a tool.”

Life is really about happiness and peace. That is what we all really want. If your relationship with money isn’t contributing to happiness and peace something is out of whack. It is up to you to look deeply into what is real. In Bar Rescue, Taffer and his associates, go through the books with the owners. They show them exactly where and why they are losing money. Taffer brings in master chefs and world class bar tenders to teach the staff how to cook a simplified menu and how to mix a limited number of highly profitable original drinks. He then schedules a “stress test” bringing in customers by the bus loads to convince the staff of their own incompetence so that they will listen to his trainers.

You really don’t need to go on a budget, but you should. What you have to do is look at the truth. If you track and record every expense to the penny for a month, with or without a formal budget, you will know the truth. You can tell lies, pretending everything is OK. You make excuses for your behavior, but neither lies nor excuses will make any improvements. Happiness and peace begin when you take responsibility for the truth of your financial life. Happiness and peace begin when you extend compassion and forgiveness to yourself for your own mistakes and shortcomings.

The turning point in the show occurs when the owner and managers take responsibility for their own mess. While the dirty run down old bar is getting a make over, the staff is training in kitchen and bartending boot camp. When the bar reopens it is a new beautiful establishment with state of the art equipment. For opening night Taffer again brings in customers by the bus loads. This time things go a lot better, not perfectly, but a whole lot better. The show ends with a report on how things are progressing a month or so after the bar reopens. Usually the news is pretty good, but sometimes the owners go back to their old ways.

In the end it is up to you. You can read a book or take a personal finance course. It doesn’t take long to learn what you really need to know. Either you need to find a way to earn more money or find ways to thrive and find happiness on less. Both paths are available. Most of us find our own way that incorporates elements of enlightened frugality with a realistic approach to earning more money. Let your mind become still and calm. Learning to relate to your money can be a great teacher. The lessons you learn taming one of the great difficulties of life, can then be applied to more important issues, happiness, peace, learning how to be a blessing to others.

Update: Long Term Care Insurance

The latest news on the cost and availability of long term care insurance is pretty disturbing. The numbers come from a Wall Street Journal article, Long Term Care Insurance Leaves Customers Groping by Kelly Greene posted less than eleven hours ago.

A year ago, I covered this topic in less detail than it deserves.

Long Term Care Insurance

As I mentioned in this article long term care insurance really isn’t available anymore. Normally, we buy insurance to cover the risk of unlikely events that would wipe us out. We self insure for those events that we can cover with our own resources. I know a few people who own one of the old Cadillac policies that have no cap. Today long term care insurance is sold in blocks of $100,000. Insuring against 20 years in an Alzheimer’s ward is no longer possible. With or without the normally recommended $300,000 in long term care insurance, such an event would wipe out even a wealthy family.

Jonathan Pond observes that not everyone needs long term care insurance. Here are his categories by liquid net worth.

Are you worth over a million dollars, excluding your home?

In that case, you probably can afford to pay for home health care and nursing care out of your own pocket.

Have a limited income and less than $500,000 in investments, excluding your home?

You probably can't afford long-term care insurance.

Are you somewhere in between?

Have more than several hundred thousand dollars, but aren't quite a Rockefeller? Long-term care insurance could be worth the price, particularly if you're married or in a partnered relationship.

Given the growing cost of long term care, the rate you are paying today will certainly not be the rate you are paying when you might actually need the coverage. Greene begins the article with the story of a family hit with a 77% rate increase. That is 77% in one year! In order to keep the policy in force, the insurer lowered the rate increase and the coverage. A number of facts presented in the article would seem to indicate that currently most insurance companies are looking to increase their premiums somewhere in the 50% range.

Given the option of losing all your money that you have been paying into a policy for a decade or more or settling for something less than originally planned and paid for is not a good solution. Attempting to budget for this expense in retirement is now close to impossible given the threat of catastrophic rate increases.

Greene notes, “The long-term-insurance industry now is shrinking, premiums are soaring and there is no fix in sight. At the same time, government safety-net programs, already under cost-cutting pressure, are bracing for demand from more of the 77 million aging baby boomers.”

Many insurance companies are simply getting out of the business. Greene reports that a decade ago about 100 companies sold long term care insurance. Today that number is about 12 companies. Many of the largest insurance companies including Met Life and Prudential are out of the business.

Part of this problem was caused by insurance companies going after market share. They intentionally low balled the premiums in the early years of the policy knowing full well they intended to raise them significantly once the policy was in force. Part of the problem was caused by bad assumptions. The insurers expected that 5% to 7% of their policy holders would drop their insurance without ever tapping any benefits. In fact, the annual cancelation rates are running at about 2%. Price Waterhouse Coopers estimates that if the insurance companies knew this was going to happen their initial premiums would have been 35% higher.

Insurance companies also underestimated how long their policy holders would live and how long they would collect benefits. Price Waterhouse Coopers principal Larry Rubin estimates this caused a 14% shortfall in premiums.

Historically states have allowed insurance companies to raise the rates on long term care policies without much review. Now some states have passed rate stabilization laws to protect the policy holders. Since insurance companies are already finding they underestimated their costs, expect these laws to drive more companies out of the business. Don’t expect the Government to come to the rescue. During the studies leading up to Obamacare, an overhaul of long term care was deemed too expensive. The subject was dropped from the law.

The insurance industry is attempting to replace long term care insurance with a hybrid product that packages long term care as a rider on a conventional life insurance policy. Expect the medical screening requirements to become more stringent. Expect the benefits to decline. Expect these products to be expensive.

According to recent statistics, only 37% of all 65-year-olds will need long-term care in a nursing home or assisted living facility. Most will stay less than two years.

Practice Random Acts of Kindness and Senseless Acts of Beauty

Hey, we’re all in this together. I want you to shift your state of consciousness. Instead of listening exclusively to your favorite radio station WIFM (What’s In It For Me), start the morning with a little prayer. Ask God to show you how to be a blessing.

I not asking you to give more to your favorite charities, but that is a part of it. I am asking you to make a conscious effort to change how you view the world. What if you let that guy move over in front of you on the Interstate, even if you can cut him off? Really what difference does a few minutes make. Instead of jamming your way into a parking place, what if you gave it to that other car? Give them a wave of your blessing, they might faint. Where can you be a blessing in little things; grocery lines, tipping a waitress, that sort of thing? Could you stay a few minutes late to help out a coworker so that he could get home before his children are asleep? Isn’t that the kind of world you want?

For most of us I think it starts with time. That is the really valuable commodity, especially in highly competitive, congested areas like the Washington D.C. area. If you actually make it to church on a Sunday morning after a 60-70 hour week (including the commute) that is a real sacrifice. God knows you gave up coffee with the Sunday Post to worship him.

I think the next step is money. Start with small things. Give a little more than necessary to the people who do little services for you and your family. Have you ever tipped a really good employee at somewhere like Walmart? Try that sometime. It may revolutionize your life. Giving is a muscle. As you exercise it, you will learn that you can’t out give God.

Then it gets harder. The next level of giving is emotional energy. I am not asking to you to make your life a study in codependency. All I am asking that you find a way to encourage that coworker who seems walk around through life under a black cloud. Yes, you will need to listen to a bunch of crap, probably more than once, but maybe you can help him have a better more productive day. That would be a good thing, especially if that energy vampire is assigned to your job.

I call the highest level of giving, The Gift of The Open Heart. It is precious beyond words. It is the gift that parents give children. It is the gift wives give their husbands. It is the special condition of lovers. Want to understand The Gift of The Open Heart? Watch a good parent with a difficult teenage child. If you are lucky and faithful, God may give you The Gift of The Open Heart. If you are very lucky it may not even involve sex or family.

The greater gift always contains the lesser gift. Money is time. Time is money. Emotional energy will always contain time. The Gift of The Open Heart always contains time, money, and emotional energy.

If you are faithful in the little things, God may give you the opportunity to fundamentally change a life. If that ever happens, you will find it to be a blessing that you will remember for the rest of your life.

Do you want to be blessed? Try blessing others as you walk through this vale of tears.

Clay Walker The Chain of Love