The Medicare Card Blues

Recently I received my Medicare card in the mail. A little over a month from today I will celebrate my 65th birthday, one of those important birthdays. I am old enough to have buried a few of my contemporaries, but still young enough to have a functioning body and mind, although neither works quite as well as it did thirty years ago. I am at a point in life when I am watching a third generation pass out of childhood to begin the long march to the grave.

Although this is a personal finance blog with an intentional over-emphasis on investment, I have been thinking about the importance of position, direction, and velocity as it applies to my walk as a Christian. My beliefs about the Bible, the Church, and what constitutes the Faith have evolved over the years of my life. My beliefs are not the same as they were when I came close to trapping God in a box during my twenties. It would be profoundly depressing if they hadn’t changed over all that time. My prayer is that they continue to change as I continue to move through my remaining years.

As I look at people moving through their careers and the seasons of family life, I have learned that direction and velocity are more important than initial position. Your current position, financial, spiritual, or relational is what it is (as the football players are fond of saying). Are you moving in a direction that will bring you closer to your goal? How fast are you moving? These are the important questions.

To what degree we are the product of our environment and to what degree we are responsible for our current situation, really doesn’t matter as much as what we choose to do to move towards something better. It is a matter of the heart. A person who has made the decision not to accept the status quo and is taking action to improve some dimension of their life is already better off that someone who doesn’t care or has just given up.

Recently I watched the documentary Born Rich, produced by Jamie Johnson, one the heirs to the Johnson & Johnson pharmaceutical fortune. He interviews young adult children of billionaires, not just your regular run of the mill billionaires, but really serious billionaires. Some of these young people seem to be doing a pretty credible job finding a purpose for their life and goals that give their efforts meaning. Others can charitably be described as—a mess. I suspect that most of this group would be a mess with or without money. A surprisingly small number of these young adults have made the decision to kick back and enjoy an obscenely decadent and somewhat debauched lifestyle that can only be supported by a nearly inexhaustible supply of money.

They didn’t do anything to enjoy the benefits or the real, serious problems associated with wealth and celebrity status. Imagine learning that your parents are going to divorce for the first time from a horde of reporters and paparazzi descending on you at the end of your school day. At stressful times I like to joke that in my next life I will do a better job selecting my family, but on that Day I won’t be asked by my Lord and Savior about the hand I was dealt.

I will be asked to explain how I chose to play the cards in my hand.

May God have mercy.

Learning about Investment from Gimli son of Glóin

“I do not foretell, for all foretelling is now vain: on the one hand lies darkness, and on the other only hope. But if hope should not fail, then I say to you, Gimli son of Glóin, that your hands shall flow with gold, and yet over you gold shall have no dominion.” Galadriel, Lady of the Golden Wood

In the Lord of the Rings, Gimli the dwarf, representing the most acquisitive species in the Middle Earth in the great quest, asks a favor of, “The mightiest and fairest of all the Elves that remained in the Middle Earth and the greatest of elven women,” three strands of her golden hair to mount in crystal.

Pleased with this bold yet courteous request, the lady grants his wish along with the blessing quoted above. This story contains a truth that we should all pursue. Not many will reach the goal, but all of us who choose to invest in the market can do better, moving closer to that state of perfection that was ultimately achieved by Gimli the dwarf after a great deal of hard work. I don’t know who first said it, but someone observed, invest as though you do not need the market. What is the meaning of this koan? We invest our money to earn what we will need for the big expenses of life like college educations for our children, retirement, and a legacy for future generations.

It seems like we kind of need the market.

As you begin the saving process early in your working life, your first major goal is building an emergency fund. Of course, if your employer offers a 401(k), by all means take advantage of the opportunity to begin saving for your retirement, even if at a very low level. During this time you are not investing money that you can not afford to lose. Later, you will begin to invest more aggressively, building a diversified portfolio that uses shares from many asset classes to protect your future against individual risk. Hopefully, someday you will have a large enough stream of interest and dividends, so that you can not only survive major disruptions to the economy, but use those times as an opportunity to buy when those around you are selling in fear and desperation. If you achieve this goal, you have protected yourself and your legacy from systemic risk.

Recently at age 87, T. Boone Pickens took some horrendous losses in the oil downturn, losing his status as a billionaire. He laughed, observing at his age the $900 million he had left was probably going to be enough. He added that since he had given over $1 billion to charity, he had given away more than he was currently worth. Don’t worry about Mr. Pickens he is already planning on how to recover his wealth.

But note: He doesn’t need the market.

The first step is a desire in your heart to be content with what you have in the present moment even as you plan to have more in the future. This requires a great deal of trust in something, hopefully the goodness of God your provider. If you look to credit to fulfill the desires of your heart, you need the market. Remember, banks are a just another asset class in what is termed “the market.”

When you are in your working years, buying a house and raising a family, live on less than you earn, using the surplus, money that doesn’t need the market to fulfill your ultimate dreams. If a thirty year old man saving $100 a month has $5,000 in a 401(k) a stock market crash such as the one that occurred in 2008 simply doesn’t matter. $2,500 over the course of the remaining 35 years of our young man’s working years is pretty irrelevant. He doesn’t need the market in order to survive.

In both the dotcom bust of 2000-2002 and again during the slow motion train wreck that occurred between 2006 and 2009, I watched intelligent, successful men who had achieved more than I could ever imagine for myself, suffer losses that broke their will. They sold out at the bottom, locking in their losses to protect what remained of their devastated retirement portfolios. They were investing in a manner that required the market to deliver their retirement needs.

This is why diversification is so important.

In early 2000, at the height of the dotcom bubble, one investor I follow had 10% of his holdings in Internet companies. He was creamed, just like everyone else, but even an 80% loss of 10% is not going to kill your future. Another very knowledgeable investor who taught me some of my early lessons believed the great lie, “This time it’s different.” He thought Internet stocks would go up forever. He needed the market for both survival and for his self identity. Putting together the pieces from our various conversations, I know he lost an amount of money somewhere in the mid six figures. I don’t know if he ever recovered.

Don’t forget to let that gold flow through your hands, even if you have a trickle rather than a river. After the War of the Rings ended, Gimli now know as the Lord of the Glittering Caves, started a one dwarf Marshall Plan to rebuild the Middle Earth, particularly Gondor, the city of the king, his buddy Aragorn son of Arathom, Elessar the Elfstone, Dunadain, heir of Isildur. By the way after living a long and fulfilling life, Gimli was the only dwarf allowed to pass over the sea to the Undying Lands of the West.

Using your money to build the Kingdom of God is another indication that you don’t need the market.

It is harder now than it was even during the dark years of the first oil crisis when the best job I could find was packing cloth in a bleachery or when I lost my job in great recession of the early 1980s. Walking in contentment isn’t easy in a consumer society that isn’t creating enough stable quality jobs in the private sector. Yet, in good times and in bad we are challenged to trust God and walk in the truth and I for one could do better learning to live and invest without needing the market.

1 Timothy 6:6-8

“But Godliness with contentment is great gain, for we brought nothing into the world, and we cannot take anything out of the world. But if we have food and clothing, with these we will be content.”

An Efficient Frontier

Yesterday, I sold some shares in two different companies. One was a happy story, Piedmont Natural Gas a consistent dividend producer that recently produced some nice capital gains, is going to be purchased by Duke Energy. There is a chance the Government will not approve the deal, so I decided not to hang around to get the last couple of dollars. I also needed to harvest a loss to help lower my tax bill. I decided to sell my shares in GoldCorp. I bought this stock before the big run up in gold and then watched it run back down faster than the value of the underlying precious metal. Under normal circumstances, I would have held on to this dog because I believe gold will go back up in the future.

In the next week or two I need to decide what to do with that money. Since I don’t have any hot tip that I find particularly convincing, I need to drop back to Harry Markowitz’s presentation of Modern Portfolio Theory that demonstrates that selection of an optimum mix of asset class is more important that selecting particular members of that asset class.

A caveat: Benoit Mandelbrot has demonstrated that the market is a much more dangerous place than is predicted by Modern Portfolio Theory.

Part of Markowitz’s work is now termed, an efficient frontier. This is a line showing the risk reward ratio of any portfolio. If your holdings fall on the line you have optimized your return for a particular level of risk. A selected base interest rate, such as ten year Treasuries, will form the low point on the graph, currently a miserable 1.28%. While I am showing a generic graph without numbers, an actual graph will have a bit of a nose, showing that as you diversify a portfolio of 100% bonds with some equities, your expected rate of return will increase as you lower your risk. Soon, however, increasing your stock holdings will increase both your risk and your expected rate of return.

I am not posting a graph with numbers, because no one can predict the future by back testing the past. However, let’s discuss some numbers based on an efficient frontier graph produced as an advertisement by a nameless investment advisor and the most recent recommendations found in a news letter I generally trust written by Richard Young.

Nameless shows that a portfolio of 100% bonds producing a return of 9% with a risk of 9% and a portfolio of 75% bonds and 25% stocks producing a return of 10% while the risk drops to 8%. 40% bonds and 60% stocks raises your expected return to 11% and your risk to 11%.

Richard Young drops the current 100% bond point to a little over 4%, realistic if you have a few junk bonds in your mix. This comes with a risk of 6.75%. 40% bonds and 60% stocks increase your expected rate of return to 6.75% and the associated risk to 8.75%. By the time you jump to 30% bonds and 70% stocks, you can expect an 8% return on your money, but the risk to your portfolio has increased to 13%.

Is it worth it?

What does risk in this example actually mean? Generally the person proposing a particular efficient frontier is talking about one standard deviation, a statistical measure that shows how much your portfolio will vary from its expected average return in a given year. So, for an expected 6% return with 4% risk means that in a given year there is a 68% chance your actual results will fall between 2% and 10%. An 8% return on your money with a 13% risk would mean that it is likely your actual return would fall between 21% and -5% (ouch!).

I think I will put at least half the money in a boring hybrid fund, Vanguard Wellesley Income, containing 65% in investment grade bonds and 35% in dividend paying stocks. I don’t think this is a time to increase my exposure to equities, but I while I should never have 100% of my investments in stocks, I should always have some of my money in corporate shares.

Of course, if I knew what I was doing, I would be dictating this blog post to my secretary while waiting for the maid to bring me breakfast on a veranda overlooking the Pacific Ocean in my beachfront estate in Hawaii.

Please! Let’s be careful out there.

The Romulans are Different

In the later incarnations of Star Trek, the Romulans used a quantum singularity, a distortion of space and time that may be related to black holes, to drive their starships through the galaxy. The Romulans just had to be different. Everybody else was using your everyday ordinary antimatter warp drive. When an antimatter warp drive failed, it just blew up. I guess if a singularity drive failed it would implode, sucking everything around it into a miniature black hole of some sort.

Guess what? You are flying around in starship powered by a singularity drive called compound interest.

Consider the money equation:

Money In = Money Stored + Money Out

When Money Stored reaches critical mass, compound interest will generate enough new money, all by itself, to propel you on your merry way, “To explore strange new worlds, to seek out new life and new civilizations, to boldly go where no man has gone before.” Unfortunately, debt can drive Money Stored into negative territory. Then compound interest will increase Money Out until your little space cruiser implodes into nothingness.

This also happens to countries.

The iconic Texas oilman, T. Boone Pickens, started life in a poor family during the depression. He would hide the money he earned from his paper route from his mother’s prying eyes. Once, she demanded to see all of it. At age 14, he had $286 hidden in a crawl space under a rug in his closet. At age 87, he still remembers that his mother was stupefied that a child could have amassed such an amazing sum of money. He believes the two most important truths about money he could share with young people are develop a good work ethic and don’t ever let yourself get caught without money. Once you have those two cornerstones in place, then get busy “working smart.” Get an education, but don’t limit your idea of what constitutes an education to college. I suspect that not even Pickens’s beloved Oklahoma State offers courses in how to become a successful Texas wildcatter.

We live in a society where we are constantly encouraged to take on more debt. It is so easy. Children are taught nothing about the power of compound interest during the K-12 years. Then they are given student loans to pursue degrees that are unlikely to result in a job. They are given credit cards before they take their first college course! Once they graduate, if the graduate, they are encouraged to take out six year car notes. Of course, no one can live without a thirty year mortgage.

On the other hand, The Federal Reserve Bank and the taxman relentlessly punish savers. These people are the backbone of a healthy economy. The wealth that they generate and do not consume ultimately provides the fuel to drive a family and a nation to financial freedom.

If it violates the Word of God and common sense it is probably a bad idea. Most of the people I personally know who have found financial freedom have a decent work ethic and the ability to defer gratification. This is not only encouraged by T. Boone Pickens, but by both the Protestant and Confucian work ethics. Proverbs observes, “The wise store up choice food and olive oil, but fools gulp theirs down.”

Make the decision today to provide fuel for your warp drive rather than finding new ways to sell yourself into debt slavery. Take small consistent steps every day. In ten years, or less, you will not believe how far you have progressed.

Idolatry

“Thou shalt have no other gods before me.”

I listened to Tim Keller speaking on idolatry. His lecture got me thinking about our many problems with the first commandment, particularly as it relates to money. I would define an idol as anything we look to for salvation, fulfillment, and deliverance other than God. The more obvious of our cultural idols would be related to money, sex, and power, but ferreting out our idols is not a simple task. Self fulfillment, political ideologies, and even our church or its dogmas can become idols that supersede the importance of God in our lives and our heart. Keller suggested that the loss of something important in our lives would certainly make us sad, but the loss of an idol would tempt us to despair or even suicide. If when someone questions one of your beliefs or practices, you find yourself driven to demonize your opponent or resort to nasty, sarcastic attacks, chances are you are defending one of your idols. If you feel the necessity to resort to violence, especially when you haven’t been physically attacked, chances are you are defending one of your idols.

I spent the majority of my working life in the suburbs of Washington, DC. In that city, the gods of political power, liberal and conservative, Democratic and Republican, were worshiped in their many shrines. Tim Keller lives in New York City, home to the gods of finance. He points out that child sacrifice is routinely practiced in Babylon on the Hudson. It is also practiced in Washington, DC. If you really want to go somewhere in your career, you are talking a minimum of fifty hours a week, plus time for your commute, and a half hour a day for lunch (if you take a lunch break). If you are looking to reach the highest levels of your ziggurat, sixty hours a week are a minimum.

Does that leave much time for parenting?

Greed is one of those tricky sins. It is hard to know when someone else is committing the sin of greed (excess in the desire for and pursuit of material possessions, especially money for its own sake). I have seen wealthy men who are unaffected by their money. It is simply a tool they use as a carpenter would use a saw or a hammer. I have seen wealthy people become a slave to their own money. I have seen wealthy people so overcome by the importance of money in their lives that the loss of it led to their suicide. I also spent nine years of my life toiling in southern factories with the working poor. I can tell you that greed is not a sin limited to the wealthy. I have seen the poor lust after money and the things it can buy.

So how are you doing with money? Do you ever compromise your morals to get more of it? If you routinely pilfer office supplies, money is probably a problem. “Thou shalt not steal,” commandment number eight comes to mind.

Do you envy the success and possessions of others? “Thou shalt not covet thy neighbour's house, thou shalt not covet thy neighbour's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor any thing that is thy neighbour's.” commandment number ten bites all of us now and then. Just the other day I saw a new SL series Mercedes tooling through our neighborhood.

Money is an absolute necessity in this material world. It is necessary for survival. Enough of it allows you the freedom to live a good life and do some good things in this material world. However, “He who dies with the most toys, wins.” The motto of our society is an indication that we, as a culture, have a real problem with greed and its idol, money. If you are working so many hours you forget your child’s birthday, you have a problem. If you are overwhelmed with credit card debt, it is quite possible that you have a problem with greed. Although there is a close correlation between money and happiness up to an annual salary of $70,000 a year in this country, ultimately money can not buy you happiness. Finding the middle ground between greed and prodigality, the reckless misuse of money and time is tricky.

Matthew 22:36-40

“Teacher, which is the greatest commandment in the Law?”

Jesus replied: “‘Love the Lord your God with all your heart and with all your soul and with all your mind.’ This is the first and greatest commandment. And the second is like it: ‘Love your neighbor as yourself.’All the Law and the Prophets hang on these two commandments.”

Is the Present the New Normal?

The traditional rule of thumb was your age in bonds. If you were 60 years old you should hold 60% of your investment portfolio in bonds and 40% in stocks. The new conventional wisdom states that given the risk of inflation, you need about 15% more in stocks than suggested by the old rule of thumb. Hence, at age 60 you would hold 45% in bonds and 65% in stocks. I haven’t checked recently, but I am somewhere around a 50/50 split at age 64. I tend to buy into the argument that it is wise to be a little too conservative in the first years of retirement, as it would be very difficult to recover from a major market crash while maintaining a 4% draw.

Scott Puritz, managing director of Rebalance IRA, believes that such traditional models of asset allocation are hopelessly outdated. Instead, he recommends:

100% in stocks during your 20s and 30s
90% to 100% during your 40s
75% to 85% during your 50s
70% to 80% during your 60s
40% to 60% during your 70s

His logic is based on the historic low interest rates offered by bonds. Ten year Treasuries pay a pitiful 2.15%, while AT&T stock current pays 5.74%. In his mind, shares in AT&T should be considered as part of your bond portfolio. Bond funds, CDs, and the like are paying just about nothing these days, but the market has been artificially inflated by the policies of the Federal Reserve Bank. Right now the Shiller price earning index is at 26.22, a dangerous number. Is this really a good time to put 75% of my liquid net worth into overpriced equities? I see a whole lot of downside risk and not as much upside potential. How much more can the Fed do without the risk of inflation?

For the record, I am a huge fan of stocks that pay a good sustainable dividend. In fact, if it doesn’t pay a dividend, I am not sure why I would want to own it. Of course, there are stocks that don’t pay dividends represented in my mutual funds and I do own some gold. Studies indicate that about 50% of the increase in your portfolio over time will be generated by dividends.

Puritz also recommends investing more in foreign equities. I agree. I would guess that I am running somewhere around 15% in foreign equities, maybe a bit more. Today the U.S. still controls about 50% of the world’s wealth, but the rest of the world is headed up and we are headed down. I should probably consider bumping that number up closer to 25% or even 30%. U.S. markets are way safer than those of the developing world (Brazil, Russia, India, and China) but the markets of Europe and Canada are pretty similar to our markets. Japan is worrisome. Their deficit is screaming danger. If that nation wasn’t so incredibly productive, I believe their economy and the value of the Yen would have already crashed.

I think that even in your twenties you should hold a small percentage in bonds and such. When the market tanks, and it will, the young investor would then be in a position to convert his holdings in bonds into a once in a generation opportunity to load up on high quality stocks at a very low price.

It is said that J.P. Morgan had a friend who told him he was so worried about his stock portfolio that he couldn’t sleep. The distraught investor asked the great master for advice. Morgan replied, “Sell down to your sleeping point.”

Puritz puts a different spin on this advice.

“There’s no sense in creating the optimal asset allocation that works at an intellectual level if when the markets drop, the investor can’t sleep at night,” Puritz says. “Particularly, as people get older, have families and mortgages and are paying down debt, their financial situations get more complex, so it’s good to have a seasoned professional in the mix to strike the right balance for you personally.” (USA Today: The 60/40 stock-and-bond portfolio mix is dead in 2016)

Even a seasoned professional can’t see into the future. Remember. If the market loses 50% of its value, you will need to double your money to get back to even. Even if the market rebounds from such a crash at 12% a year, it is going to take several years to get back to your starting point. However, if you have maybe a little more than you should in your bond portfolio, you will be able to buy shares at a time when a blind monkey throwing darts could put together a winning portfolio. It’s a bad time to buy stocks. It’s a bad time to buy bonds. It’s probably not a good time to buy real estate, but real estate is not my game. Please—Let’s be careful out there.

myRA Good but Could be Better

Social Security, America’s great contract with itself, has proven a success over the decades. It is almost universally accepted by voters of all persuasions. The Government, in its infinite wisdom, takes a portion of my income, not as a tax, but as an enforced savings program. The promise is that MY MONEY with interest will be returned to me when I am old and feeble. That has happened as promised since the act was first signed into law in 1935. Social Security is termed the “third rail of American politics” for good reason. The politician that touches it, will surely be electrocuted by the electorate.

The problem is that Social Security was never intended to provide a living income in retirement. It was a guarantee to cover minimal food and shelter, the first leg in the traditional three legged stool of Social Security, pension, and personal savings. The defined pension has almost disappeared from the American corporate landscape. Public pensions, while generous, are threatened by local and perhaps state funding shortfalls. The largest chunk of personal savings came from the equity in the big house in the expensive neighborhood that was exchanged in retirement for the little cottage in a low cost region of the country. That worked until 2006. Then the slow motion train wreck of the real estate bubble and the stock market crash of 2008-2009 did a number on the savings of the average prudent American.

The myRA was introduced to encourage low wage earners without access to a company sponsored 401(k) the opportunity to save for their retirement on a regular basis, a good idea.

All that is offered to the applicant is the G fund (Government Security Fund) that is offered Federal employees who participate in the Thrift Savings Plan. This fund paid a measly 2.31% in 2014. Don’t get me wrong, I actually own shares in the G fund. Your money is secure, but unlikely to beat inflation by even a single percentage point. Every portfolio should contain at least some Government Securities, but it should also contain stocks and commercial bonds that offer great risk with the probability of greater returns. The Thrift Savings Plan also offers four more low cost index funds to supplement the G fund. I own shares in all of them.

F fund: A fund that mimics the performance of Barclay’s Capital U.S. Aggregate Bond Index

C fund: An S&P 500 index fund

S fund: A fund designed to match the performance of the Dow Jones U.S. Completion Total Stock Market index of U.S. companies not listed in the S&P 500.

I fund: A fund designed to match the performance of the MSCI EAFE index of international companies.

One more note on the G fund: It is structured in such a way as to guarantee a slightly higher rate of return than is offered by similar commercial funds. Some in Congress wish to end this disparity, as a cost cutting measure.

The myRA is essentially a mini-Roth-IRA sponsored by the Government. This is a good thing. It can be funded by any after-tax income, including direct withdrawal from a paycheck. This is a very good thing. Money that you never seen isn’t missed. Direct withdrawal is a significant plus. In addition, money can be withdrawn from your checking account, not a good idea for the low income worker, or deposited on a one time basis.

Up to $5,500 per year can be contributed to a myRA account. This number is $6,500 for individuals over 50 years of age or older. Although it is unlikely that a low income worker would have $5,500 a year to deposit in his account during any given year, it is a nice option. Who knows, he may have a very good year.

The big plus offered by the myRA to the low income employee is no minimum contribution. Most commercial Roth-IRAs have some minimum requirement to open an account, usually $1,000 or $3,000. This could be a deal breaker for a near minimum income worker. This is a very good idea.

There is a $15,000 limit on the amount that can be held in a myRA account. Any money beyond $15,000 needs to go into a private Roth-IRA. Any money held in a myRA account can be transferred to a commercial Roth at the discretion of the investor, a good thing.

All things considered, I am pretty happy with the myRA. I would be happier if it was offered to low income workers on an “opt out” rather than an “opt in” basis. Companies threatened with discrimination suits due to uneven participation in their 401(k) programs, have learned that forcing the employee to “opt out” by checking a box, significantly raise the participation rates of all groups. I would be happier still if the participants were offered a full range of investment options along with some very simple information on the virtues of asset allocation.

Getting something like this passed and signed is at best difficult. I am thankful to get “good,” but I hope that in some future modification of this law, we will be offered better.

This is Really Important

Before you fill out your budget, before you spend a penny, do two things for yourself and your future. Pay yourself first. Take 10% of your take home pay and put it in the bank. Then take something (I’ll never tell you how much or where to give, Christianity is a religion of freedom and grace) and return it to God. If 10% to savings is a pipedream given your current circumstances, don’t beat yourself up. Start with something. Start today.

In my last post, we looked at some pretty prosperous Americans who didn’t even have a $1,000 Baby Step 1 emergency fund. I believe that your emergency fund should ultimately reach six months take home pay, in cash, stored in an insured savings account or money market fund. Again, don’t beat yourself up if it seems impossible. I was well into my early 40s before I reached that goal. Given the length of time out of work suffered by those who lost their jobs in the last recession, Suze Orman believes your emergency fund should be able to cover eight months of your normal expenses.

There aren’t many people who are telling you to save your money for tomorrow.

Businesses want you to spend more than you make. A car company that sells you a new automobile on credit, not only makes a profit today, but they own a piece of your future. By the time you pay off that five year loan, your car is worth less than ½ of what you paid for it when it was new. Many politicians don’t want you to believe you can make it without Government assistance. They want large numbers of poor people who believe they are helpless voting for their party and their programs. You don’t believe me? Check out the income, perks, and net worth of some of our political leaders. Ask yourself, “How did they get all that money if we are all so helpless?”

In an article entitled, America is Full of High-Earning Poor People, by Allison Schrager, graphs are presented that I can’t copy into this blog article. Reading her graph of financial asset holdings for American families earning $50,000-$75,000 a year it appears that their average financial net worth is about $25,000. For Americans earning $75,000-$100,000 that number would be around $72,000. That would include all savings, taxable investment accounts, and tax favored retirement accounts. Remember median household income is $55,000 a year, so these people are doing pretty good.

These numbers give me the same kind of queasy feeling I experienced just before the real estate crash of 2006. I knew something bad was going to happen. I just didn’t know how bad or when. My generation, the Baby Boom, isn’t doing too well. Many of us believe that we will need to work into our seventies in order to have enough money to retire. Real health issues and age discrimination make that an unlikely scenario. Delayed retirement also handicaps the aspirations of Gen-X and the Millennial Generation, looking to move up in the workforce.

According to the Census Bureau if you are an American between the ages of 55 and 64 your net worth would be:

$39,057 30th Percentile
$144,200 50th Percentile
$333,750 70th Percentile

If you are over 65 those numbers become:

$68,783 30th Percentile
$171,135 50th Percentile
$334,870 70th Percentile

Net worth not only includes your financial assets, but any equity you might have in your home. Even if you are in the 50th percentile at age 65 and you sell your home, a 4% draw on a $171,135 portfolio of stocks and bonds would generate a monthly check of $570. Add something on the order of $2,500 a month in Social Security to this number.

As you can see, the average American is looking a pretty scary retirement scenario.

One more thing to worry about—debt. Returning to Allison Schrager’s article, the leverage ratio for an American family earning $50,000-$75,000 a year is running around 38%. Families in the $75,000-$100,000 a year range are only doing a tad better at somewhere around 36%. We are still hovering near record levels of individual debt that ultimately needs to be paid down prior to retirement.

Which brings us back to the first paragraph; you know what you need to do. You know how to do it—one dollar, one step at a time. I can encourage you to start an emergency fund, pay down your debts, and contribute more to your 401(k), but I can’t do it for you. You are going to make those decisions every day for the rest of your life. Those little bits of money will grow. Over time, the miracle of compound interest will begin to work for you instead of eating you alive.

If you persist, you will find financial freedom.

The Emergency Fund (No Excuses!)

This is yet another post on the importance of having an emergency fund. It is a subject that has been beaten to exhaustion by every living personal finance author and probably some that are dead, but every year another survey is presented that shows the average American family is horribly ill prepared for even a small emergency. Please, even if you are living on public assistance, save a little something every time any money crosses your palm. The pay yourself first rule of thumb is skim 10% of your pay before you spend a penny. Put it in a bank account—or a cigar box hidden under the sofa—if you don’t have enough to open a savings account. If 10% isn’t a realistic possibility given your monthly bills, start with something small, like a ten dollar bill.

I agree with Dave Ramsey’s minimum $1,000 emergency fund. If you are an adult living in America and you can’t put your hands on $1,000 cash, you have an emergency. The fact is most Americans have bought into a materialist nightmare. We not only spend everything we have but we routinely spend more than we make.

Let’s look at families earning between $75,000 and $99,000 a year:

21.1% reported that they didn’t have a savings account.
21.8% reported that they had $0 in savings!
10.4% reported that they had between $1,000 and $4,999 in savings.
9.3% reported that they had between $5,000 and $9,999 in savings.

Let’s look at families earning between $100,000 and $149,000 a year:

7.7% reported that they didn’t have a savings account.
13.8% reported that they had $0 in savings!
23.1% reported that they had between $1,000 and $4,999 in savings.
7.7% reported that they had between $5,000 and $9,999 in savings.

OK. I get it if you are earning $30,000 or less it is going to be hard to skim off even a few bucks for savings on a regular basis, but do it anyway. Even ten or twenty dollars a week is better than nothing. You might even want to consider a temporary part time job for a couple of months to get something into that emergency fund.

People! If you are earning over $100,000 a year, you are in the top quintile. Your salary puts you into the top 20%. And you have to tap the credit card to get your $60,000 SUV through state inspection if one of your tires doesn’t have enough tread left to pass? Unless your family recently suffered a major uninsured catastrophe, I don’t want to hear your excuses. Start saving money for the future. Emergencies happen to everyone, but if you have an emergency fund, that emergency is no longer an emergency.

I hope I don’t have to write another article on this subject anytime during the next six months, but I expect there will be another survey and that I will feel obliged to write another post.