More Than Ever, It's Up to You

The graphic contains Fidelity’s latest version of their rule of thumb for retirement. Let’s try to see how this might work out for a hypothetical retired couple. The husband worked full time for 40 years with a final salary of $60,000 a year. The wife left the work force for fifteen years to raise a family. However, she retired with a full time final salary of $40,000 a year.

Let’s assume they have no pensions, but expect $36,000 a year in Social Security. Another rule of thumb states they will want 80,000 a year in retirement in order to maintain their lifestyle. If they have managed to save $1,000,000 in tax favored retirement accounts as Fidelity suggests, our old friend the 4% rule states that they can reasonably expect to draw $40,000 a year from their portfolio. They are $4,000 a year short. That is pretty close. They are going to be OK even without downsizing to a smaller house in a cheaper warmer state.

From my viewpoint, the problems with this chart are the first two hurdles. Gen X and the Millennials have been conditioned by our consumer society not only to accept debt as a norm, but to welcome debt into their life as a rite of passage into adulthood. Most of our young adults carry credit card debt and a car note. Far too many young people have believed a lie. There is no guarantee that $30,000 or more in student loans will magically create a job opening that will allow them to repay this debt in a few years. In fact, from what I have read and witnessed, it appears that student loans are robbing their victims of at least ten years of their adult lives.

Even if a hypothetical young couple receives a good basic education in personal financial behavior, it is hard to simultaneously save for retirement and for the new normal, almost mandatory 20% down payment on a new home. Even on a $150,000 house which would be hard to find in most urban areas, $30,000 cash money for a down payment is hard to come by when baby needs a new pair of shoes.

The earlier you can save more money the better. The magic of compound interest, favors long periods of time.

$1,000 that receives a 6% rate of return over 40 years results in $10,828.46
$1,000 that receives a 6% rate of return over 20 years results in $3,290.66

Those calculations are assuming that the interest compounds 4 times per year.

The good news is the stretch drive. If you pay off the mortgage early; if you get the kids out of the house on schedule, you can accomplish miracles in the last 10 to 15 years of your working life. These are typically the years when you will be earning maximum income. No mortgage payment adds a $1,000 a month or more in after tax income that can be invested in a Roth IRA that will produce growth and income—tax free—forever! I never quite reached the widely recommended target of 15% pretax income into the 401 (k), but I did hit 14%. Something close to a third of my after tax income went straight into savings during those critical final years of my working life. Ten years of that kind of focus can catapult you into a comfortable retirement.

The Baby Boom bought a bait and switch. We were promised a conventional defined benefit pension in our declining years if we gave the best years of our life to our employer. This didn’t happen. By the mid 1990s the handwriting was on the wall. The covenant between worker and company had been broken, but during those boom years, instead of saving for retirement we were taking out second mortgages to finance luxury vacations and new SUVs. Too many of my generation aren’t going to finish the stretch drive until they are in their seventies. This logjam will limit employment opportunities for the generations that are following us. Not everyone who is planning to work until he is 70 is going to be healthy enough to finish the race. Those that do will have lost those early retirement years when we would be better able to enjoy a little travel and extra time with the grandchildren.

More than ever, it is up to you. Don’t count on the Government or your employer to lead you into the Promised Land. Instead take responsibility for your own life. Bite the bullet. Make those hard decisions. Stay out of debt. Consistently live on less than your income. Invest that surplus in an age appropriate mix of stocks and bonds or even income producing real estate, if that is your thing. It is quite reasonable for a young couple just starting out on the road of life to expect that they will retire with at least $1,000,000 in investments. Add another $300,000 or so in home equity and Social Security.

Life can be good. Don’t let anybody tell you that you can’t do it.

Who are You?

I am not sure where this line of reasoning will take me, but let’s start to explore the question, “Who are you?” For the past several months I have been vaguely dissatisfied with much that has been written on the topic of work as a meaningful part of life, including material I have written for this blog. There is an underlying assumption in most of it that your happiness, fulfillment, and self actualization matter. They do, but is there something that is more important? I think that if we are honest, we know that the answer is, yes. In part I have avoided the question because I am a Christian writing a Christian financial blog. While I am attempting to answer this question with my life and my faith, how can I explain it in terms that will be meaningful to readers immersed in a post-modern Western Zeitgeist that considers personal fulfillment its summum bonum?

I am not sure of the source, but I remember reading an Arab proverb that stated one man, one real man, can support sixty. I expect that this was the boast of a tribal chieftain who lived his life in order to be a blessing to his people. I am sure that if I asked him to prove it, he would show me his scars obtained in battle with neighboring tribes. His identity ultimately came from his relationship to his extended family.

Again, I don’t remember where I read the story of an outcaste Indian rickshaw driver. He was considered subhuman by his culture, yet he was a strong man, both physically and morally. When asked why at the age of 60 he was still pulling around customers in his cart, he replied his family needed him. He was the sole support of a number of family members, excluded from the life of their community by the accident of birth.

Perhaps meditation on a life such as this one led the Buddha to observe, “Birth does not make one a priest on an outcaste. Behavior makes one either a priest or an outcaste.”

Every five days or so, when I visit my father in an Alzheimer's ward, I get to see and hear who people are when everything else is gone. Some of the men are still off on a business trip or lost in the skies over Korea. Some of the women are still caring for their little children or reliving a time when they were the belle of the ball. It makes me ask the question, "When everything else is gone, who am I going to be?"

Most of us, the tribal chieftain, the outcaste, the businessman, the fighter pilot, the young mom, and the woman who understands men playing the role of the ingénue are mistaking what they are for who they are. Where does the power come from to make you a success at your job or your vocation?

What is it that ultimately makes us who we are?

I believe the answer to the question, “Who am I?” begins with our understanding of the verb covenant. When we make a promise, do we fulfill our commitment even when it is not in our rational self interest?

Whether or not we perform our vows is an answer to the question, “Who am I?”

Once we are adults we choose to enter into covenant relationships of our own free will. When we accept a job, we promise to deliver an honest day’s work for the agreed upon wage and benefits. It is a covenant relationship. When I accepted a job with the Navy, I swore an oath to uphold and defend the constitution of the United States of America against all enemies foreign and domestic.

When we take a husband or a wife we make some pretty incredible promises about how we are, from this day forth, going to live our life for the welfare of another. Perhaps, it is a good thing that most humans marry at an age when they don’t really understand what the oath they have sworn before God and man actually means!

The kind of employee, the kind of spouse we become is an answer to the question, “Who am I?”

Do we routinely tell the truth and nothing but the truth (as we might attest in our courtroom vows) or are we a bit—creative. The whole truth is an entirely different issue. Do we tell the whole truth to a customer when it might save him thousands of dollars and cost us our job? Can we avoid the whole truth when it serves no useful purpose or leads to the unnecessary harm of another?

How we use words is an answer to the question, “Who am I?”

Parents are not forced by law to take vows when they conceive a child, but whether they like it or not they have entered into a covenant relationship with a sentient being they created through an act of their will. For eighteen years (in our culture) the parents are legally responsible for their child, his or her actions, and most importantly the life they model will teach the child how to answer the question, “Who am I.”

It is who he is that gives a young man the courage to face combat. It is who she is that gives a young mom the will to stay up all night caring for a sick child. It is who we are that give us our dignity, our self worth, and the integrity to say, “No.” even a great personal cost.

Perhaps, “What do you want to be when you grow up?” is the wrong question to ask our children.

Perhaps, a better question would be, “Who do you want to be when you grow up?”

One Billion Three Hundred Million Dollars!

More money is spent annually in America on lottery tickets than on sports, books, games, movies, and music combined!

I wasn’t planning on writing another post on the lottery, but then I went to get some beer at a local convenience store just before the last drawing. Even though they had three cashiers instead of the usual one or occasional two, the line went well back into the store. I had no idea what was happening, but the man in front of me in line explained the Powerball jackpot stood at $949 million. He predicted that if there wasn’t a winner, the lines would wind around the store and out into the parking lot. I hope he isn’t correct, but last week there wasn’t a winner.

Now the prize will be approximately $1.3 billion. That’s 1,300 million dollars, or 1,300,000 thousand dollars. I understand a million dollars, but in all honesty the concept of a billion dollars escapes me. Now let’s see, that might just be enough to buy one of the lesser NFL franchises, like the Jacksonville Jaguars, and still have enough money left over to pay the players their million dollar salaries.

Voltaire termed the lottery a tax on stupidity. Jefferson called it a tax on the willing. Some days I think the lottery a silly waste of money. Some days I think it a sad waste of money.

The odds of picking the correct numbers are 1 in 292 million! This is such an absurdly large number that most people have no idea what it means. It would be easier to pick the winners of every single basketball game in the national college tournament than pick the numbers in the Powerball Lottery. The odds of being bitten by a shark are 1 in 3,748,067. The odds of being struck by lightning once in a lifetime are 1 in 3,000. I actually know a lady who was struck by lightning, but I don’t know anyone who was bitten by a shark.

Back when I lived in Maryland, I would buy a lottery ticket every now and then when the prize became ridiculously large. I have actually won the lottery twice. Once I won $3 playing the Powerball Lottery. Since I purchased the ticket in another state, I couldn’t cash it locally. Therefore I mailed it with my blessings to a resident of that state. I once found a discarded scratch off ticket in a convenience store parking lot. I won $2!

Picking up tickets in parking lots is probably the best way to play the lottery.

I haven’t bought any lottery tickets since moving to South Carolina. I am not sure why. Even when the prizes have been ridiculously large, it just didn’t feel right. Perhaps the difference has something to do with median household incomes. In the town where I lived in Maryland that number was $135,575 per year. The folks who bought lottery tickets, bought them one or two at a time. In my town in South Carolina, the median household income is $51,087. I see people who don’t look like they can afford it buying ten or more tickets at a time.

In Maryland most of the state sales of lottery tickets occurred in the poor neighborhoods of cities like Baltimore. A report in the Atlantic notes that half the lottery tickets sold in our country are sold to the poorest third of our citizens.

Even a few of my coworkers at the laboratory habitually spent more on the lottery than could be explained by an occasional desire for a little entertainment. I noted that those who purchased lottery tickets on a regular basis faced what they perceived as overwhelmingly difficult personal problems. They just didn’t believe they could escape their sorrows without the intervention of fate or the Divinity through the mechanism of the lottery.

The lottery, I fear, is neither a tax on stupidity nor a tax on the willing, but a tax on despair.

Car Talk

One of my favorite targets is the middle class myth that we have to live with a car loan. It isn’t true. I have never had a car loan. Back in the day, I drove some pretty nasty worn out cars, but at least I paid cash for them. My first car cost $600 in 1973. That would be equal to about $3,000 in today’s money. With trips to local junk yards and my father in law’s guidance in the rudiments of automotive maintenance and repair, this rust bucket lasted for seven more years and covered about 75,000 miles. I sold it to a friend for $50.00.

Rule of thumb: Don’t buy a car that costs less than $3,000 unless you are receiving a discounted price from a family member or you are a mechanic.

Cars are a tool, not a source of self actualization unless we are talking about a 1970 Boss 302 Mustang with the big valve Cleveland heads. I am certain that if my father bought me one back when I was 19 years old, I would have become an ascended master of cool.

When you prepare a requirements list, be honest. If you live in a city with a good public transportation system (such as Washington DC) you might be able to live without a car for a few years until you can afford to buy one. However in most of the country, a car is a necessity.

If you need a car to drive 7 miles to and from work, 3 miles once a week to the grocery store, and to miscellaneous obligations like church and doctors’ appointments, you don’t need much of a car. If you are an anvil salesman with a five state route, you need an entirely different kind of vehicle, but remember, a $51,000 heavy duty pickup with a seven year note will not make you a more manly man.

A list of requirements might include an automatic transmission if you can’t use a manual transmission, but could you live without an air conditioner for a couple of years until you could afford something better? Three of my early cars did not have air conditioning, but my wife’s cars did have air conditioning.

Then there is the budget. Set a number, look in places like Consumer Reports for advice in that price range, then start looking for cars.

Rule of thumb: It is almost always cheaper to repair your existing car than it is to buy a new car.

Rule of thumb: An average new car depreciates 20% the second you drive it off the lot. They depreciate at the rate of 15% per year thereafter, making a late model used vehicle your best buy. Note: Build a cost/year curve for your particular model of interest using normal mileage valuations from the Kelly Blue Book. The years around the inflection point on your graph will represent the best value.

Rule of thumb: When you don’t have much money, consider trading in your car when your car will be worth less than the cost of repairs after the proposed repairs would be complete.

Rule of thumb: When you have some money, consider trading in your car when the cost of repairs starts to approach the monthly loan payment on a similar new car. Then, of course, always pay cash. The loan number is just a suggested trigger point.

Rule of thumb: Buying a late model used car will probably be the best course of action in most situations. However, buying a new car and keeping it for twelve or more years is also a pretty efficient use of capital.

Since buying our first new car in 1988, I have always bought new. Our current second car is a 16 year old Nissan Altima. Although it isn’t worth much of anything anymore, it still runs just fine.

While I’m thinking about it:

Rule of thumb: Retired folks most likely don’t need that second car.

Now if I can just convince my wife of that last rule of thumb—at thumbtime in the future.

Stop Using Their Money

I don’t always agree with articles written by Charles Hugh Smith, but he is one of my favorite financial bloggers, because he is unpredictable and often entertaining. Recently, the title of a link to one of his articles caught my eye, “If you Want to Limit the Power of the Super-Wealthy, Stop Using their Money.” Once again Smith delivered something other than what I expected. The article was a wild-eyed rant against fiat currency and the Government entities that own the printing presses. To tell the truth, I am not at all happy with the Federal Reserve Bank or a currency that always declines in value, but I am writing a blog for people who live in the material world. Bitcoins, gold, cigarettes, or even bartered services are not really a practical option when shopping for groceries at the local Walmart.

I would have phrased the title differently, but I am in agreement with the concept I thought the article would contain. I have more problems with super-wealthy organizations backed by the Federal Government, like Citibank or General Motors than by super-wealthy individuals such as Bill Gates or Steve Jobs. The printing presses of the Federal Reserve Bank are running night and day for the benefit of a fractional reserve banking system that ensnares the unwary with money created out of thin air. It is a bit naive to believe I could stop this nonsense, but I do not have to play their game.

Don’t bite the hook.

Ultimately it is you, the American consumer, who of your own free will, are giving power to a system that is making you a slave. Decide you can live without it if you can’t afford to buy it. Yes, I know if you need the services of a heart surgeon today, you might well end up paying for it tomorrow. I am talking about a new car, a no money down mortgage on a house you can’t reasonably afford, a vacation charged to a credit card, replacing a perfectly good 26 inch TV with a new flat screen when you could have waited a few years until the old unit died a natural death.

As is often observed, we as a nation are addicted to buying things we don’t need with money we don’t have to impress people we don’t know.

If you have the money, enjoy it. I have no problems at all with a 55 year old man who has raised his children until they are independent adults paying cash for a new Corvette to reward himself for a lifetime of hard work. I don’t even have a problem with a single man choosing to spend $500 for a meal and a bottle of wine with his lady if that is what makes him happy and he is living a debt free life.

But…If you are one of those people who curses the system, I have to ask why do you have a car payment? Why are you bending your knee to the banker you hate to get a credit card that charges you a usurious 21% to gain access to his money at your convenience.

There is a better way. Deferred gratification isn’t easy. Everyone else has an iPhone 6, why should I have to live with a ten year old pay as you go flip-phone? The truth might be, because you can’t afford it and you don’t need it.

What I Write. Why I Write.

After a year and a half and 125 posts, I wrote an article reflecting on the experience and analyzing what I was doing and why I was doing it. Today, I am closing in on seven years and I have passed 750 essays. What am I doing? More importantly, why am I doing it? The simple answer is that I see a crying need for sane financial behavior in a consumer society that seems to have gone mad.

I would love to see everyone who reads even one article I have posted in this blog become part of the 1%. I don’t want you to live an average life. I want you to live an extraordinary life. I would love to learn that twenty years from today some former reader reflecting on her life would say, “I remember reading an article in somebody’s blog back when I was still in school. That got me started in learning about investments and here I am today.” Every teacher worth anything wants his students to exceed him in every way.

If the last paragraph is a little messianic for your tastes, I would be perfectly content if all of you found financial freedom before passing on to an existence where there are still rewards, but no money.

It starts with debt. I was born with a third generation fear of debt that has served me well. It simply never occurred to me to borrow money to buy a car or attend school. While I was still in my twenties, I saw what credit cards did to some of my friends. I didn’t get a credit card until I was about 35 years old. By that time life without a credit card was just about impossible. Avoid debt. Find another way to do it. Drive a clunker until you can pay cash for something better. Apply for grants, scholarships, and work study programs. Do two years at an inexpensive junior college. Find a part time job that offers tuition reimbursement. Starbucks comes to mind. In the depths of your soul, eliminate debt as an option. Even “safe” debt, your home mortgage, can be dangerous. Some of those who bought in at the top of the bubble in 2005 are stuck in homes that are still underwater almost a decade after the crash. Unless your state government is making an offer you can’t refuse, the traditional 10% down is a minimum, the new normal, 20% down to avoid the dreaded private mortgage insurance is better. Carrying a balance on your credit card? As they say in Brooklyn, “Forg’t about it.”

The left hand side of the money equation, your job, is much harder to discuss than how to spend your money once you have it. There is no single answer to question, “What do you want to be when you grow up?” It’s your life. There is only one of you, but there are some general principles that seem to be universal. It starts with the stories you believe about the nature of the universe and your place in it. Your decision making processes and your actions will be based on the stories you tell yourself about life. At the laboratory, I worked with white engineers, black engineers, Asian engineers, and even a couple of Hispanic engineers. Even though we came from every possible economic strata, from extreme poverty to serious wealth, we all pretty much shared the same basic beliefs. This led to a lifetime of similar decisions and actions. We all got pretty much the same results. We live in what is basically a cause and effect universe that has been corrupted by the Fall. Yes, good things happen to bad people and bad things happen to good people, but for most of us good luck and bad luck are something that balances out over the course of a lifetime. In mathematics this phenomenon is termed reversion to the mean. You aren’t responsible for the hand you are dealt, but you are responsible for the way you choose to play the cards in your hand. Hard work, high moral standards, the ability to defer gratification, respect for education and learning, talent, and the courage to take a calculated risk all are factors in your success or failure regardless of your starting point.

I must admit I have spent a lot more time and effort avoiding failure than trying to find my way to success. During my working years, engineering (if you could make it through three semesters of calculus and one semester of differential equations) was the ultimate safe bet. There has always been a shortage of engineers. Companies not only hire these graduates to work as engineers, but also as project managers, factory supervisors, and program analysts of one sort or another. However, if you want to go beyond safety, avoiding failure, to success whether you are working for a lawn service or attending Harvard (like Bill Gates) find a way to become a greater blessing to your neighbor. I can’t tell you that you will become rich, but I can predict with some certainty you will become richer than you are today if you look for opportunities to bless your neighbor.

I was shocked to discover the importance of timeframe in achieving financial freedom. If you want to become rich or at least achieve financial freedom, start setting long term goals and develop the determination necessary to finish the race.

“The very poor think day to day.”
“Poor people think week to week.”
“The middle class thinks month to month.”
“The rich think year to year.”
“The very rich think decade to decade.”

The final key is investment, for most Americans that either means income producing real estate or the stock market. Since I am not a real estate kind of guy, I write about what I do with my money. I buy bonds, bond funds, individual dividend stocks, stock mutual funds. I seldom sell. The world is a more dangerous place than assumed in Modern Portfolio Theory, the best tool at the disposal of the average investor, but if you spend less than you make over a working lifetime, you will have a surplus to invest in stocks, bonds, or real estate. If you don’t invest too much in any one thing or too much at any one time, it is likely that you are going to be all right.

By the way, I also discuss giving. Generosity, an open heart, is an important part of anything that claims to be true religion.

James 1

[27] Pure religion and undefiled before God and the Father is this, To visit the fatherless and widows in their affliction, and to keep himself unspotted from the world.

You're a Professional

The Hall of Fame linebacker, Sam Huff, played for 14 years. At one time he was known as the meanest man in the National Football League. After his retirement, he partnered with Hall of Fame quarterback Sonny Jurgensen and Frank Herzog, a popular local broadcast personality. The Sonny, Sam, and Frank radio broadcast of the Washington Redskins’ games are legend. Almost every Redskins’ fan would turn down the sound on the TV to hear their heroes’ radio commentary as they watched the game. Sam may have also been one of the meanest expert commentators in the business. His contempt for anything less than excellence in tackling led to numerous emotional outbursts. His dislike for incompetence was exceeded by his distain for referees who had the audacity to throw the flag on a defensive player just trying to do his job with a late hit or some other infraction of the rules. However, he reserved a special place in perdition for today’s prima donnas who would throw tantrums, give less than their best effort, or whine in the press when the game didn’t revolve around their particular talents.

Whenever this happened, Sam would yell into the microphone. “You’re a professional. Now, do your job.” After 14 seasons he had the right to call out these players. Tom Landry constructed the first four three defense in the history of the game to take advantage of Huff’s unique abilities. Some years Sam was not allowed to play “his” game. Instead he was asked to support a teammate who had been given the staring role. He never complained. He never gave the game anything less than his considerable Hall of Fame best effort.

From time to time Sam would remind his audience that he was born in Coal Camp #9, a town that didn’t have a name or an address. He expressed his gratitude that he had been given a chance to become a millionaire playing the game he loved.

We are all playing a game called life. There are days when I want to whine and complain; to blame my problems on somebody else; to pout when I don’t get my way.

Some days it is just hard to get up off the ground.

On those days, I need to hear someone like Sam telling me to suck it up and do my job. Somebody needs you, your talent, your time, and your effort. Your organization needs you. Your family needs you. The world needs you. God put you here for a reason.

Now, do your job.

I am privileged to know some everyday heroes; people who have faced the worst life could throw at them with class and with courage. They have fought against serious illness, horrible divorces, heart breaking family problems, and yes, even crushing financial difficulties. Some of these people won their battle, some of them are still fighting, some won’t receive their reward in this life but will live forever in a hall of fame of a different kind after hearing the words, “Well done, good and faithful servant.”

When I have told a few of these people they are members of my Pantheon of Excellence, they look at me like I am crazy. To a man or a woman they don’t believe they are anything special. They think, at best, they just ordinary folk who tried to do their job.

They’re wrong. It is all too easy to take our ball and go home to mommy when the game doesn’t go our way. Some days it is hard to be a professional, a man or a woman who does their job.