Lies and Expectations

A few days ago I noticed my neighbor, the master gardener had already started watering her lawn. She really is a master gardener. She not only teaches classes, but has a beautifully landscaped yard filled with flowers, bushes, and trees, all beautifully arranged and meticulously maintained. This morning, I dragged out one of my hoses and my sprinkler. The lawns around here are getting a little brown in places.

When I lived in Maryland, a less than perfectly green lawn would not have mattered at all. Less than half the neighborhood cared much about the state of their grass. If it was green most of the year they were happy. A few weeds? Who cares? Now I pay the Chemical Warfare Service to come out nine times a year to fight off uninvited plants who have the unmitigated gall to grow in my yard. I even have a gallon spray jug of Round Up to maintain order between treatments.

What has changed? Expectations. Instead of living in a neighborhood of 40 year old tract homes inhabited by people who generally minded their own business, I live in a new much more upscale development inhabited by people who expect the Home Owners Association to keep watch over their neighbors’ comings and goings. It is more than that. Most of my immediate neighbors really care about the condition of their lawn. They either spend a lot of their own time doing yard work, or like me, they pay someone else to maintain the illusion of suburban agricultural perfection.

A few days ago, I shared a blog post on The Secret Shame of Middle Class Americans written by Neal Gabler. Evidently I wasn’t the only person that found it upsetting enough to share. I have since discovered it is going viral. Think about it. A man who was earning something in the neighborhood of $200,000 a year can’t put his hands on $400 in cash to cover an emergency.

The Money Equation:
Money In = Money Stored + Money Out

I believe what really upset me was that Gabler grabbed the brass ring. He was a winner in a profession that produces real estate novelists, bar tending poets, and retired engineers who write personal finance blogs. He handled the left hand side of the money equation beautifully. This is the hard part. Then he blew the right hand side of the equation. What was he thinking about living in the Hamptons, one of the most expensive addresses in the New York area? There are not only the obvious costs of living in a super zip code, but whether or not you choose to fight the urge, you are going to at least want to keep up with the Jones.

If your neighbors all drive new BMWs or better, how long will you continue to own that 16 year old beater?

If your neighbors’ children attend elite private schools, are you going to continue sending your little prince to the local elementary school?

If your neighbor invites you to play golf at a country club you can’t afford, will you say, “No?”

If Gabler chose to live somewhere in central New Jersey and commute to New York, I expect he might not need to write this confessional. The public schools located around Princeton University are not surprisingly some of the best in the country, there are some privately owned golf courses in the area that are affordable, leaving you more money to buy a new—Camry?

Gabler wasn’t properly evaluating risk. His career as a journalist turned out to be not all that stable. He didn’t properly evaluate the future costs associated with raising his children. Their college educations not only wiped out his pathetic savings, but diminished the savings of their grandparents to the point there won’t be any inheritance to help with his retirement.

There is no guarantee that your salary will continue to grow at a rate to cover all your mistakes. This is a common error made by medical doctors and other high income earners. It is a certainty that unplanned expenses and unfortunate losses of capital and income will occur over the course of your life. If you haven’t prepared for those eventualities you will end up like the 47% of Americans who can’t cover a $400 emergency.

It is hard to define the middle class. Everyone believes they are a member of the middle class even if they are really belong to the working poor or are rich. I am becoming more convinced that class is a mindset rather than a number. The middle class is concerned with consumption. They define themselves as the possessions and lifestyle that one would associate with “middle class,” whether they can afford it or not. The middle class thinks month to month. If they are living a life consistent with their expectations and covering the monthly payments, it’s all good.

Neal Gabler did not understand the difference between rich and wealthy. The billionaire, Michael Sonnenfeldt tried to explain the concept. “What’s seen is the money they made, but what’s unseen is the choices that they have made. It’s what allows them to continue to be wealthy. It’s more about taking a very long view with all the potential negatives that we all fear.”

Those who were truly wealthy, whether they were a retired school teacher living on his pension or a billionaire living in the Hamptons have enough. This is what I term financial freedom.

A man could be rich and still be living paycheck to paycheck.

Such a man can never be wealthy.

A Pack of Lies

This article is a confessional written by a successful professional writer who even once had a television gig. It contains all the information I have been wailing about for the last nine years, but more importantly it is an honest appraisal of the lies about our economy that the author believed and how that affected his life. The story is long, deeply disturbing, and brilliantly written. When you are ready, read it—to the end. I couldn’t make it to the end on the first read. It made me ill.

The Secret Shame of Middle Class Americans

I hesitate to try and comment on this article. I can cover the material in fewer words, but I can’t do a better job. It also made me angry, not the best emotion for a personal finance author.

Don’t believe the lies. Don’t bite the hook.

This will be hard because the big green money machine doesn’t want you to find financial freedom. It wants docile tax donkeys, debt slaves, and people who are wholly dependent, who will always vote to perpetuate the lies. Here are some of them.

If you do well in K through 12, be accepted, if you learn to fit in:
You will be rewarded with a good paying job that doesn’t require any skill or particular level of effort on your part.

If you do what your boss tells you to do:
You will be rewarded with job security, regular raises, and promotions until it is time to retire. Then your boss will care for you the rest of your life.

If you are even barely average:
You can go to the university of your choice and major in any subject you find halfway interesting.

If you hang around long enough and spend enough money to graduate:
You are guaranteed a job in a cubicle where you can wear nice clothes and play computer games in air conditioned comfort without ever getting dirty or doing any work that produces anything of value.

If you buy enough stuff:
You will become happy and everyone else will want to be like you.

If you can’t enjoy the life you want because you don’t have enough money:
The Government will give you everything you desire because you deserve it.

If the Government doesn’t have a program to cover what you desire:
The friendly people at the bank will give you all the money you need to fulfill your every wish.

At the beginning of the industrial revolution, as Seth Godin observes in Linchpin, machines that were purchased with capital and tended by obedient human robots greatly increased the quality of life for the entire world. However, now the entire world has access to machines that require fewer and fewer human robots to produce all the goods that the world can buy. There is a worldwide surplus of labor that has trapped the American worker into a race to the bottom, a race that can’t be won.

Even the white collar worker, a well paid part of the machine, has proven to be nothing more than human robot. Consider a mid-level accounting professional in a large bureaucracy. Today he is being replaced by sophisticated accounting programs that exist in the “cloud.” Want a report? Any report? Assemble the outline. Push a button. Voila. Presto chango. Data becomes a report. A week’s worth of labor by a college graduate is complete in a second more than it actually takes to print the document.

As a child I was taught to believe the key to the good life (consume, consume, consume) was a college degree, any college degree. That was true until the baby boom hit. Then, for the first time, there were more college graduates than jobs for college graduates. This situation has continued to get worse in the years following 1970. Don’t expect it to get any better.

Nothing is free. The Government can redistribute wealth and print money, but it can’t create wealth. Reasonable men and women can disagree as to the size and nature of Government, where tax money comes from and where it goes, but the bottom line is somebody pays. There are no free lunches. There is another problem with Government, humans. As a species we have an amazingly consistent track record of producing government fraud, waste (mal-investment), and abuse of individuals, their lives, liberties, and property.

Lord Acton said it best, “Power corrupts and absolute power corrupts absolutely.” Look at the world we inhabit and tell me this isn’t the truth.

If you think the people at the bank who help you indulge your lusts and desire to become a conspicuous consumer have your best interest at heart, think again. They are giving you 0.5% to 2.5% to borrow your money that they then lend to you at 4% for mortgages, 8% for student loans guaranteed by the Government, and 8% to 25% for unsecured revolving credit. I won’t even discuss the sleazy world of subprime credit.

Who has the biggest, fanciest, buildings in your city? The bank? The insurance company? The hospital? What is this telling you?

You must take 100% responsibility for you own life and be willing to live with the consequences of your decisions and actions. You can still find financial freedom by learning to manage your money. That is the easy part. Simply pay yourself first. Put something aside every month until you have a respectable emergency fund. This is going to take some time. Don’t beat yourself up. Just keep adding a little every month until you have enough to invest. Once you reach that point the miracle of compound interest will work for you rather than against you.

How to earn more money is the hard question. I wish I had a simple answer, but I don’t. Here are some thoughts from the Bible. There are many more verses on the subject, but I think the bottom line is do everything you do as though you are working for God rather than man and let the chips fall where they may.

Proverbs 22:29
Do you see a man skillful in his work? He will stand before kings; he will not stand before obscure men.

2 Thessalonians 3:10-12
For even when we were with you, we would give you this command: If anyone is not willing to work, let him not eat. For we hear that some among you walk in idleness, not busy at work, but busybodies. Now such persons we command and encourage in the Lord Jesus Christ to do their work quietly and to earn their own living.

Colossians 3:17
And whatever you do, in word or deed, do everything in the name of the Lord Jesus, giving thanks to God the Father through him.

Colossians 3:24
Knowing that from the Lord you will receive the inheritance as your reward. You are serving the Lord Christ.

So? You're Retired?

So you retired a few years ago, how’s that working out? You made your plan and then—life happened. I have been retired for a little over three years. I can’t complain, but it hasn’t happened like I planned. I expected to be retired after I retired, but in the last three years I haven’t been able to take a vacation.

Let me explain. First I had to prepare a house in MD for sale. Then I had to find and buy a house in SC. Then we moved. Then I had to close out my mother-in-law’s estate. Then I finally sold my house in MD. Then I thoroughly enjoyed three months of retirement, before the family emergency that lasted for over a year. Now I am in the new normal, overseeing my father’s affairs and managing his care. We still haven’t made it to Hawaii nor have we taken that Mediterranean cruise that is the top item in my wife’s bucket list.

It’s OK. Our day will come.

How about my financial affairs? The omniscient THEY tell us to plan to spend more in the early years of retirement. Golfing vacations in Hawaii can be rather expensive. Then as you slow down, your expenses should drop pretty significantly until they haul you off to the nursing home. Then, for the last few years of your life, plan of spending a lot, maybe $100,000 a year or more.

I am assuming you were debt free on the day you retired. Larry Burkett taught that if you haven’t paid off your mortgage you have no retirement plan. Maybe that is an overstatement, but I think it a pretty good rule of thumb.

It starts with your renewable income from rental properties, pensions, Social Security, and annuities. Is it enough to handle those normal every month expenses like food, clothing, gasoline for the car, utilities, and rent? In an ideal world, you don’t want to start dipping into savings for ongoing expenses if that is possible.

Do you need to adjust your living expenses up or down? Remember, you won’t live forever and your body will continue to age. If you want to hike the Appalachian Trail or ride a motorcycle across Europe, most likely you have already missed your opportunity. It is highly improbable you will set off on any great adventures when you are 85.

How are those investments in your taxable accounts performing? Do you need to adjust your percentages between safety (cash, bonds, bond funds, gold, CDs) and capital gains necessary to protect you from inflation (equities)? I have noticed that conventional wisdom went from your age in bonds to your age less 15% in bonds. Hence at age 65, we were first told 65% in bonds. Then that dropped to 50% in bonds. In fact I saw it drop to 40% in bonds and 60% in stocks! I noticed in the latest edition of Charles Schwab On Investing we have returned to 40% stocks, 50% fixed income, and 10% cash. Please don’t forget the cash, particularly if you own an older home.

If you are going to deviate from the conventional wisdom, whatever that might be; err a little on the side of safety. It is hard to rebuild capital if you don’t have a job.

Fortunately, I haven’t yet needed to tap my Government version of a 401(k). Since it is sitting there, continuing to grow in a nice little tax sheltered hot house, I have chosen to spend other funds in taxable accounts. If you have a 401(k) and you need a guaranteed source of income beyond Social Security, look into options your company might offer for annuitizing this account. While I can’t find a single retail annuity in this Zero Interest Rate Policy (ZIRP) environment that I could recommend, the annuity option offered by your employer may or may not be worthwhile. Check it out.

The four percent rule isn’t perfect, but it is probably the best we have. The four percent rule states that there is a 98% probability that your nest egg will last at least 30 years if you maintain a balance of 50% fixed income and 50% equities if you withdraw no more than 4% the first year of retirement, then that amount adjusted for inflation in subsequent years. Obviously if the market crashes, you might want to rethink that number.

There is another reason you might want to migrate towards fixed income in your later years. I have read that our ability to make financial decisions peaks around age 55, then our decision making ability declines. I might not want to be picking stocks when I am 85 years old. It is almost impossible for me to believe that my father, once an outstanding research scientist, now suffers from late mid-term Alzheimer’s. Following our attorney’s orders, I have managed to get almost all of my parents’ assets into an appropriately structured family trust. Since I am the sole trustee, I am thinking about trusts and trustees. Who am I going to trust to be my trustee? If I live long enough I am going to have to trust someone other than myself. This will be true even if you don’t have a trust. You will need to give someone durable power of attorney, when you can no longer remember to pay your bills.

While we are on the subject, don’t neglect your will and other end-of-life documents. My wife and I were very pleased with our will when we signed it, but life happens. I can’t believe it, but it already needs to be rewritten, because—life happens. Revisit these documents at least every five years or when a significant event necessitates a change.

Life goes on. Before writing this paragraph, I checked the news on Google. There hasn’t been an outbreak of Dengue Fever in Hawaii for three weeks, but Governor Ige has extended the state of emergency for another 60 days. Hopefully, we will return to the islands sometime this year. Then—Maybe—Just Maybe; Italy, the Greek Islands, Slovenia, Croatia, and coast of Turkey.

If it isn't working--then what?

“Be the change that you wish to see in the world.”
Mahatma Gandhi

A couple of weeks ago, I shared this graph on facebook as a part of the, “It isn’t working.” series. I share data of this sort to challenge people to ask hard questions about how our behavior as a nation and individuals is producing results that almost no one wants. Usually, once posted, I feel as though I have made my point. I delete my copy of the graph and life moves on. However, I couldn’t get this graph out of my mind and I couldn’t figure out what to do with it. Now I feel as though I am ready to at least give it a try.

The key here is that roughly one out of five Americans is spending more money than they take in. Obviously, this can’t continue. It will end in bankruptcy, for a nation just as for individuals. For now, let’s not think about the nation or foolish people who are destroying their lives with bad decisions or retired folk who are spending their savings as planned or those on welfare. Let’s consider people who are trying their best to earn a living in a bad economic climate, one with too many people chasing too few jobs.

Over the course of the forty odd years of my working life, I have seen good years and bad years. I have lived through recessions, layoffs, boom years, and plain old economic mediocrity. In spite of the best efforts of the Fed and Treasury, no one has a painless cure for debt, the underlying cause of the business cycle.

However, there is another force at work for which there is no easy answer.

I (along with just about everybody) have written about the slow but relentless progress of automation and artificial intelligence in the workplace. I don’t know who first said it but, “If what you do can be reduced to a set of instructions, you can be replaced by a machine.” Seth Godin notes that for 150 years, the industrial revolution has been able to provide a rising standard of living by hiring people to keep their machines running and make a profit. More people—More profits. This allows a company like General Motors to pay their workers $29 per hour plus another $10 per hour in current benefits. When retirement benefits are included, this totals out at over $70 per hour worked in wages and benefits over the course of a lifetime. Increases in productivity provided workers in the developed world with a lifestyle without precedent in human history. Today, the rules have changed. More robots—More profits. This is even a problem in low cost nations like China.

As long as we live in a free country, every day we are given an opportunity to stand out, to be different, to provide enough value to our employer that we become indispensible, what Godin terms, a linchpin.

What can you do that no one else can do or is doing? Godin would suggest, “Just do it.” He believes that what we, as humans, should be doing is art, something that can’t be reduced to a set of instructions. Even in liturgical churches, where the priest is following a set of instructions when celebrating the Eucharist, some of these men are more successful than others, not because one follows the instructions more accurately than the priest in the next town, but because of the “art” they perform with other human beings during the remaining 167 hours in a week.

Godin suggest that we do art because it is in us and it has to come out, not for money. In a simple exchange of value, your labor or product for my money, Godin believes that no art has been created. Godin has no problem with you selling your art, so that you can earn a living, but consider the product of your art, a souvenir. He gives the example of Picasso. He didn’t paint to sell paintings. He painted what he wanted to paint.

Godin believes that if you do your best, if live a life of generosity, giving your employer your very best, every day, with or without immediate feedback in the form of more money, the nature of the universe is such that you will ultimately receive. This has certainly been true in his life and if I am honest, when I have lived a life of generosity as defined by Godin, I have ultimately benefited, financially, even if those blessings came by a strange circuitous route that had nothing to do with my job.

That is why I write this blog. In spite of what some authors believe, finding financial freedom can’t be reduced to a one size fits all set of instructions. It is an art. That is why I share everything I learn that might have value to even one of my readers without charging anyone a dime. Maybe someday my electronic scribbling might generate an income stream, but that isn’t important. Today my job is helping you find you find your way to financial freedom.

I promise you, it is still possible.