“The bankers and Wall
Street traders. Just because you showed ridiculous incompetence
in lending doesn’t mean that you, and the hideously exposed like
me, don’t deserve a second chance. God bless America! And its hard-working
backbone! And there’s still their pensions for next time!”
Joke attributed to George W Bush
This is ad-hoc bibliography collected mainly from mainstream (you
can call it "yellow", if you wish ;-) financial press. All recommendations
expressed on this page should treated very critically. Please read section
about retirement scams first !!! This
is real danger for those close to retirement and all people already in retirement.
Often scamsters are seniors themselves and live in the same community and/or
attend the same church. If the investment it too good to be true is
usually is.
In any case please understand that we cannot be all robbers, there should
be some victims too and the natural balance between robbers and victims
was distorted after Reagan due to reregulation and later rolling back the
Great Deal. Robber barons returned and they returned in quantity that will
amaze future historians. For all practical purposes 401K is taxable account,
the only difference is that it is taxed by Wall Street, not the government.
At some point the share of financial firms profits in S&P500 above 40%:
we talk about crisis of overpopulation among robbers ;-)
The first thing in retirement planning is to learn
Excel. It greatly helps to see
your situation more realistically as each couple or individual has financial
different inputs such as:
Life expectancy (there are good calculators available on the Web
such as
MSN Money calculator). As a rule of thumb person without serious
diseases (asthma, diabetes, etc) who reached age 60 are expected to
live another 22 years if he is a male and 26 years if she is a female
(see Wisconsin
Life Expectancy 2006-2008)
Medical expenses estimate (including "out of the pocket" which can
be channeled via Flexible saving account to avoid taxes on such spending).
Before tax savings, including 401K and Roth account
savings (they should be treated differently as separate items as tax
consequences for them are different -- Roth distributions and income
are not taxable. )
After tax savings
Social security
Value of your house, if any and/or your gold , if any.
Comfortable level of monthly income (depends on the area where you
plan to spend your retirement, there are expensive states to live and
less expensive places to live)
Please read section about
retirement scams first !!!
This is real danger for those close to retirement and all people
already in retirement. Often scamsters are
seniors themselves and live in the same community and/or attend
the same church. If the investment it too good to be true
is usually is.
Now in order to survive, many financial advisers are faced
with tough choices. And that is not limited to sleazy "cold-call"
financial advisors.
Robert Shiller in the past made several pretty accurate forecasts of
major economic events and it might make sense to read his columns.
"It is well enough
that people of the nation do not understand our banking and monetary
system, for if they did, I believe there would be a revolution before
tomorrow morning."
Stashing cash in a
bank is a better choice for investors than
buying U.S. stocks, according to
Mark Cuban, a billionaire entrepreneur who
owns the Dallas Mavericks basketball team.
“Something is going
to give in this market,” Cuban wrote about
stocks in an Aug. 20
posting on his Blog Maverick website. “I
want to have as much capital available as
possible for when it happens.”
I wrote a whole series of articles warning people about the
stock market over the years.
You can see them here. It’s gotten worse. So I thought i
would write some more about why you should probably avoid putting
any new money into the stock market…
If you haven’t noticed,
individuals are avoiding the stock market in droves. There
has been an
enormous exodus from equity based mutual funds. Why ? Because
people buy stocks for only one reason, they want them to go
up in price. If you don’t believe the market is going to go
up. If you don’t believe you can find a greater fool to buy
your stock, or the stock your funds own, why would you buy either
? You wouldn’t and people aren’t.
... ... ...
I’m not saying you should get out of the stock market. What
I am saying is that it is not a bad thing to accumulate cash
right now. Retention of capital is a good thing. Don’t
go chasing stocks. Something is going to give in this
market. Like I said, I dont know what it is, but I want to have
as much capital available as possible for when it happens.
Baron Rothschild said “the time to buy is when there is blood
in the streets”, Warren Buffet said it differently when he said
” you pay a very high price in the stock market for a
cheery consensus”
This is the time to start saving for a “bloody day”.
There will be a time when capital regains its scarcity.
When it becomes more expensive. When it does , what do you want
to have in as great an amount as possible ? Capital.
So save your money. Pay off your credit cards. Put
your money in the bank where it is insured. Be patient.
Get a good nights sleep knowing that your money is not going
any where and just wait till your capital is in demand
and you get paid for it. When everyone is complaining about
the money they lost, you will be ready to step in and buy.
That is how fortunes are made. Having money when no one else
does. And you can take that to the bank !
The initial story is suspect as failing to notice $300K leaving account
is not very probable. But a stunning comment by Roman Berrt about about
his disabled mother is a real eye-opener...
However, current technoogy may provide a practical solution. I get
a email everytime when more then, say $100.00 is withdrawn from my account.
Then the same officials who had directed me to keep the accounts
open, disappeared — systematically, for just over six months. When I
sought to talk to the fraud department, I still could not get records
— including my own missing bank statements — even to see the full extent
of my losses. The bank officials who had directed me to keep my accounts
open were unavailable at the branch — over the course of many attempts
to speak with them. The police at the Sixth Precinct needed to see the
missing documents, but even they could not force WaMu to hand over their
— my — records. (WaMu’s own internal emails cite a $300,000 figure for
my loss from fraud — I still did not have enough of my records to identify
the loss. It is illegal, by the way, to withhold from an account holder
his or her own records).
At eight months after the fraud discovery was confirmed — eight months
of trying to communicate with officials and a fraud department who were
oddly unavailable or unresponsive — I received a form letter from the
WaMu Fraud Department advising me that according to the regulations,
I had had a six month window for taking action; and (since WaMu had
played out the clock for eight months) the letter asserted that I had
waited ‘too long’ and my case was closed.
Inadvertently, subsequent to that, a WaMu bank official handed me
the wrong file — wrong from his point of view; illuminating from mine,
and from any consumer’s. It contained emails, some of which you can
see at
TheSmokingGun.com, from WaMu bank officials to one another — and
including emails from and to their counsel, PR department and and the
fraud department — that take as given that stonewalling a client with
a fraud claim on the bank is standard practice; and
yet one freaked-out bank official in the
emails warns his colleagues that if their mechanisms in this regard
became known, their practices would be all over the newspapers.
I was stunned by what seemed from the emails to be a systemic practice.
Why would a bank want to perpetuate bank fraud rather than fight it?
As I researched the issue and spoke to other consumer bank account
holders whose accounts had been corrupted by fraud, and to consumer
advocates, I learned how systemic experiences such as mine — and worse
experiences — are becoming. I heard from
consumers across the country from all walks of life who had also been
misdirected by their banks, or told that for various technical reasons
their corrupted accounts could not be closed, and then faced difficulty
reaching fraud departments or officials once the fraud was confirmed….
Customers assume that banking regulation and Congressional oversight
means that if they find fraud on their checking accounts, there is accountability
— which is not in fact the case; strong bank lobbyists translate into
weak protections for consumers and, as you
can see from the emails, the bank’s reasonable assumption that most
customers in this situation will not be able to hold them accountable.
And indeed, since legal action is time-consuming and expensive, most
defrauded bank customers do eventually give up and go away…..a bank’s
fraud investigation department is actually likely fraudulently representing
itself as the customer’s, rather than solely the bank’s, advocate.
Banks such as WaMu — and now Chase, which
bought WaMu — expect such people to simply go away. They
— and we — should, rather, reach out to our elected representatives
for wholesale reform — and put each and every such case online, so consumers
can see the worst offenders for themselves, and, with the power of the
internet and their own consumer choices, protect themselves and demand
accountability.
Roman Berrt:
I am (sadly) not surprised. About three years ago my mother,
invalid and confined to a hospital bed in her home then and still,
had a situation where a part-time caregiver
took her credit cards and some checks and spent thousands of dollars
of my mother’s money in a matter of days. When the
fraud was discovered and my sister and I (on my mother’s behalf)
notified the card issuer and bank of the fraud, they launched an
“investigation” to determine if in fact fraud had occurred. It dragged
on for months and at the end of that time their initial finding
was that no fraud had occurred and that my mother was responsible
for the charges and checks.
It took the services of a lawyer to bring the bank to its senses.
In the end, it turned out that they had video surveillance from
ATM machines, point of purchase locations (like the local MegaMart)
and so on which showed the caregiver using the stolen card and checks
but apparently they knew they’d never
recover the money from the caregiver and decided that it would be
easier to steamroll an old and frail woman who they thought would
not be in a position to fight back.
Let me re-state that concisely: The
bank/card issuer knew positively that fraud had occurred and yet
chose to deny that fraud had occurred.
The banks are not our friends. They will do only what they are
forced to do, and that included complying with the law.
In the end, with the services of an attorney, the bank admitted
that fraud had occurred, reimbursed my mother and turned over the
results of their investigation to the local DA who in turn brought
charges against the thief who in turn entered a plea of guilty and
wound up in jail (for a short time.) But like I said, we had to
essentially force the issue. If I and
my sister had not intervened, they’d have stuck my mother with the
loss.
Bobbo:
Sometimes it helps if you cite UCC 4-406, the specific provision
of the Uniform Commercial Code that imposes liability on the bank.
The customer’s duty is to diligently review statements and report
any errors or fraud to the bank. As long as the customer promptly
notifies the bank, it’s the bank’s problem.
The bank has the burden of proving
that the customer was not sufficiently diligent, and that the losses
could have been prevented if the customer had been diligent.
Here is the text:
She failed to notice $300k leaving
her account over a period of two years?! Sorry, I’m with the bank
on this one. There is clearly fraud at play here but it is the customer,
not the bank.
smells like chapter 11
The law is plain — banks are not the fiduciaries of their depositors,
the relationship is one of creditor and debtor, with the bank being
the debtor.
As the California Court of Appeal noted in 1991 in connection
with a depositor’s claims against a bank arising out of unauthorized
transfers:
Commercial Cotton ’s [an older case] characterization of a bank-depositor
relationship as quasi-fiduciary is now inappropriate. While some
aspects of that relationship may resemble aspects of the insurer-insured
relationship, there are equally marked differences between those
relationships. Since appending the quasi-fiduciary label to the
ordinary bank-depositor relationship runs counter to both pre- and
post- Commercial Cotton authority, and such a label provides no
analytical framework against which to evaluate the propriety of
extending tort remedies for contractual breaches, we no longer approve
the denomination of the ordinary bank-depositor relationship as
quasi-fiduciary in character. Copesky v. Superior Court, 229 Cal.App.3d
678, 280 Cal.Rptr. 338 (1991)
Should it be otherwise? Maybe so. The rule arose in the 1800’s
and was based upon a banking systemn based entirely paper era where
the ability of a third party to unlawfully extrract money from one’s
account was far more difficult that it is in today’s electronic
world.
However, current technoogy may provide
a practical solution. I get a text everytime when even $1.00 is
withdrawn from my account. The bank provides this
service for free. That service would probably helped stopped the
fraud described becuase almost anyone could pretty easily spot an
unauthorized withdrawal within the 30 days of the mailing of a statement
as required by UCC 4406.
If someone can’t manage this type
of communication, such as an elderly or otherwise impaired person,
then maybe the rules need to be adjusted to take that into account.
DownSouth:
What we are witnessing is the descent of the United States into
third-world status, or into a culture of distrust and noncooperation.
I call it the Mexicanization of the United States.
And I’m not sure most Americans fully understand where this all
leads. In Mexico, not even the mid-level government authority (police
chief, mayor, congressman) dare venture out into public without
an army of bodyguards. And even then they are frequently gunned
down. The assassinations are almost always marked up by the authorities
as being motivated by “the drug war,” but I suspect the motivations
are much more complex than that. Either way, you’re talking about
a decent into a culture of violence and social chaos.
Dan Kahan in “The Logic of Reciprocity: Trust, Collective Action,
and Law” describes how the descent into perdition occurs:
A relatively small fraction of the population (consisting,
perhaps, of those who’ve been trained in neoclassical economics)
consists of committed free-riders, who shirk no matter what anyone
else does, and another small fraction (consisting maybe those who’ve
read too much Kantian moral philosophy) of dedicated cooperators,
who contribute no matter what. But most individuals are reciprocators
who cooperate conditionally on the willingness of others to contribute.
Moreover, some reciprocators are relatively intolerant: they bolt
as soon as they observe anyone else free-riding. Others are relatively
tolerant, continuing to contribute even in the face of what they
see as relatively modest degree of defection. And a great many more—-call
them neutral reciprocators—-fall somewhere in between.
Under these circumstances, individuals are unlikely fully to
overcome collective action problems through reciprocity dynamics
alone. No matter how cooperative the behavior of others, the committed
free-riders will always free-ride if they can get away with it.
Indeed, their shirking could easily provoke noncooperative behavior
by the less tolerant reciprocators, whose defection in turn risks
inducing the neutral reciprocators to abandon ship, thereby prompting
even the tolerant reciprocators to throw in the towel, and so forth
and so on. If this unfortunate chain reaction takes place, a state
of affairs once characterized by a reasonably high degree of cooperation
could tip decisively toward a noncooperative equilibrium in which
only the angelic unconditional cooperators are left contributing
(probably futilely) to the relevant public good.
As Kayan goes on to explain, the only way to stop the descent
into perdition is that free-riders be punished:
Maximum cooperation, then, probably requires that reciprocity
dynamics be supplemented with appropriately tailored incentives—-most
likely in the form of penalties aimed specifically at persistent
free-riders. Although trust and reciprocity elicit cooperation from
most players, some coercive mechanism remains necessary for the
small population of dedicated free-riders, who continue to hold
out in the face of widespread spontaneous cooperation, thereby depressing
the contributions made by relatively intolerant reciprocators. In
the face of a credible penalty, however, the committed free-riders
fall into line.
In the United States, however, neoclassical economic theory and
its ugly twin in the fields biology and psychology—-the New Atheism
preached by the likes of Ayn Rand and Richard Dawkins—-have become
so dominant that we no longer believe in punishment of financial
or economic crimes, or that altruistic punishers or strong reciprocators
even exist. Everything is about the self, about the individual and
individual fitness, and the group and group fitness be damned.
But the altruistic punishers and strong reciprocators haven’t
gone away. They’re still out there, despite what the neoclassical
economists and their New Atheist allies profess.
And as a criminal defense lawyer in San Antonio told me many years
ago, when the authorities—-the legislature, law enforcement and
the courts—-don’t deliver justice, what you get is street justice.
For more on the interaction of the individual and the group (the
system or the culture) and how it is the combination of these two
that shapes behavior, there’s this intriguing lecture
by Amanda Pustilnik.
Thank you Down South, excellent post and link. I obviously agree
fully.
You call it the “Mexicanization” of America. I call this the
“caveat emptorization” of America.
the caveat-emptor free-market ideologues are fools.
they laugh at financial victims as
’sheeple’ and cloak themselves in a “well they should have known
better or at least learned the information”. but life is simply
not long enough to learn everything.
I am a doctor and I laugh myself to pieces every time I hear
them claim how smart they are and how they are able to make “informed”
medical decisions. I’m sure mainly based on GoogleHealth web searches
or whatever.
I have 11 years of medical training AFTER college (so not including
all the pre med courses), and yet I have to rely on my own doctor’s
recommendations since I am not an internist. I know that I am in
her hands and that in the end I have to trust her. I am not so foolish
as to think that I am “fully informed”. I am a financial dork, so
am relatively informed there. But what about when I fix my car?
or when I buy a house? or when I contract for legal services? In
the end, I have no choice but to TRUST my counterparty.
The caveat emptorization of America is breaking that trust, and
thus eventually all commerce beyond dark-ages technology will break
down.
we have a very long road ahead since we can’t even trust our
fiduciary agents.
koshem:
Banks rely heavily on the enormous cost a defrauded customer
lawsuit incurs on the defrauded. This modern version of the Wild
West takes the law out of the equation and substitutes it with raw
force the banks possess.
The government itself uses the same raw force when suit by its
own employees. Government agencies are, by and large, organized
according to the 50s organizational practices (e.g. three employees
have a supervisor who enjoys almost absolute power and doesn’t do
anything but supervision).
As a result, abuse and harassment are prevalent. Many government
employees injured by these abuses cannot afford to complain and
internal reform is impossible. Customers and employees will be protected
from abuse only when following the law will be enforced by swift
and affordable reaction to violation.
nilys:
It’s a dog-eat-dog kind of climate out there. How what banks
do is any different from what other companies and individuals do?
Chances are you’ve read Napoleon Hill’s classics, Think & Grow
Rich and Success Through Positive Mental Attitude, coauthored
with insurance mogel Clement Stone. I did way back when I was
at Morgan Stanley in the 1970s. Today, the cult of “Positive Thinking”
is very much alive. Look in the business & finance shelves in Barnes
and Noble. Still, in the wake of Wall Street’s 2008 meltdown, many began
questioning the magic of ”PMA” as they saw their 401(k)s flatline.
It’ll take more than PMA, mantras, affirmations and a pep talk from
the “God Wants You To Be Rich” crowd to rebuild your retirement nestegg.
And it’ll take a lot longer than you hope because there’s a “new normal”
for the American mind as well as the lower market expectations Pimco’s
Bill Gross sees ahead. And it’s not about increasing your optimism level.
The meltdown and bailouts left us with enormous anger, frustration,
skepticism and mass distrust of virtually everything, including the
Think & Grow Rich mantra: “Whatever the mind can conceive,
it can achieve.”
Barbara Ehrenreich, the author of Nickel and Dimed, a 2000
bestseller, captures this new mindset in her diagnosis of America’s
troubled psyche. Macho male readers may prefer reading the new books
detailing Wall Street’s collapse in blow-by-blow real-time TV-style
dramas, like Sorkin’s Too Big To Fail. But if you want the
psychological “new normal,” step into Ehrenreich’s office where
you’ll dig deep and discover what’s really going on in America’s collective
brain. Read Ehrenreich’s Bright-Sided: How the Relentless Promotion
of Positive Thinking Has Undermined America.
Yes, ”Positive Thinking” & “Happiness” Are Undermining America!
She pokes huge holes in the myth of positive thinking and its “new
age” siblings — optimism, self-esteem, positive psychology and the new
“science of happiness” — that are undermining America with false promises
of an entitlement of prosperty. In
BusinessWeek Michelle Conlin focused on Ehrenreich’s warning
to future whistle-blowers in the chapter on “how positive thinking destroyed
the economy.” Listen:
“In pre-subprime America, delivering the news that we were all
burning down the house was a career-ender. Nowhere was this more
true than on Wall Street. One such martyr to the cause of financial
realism, Ehrenreich writes, was Mike Gelband, who ran the real estate
division of Lehman Brothers. Gelband warned Lehman CEO Dick Fuld
about the real estate bubble in 2006. ‘Fuld promptly fired the misfit,
and two years later, Lehman went bankrupt’.” Hmmm, isn’t that about
the time Paulson left as Goldman’s boss to become Treasury Secretary,
later Bloomberg News revealed that Paulson did warn the
White House staff of a possible meltdown, still they stayed in denial
till it was too late.
Today we know Paulson and Fuld are just bit players in America’s
broader ‘positive thinking’ drama, which far more pervasive than the
guys at the top of Corporate Amercia and Wall Street. It also infected
home builders, realtors, mortgage brokers and millions of homebuyers
were all hypnotized, in denial about the risks of defaulting on mortgage
payments in event of a down market.
Other critics are equally blunt. Writing in the
New York Times Hanna Rosin says “I have waited my whole
life for someone to write a book like Bright-Sided. When I
was a young child, my family moved to the United States from Israel,
where churlishness is a point of pride. As I walked around wearing what
I considered a neutral expression, strangers would often shout, ‘What’s
the matter, honey? Smile!’ as if visible cheerfulness were some kind
of requirement for citizenship,” adding that “America’s can-do optimism
has hardened into a suffocating culture of positivity that bears little
relation to genuine hope or happiness.”
She hesitated to go as far as Ehrenreich who saw a larger conspiracy
using positive thinking as ”just another way for the conservative, corporate
culture to wring the most out of its workers.” Others
were not so reluctant:
“We’re always being told that looking on the bright side is good
for us, but now we see that it’s a great way to brush off poverty,
disease, and unemployment, to rationalize an order where all the
rewards go to those on top,” warns Thomas Frank, Wall Street
Journal columnist and author of The Wrecking Crew: How
Conservatives Rule.“The people
who are sick or jobless — why, they just aren’t thinking positively.
They have no one to blame but themselves,” a mindset that echoes
the ideologt of many conservatives, religious fundamentalists and
hard-core capitalists today.
Read Bright-Sided, it is a perfect psychological counterpoint
to typical dramas like When Giants Fall, Bad Money, Panic and
Bailout Nation. You’ll get a shrink’s eye view deep into America’s
collective brain. And by jarring you out of denial, it’ll protect you
from the new bubble/bust cycle already blowing.
In
"Action List for the Newly Unemployed," Charles offers some thoughtful
advice for those who suddenly find that the rose-colored recovery they've
been promised by the experts in Washington and on Wall Street is little
more than a nightmarish illusion:
Here is a basic, common-sense list of actions to consider should
your household income fall drastically for any reason. It is based
on the concepts I laid out in
Survival+.
Cut expenses immediately. Middle-class households
seem especially prone to thinking they can weather a radical
drop in income without any real change in lifestyle until a
new job appears. Some even resort to pulling money out of IRAs
and retirement accounts (and paying penalties to do so) to maintain
the lifestyle to which they have grown accustomed.
The better strategy is to perform
immediate triage on the household budget and eliminate all extraneous
spending. Cut expenses in every way: unplug zombie
appliances and chargers, stop buying snacks and convenience
food, stop going to high-priced yuppie markets, borrow films
from your library rather then rent them, etc.
Write the budget down and track your actual expenses monthly.
Reward yourself with a small treat if you stay within the new
budget.
Look at your biggest expenses and reduce them to your
"new normal" income by whatever means are necessary. Typically,
the biggest expenses are housing, healthcare and perhaps education.
There is abundant evidence that when it comes to unsustainable
mortgages, The wealthy strategically default as a business decision.
If a mortgage is completely out of line with the household's
reduced income, then the wealthy may have the right idea: it's
just business. Anyone considering defaulting on debt should
of course do what the wealthy do and consult experienced, licensed
real estate and tax attorneys before making any decisions.
Some people have found that renting out rooms in their house
allows them to align their income with their mortgage costs.
Either expenses must be cut or income increased, or both. Hoping
to find a high-paying job in the near future is not a strategy,
it is just a form of denial.
Many people we know who have seen their small business income
suffer have already cancelled their health insurance--$1,000+
a month is a lot of money. There may be professional organizations
which offer cheaper catastrophic-type insurance to members;
those seeking to slash their health insurance costs will have
to look around for creative ways to do so.
Keep productive. All work has dignity. Base your
pride in being productive, not on your position or title. It
is very easy to fall into feeling lousy about oneself when unemployed,
and the best way to counteract that natural diminishment is
to stay productive. Find an organization who needs your energy
and skills; yes it is "working for free" but you get value for
your efforts: you keep your skills sharp and maybe add new ones,
you have self-worth by contributing to a worthy organization,
and you network with others in ways which might lead to some
paying work.
One value we have lost in the U.S. is the inherent
value and dignity of all work. Too many people feel that all
sorts of work is "beneath them." No wonder, perhaps, given that
our popular culture worships at the altar of narcissism, self-glorification,
indulgence and victimhood.
I personally consider picking up trash around my neighborhood
a highly valuable form of unpaid labor. There is nothing lowly
about work performed with care, attention and impeccability.
Work to establish multiple sources of household income.
If there are potentially employable members of the household
earning nothing, then get them out there making some sort of
income, even if it is informal, sporadic and low-paying. Something
is better than nothing.
Think like an employer. The attitude built up by
60 years of prosperity is generally "give me a job and I'll
do good work." That was no hindrance in decades of rising employment
but now there is a new reality: a thousand other people will
also do good work when given a job.
The key word here is "given."
If you think like an employer, then you realize that doing good
work is the minimum baseline. You have to provide additional
value that gives the employer/supervisor some hope that you
will bring a much-needed spark to the enterprise. That could
be a cheery, generous nature; it could be a can-do attitude
of wanting to learn new things. It could be a willingess to
be flexible in hours worked.
This is not a suggestion to work for free for an enterprise
which pays others to do similar work. But even in this recessionary
environment, all too many people expect to work according to
their own requirements rather than the needs of the enterprise.
This difference in baseline assumptions is most visible between
native-born Americans and recent "green card" immigrants, who
typically will do whatever it takes to get ahead.
Beware the illusion of incremental change. Sustained
effort brings results, but within this common-sense approach
is a pernicious trap I call The Seductive Illusion of Incremental
Change (May 13, 2008). Picking the "low hanging fruit" produces
significant improvements, and with that the illusion is formed:
if we just keep doing what we've been doing, little by little
the problem will be chipped away to zero.
For example, in
the first round of household budget cuts, it's not too difficult
to pare away a few hundred dollars (travel, eating out, unlimited
texting phone plans, etc.). That initial success can lead to
a false confidence that such cuts can be continued to the point
that income and expenses are actually aligned.
But incremental change often starts yielding diminishing
returns. Are the changes being made fundamental, or are they
essentially tweaks to a system heading toward collapse?
Weight loss is an example many of us can relate to. A pound
of human fat contains 3,500 calories. To lose a pound of fat
you need to burn 3,500 calories in excess of what you eat. To
lose five pounds, you must burn 17,500 calories more than you
eat. If you ramp up your exercise program and burn 500 more
calories a day, then in 35 days you will lose the five pounds.
Alternatively, you can cut 250 calories from your intake and
expend 250 calories in additional exercise.
This sort of sustained effort will produce fundamental results,
but anything less will not. Just sending out 10 resumes a week
may not produce any job offers, and cutting marginal expenses
rather than making the deep cuts needed to re-align income and
expenses will only set aside the day of reckoning.
Preserve capital. Pulling money out of savings, IRAs
and 401Ks to maintain a giant mortgage or an unsustainable lifestyle
is unwise; that savings might be needed down the road for a
really important emergency such as getting a knee replacement
(paid in cash).
Given the likelihood that the stock market will eventually
reflect the weakness of the real economy, then keeping IRAs
and 401K capital in cash rather than stock mutual funds is a
form of capital preservation.
Become fluid and flexible. Someone to whom various
kinds of work is "beneath them" is like the person who has no
interest in learning new skills; their inflexibility dooms them
by reducing their adaptability. The living branch bends in the
wind, the dead branch snaps off.
Accept the new reality. If someone offers you four
hours of work, take it. It might lead to something else, and
if not, at least you made a few bucks. Clinging to past paradigms
is a dead-end.
Get healthy, stay healthy. Losing status, income,
security, etc. are wounds to self-worth and the soul. Increased
stress and anxiety are not healthy. Exercise and productive
work/learning are important ways to reduce stress and build
a positive response to unwanted change. Walk a quarter mile;
when that's easy, walk a half-mile. When that's easy, walk a
mile, and so on. Seek respite and renewal in Nature. Your body
is a temple; don't feed it crap.
Think entrepreneurally. The basics of entrepreneurism
are simple: seek out unfilled needs, or offer a service/product
which offers customers faster, better, cheaper. Identify what
you like doing even if it's unpaid (at first) and pursue that
line.
According to the
Fidelity
study, "Among the 11 million workers whose 401(k) plans are run
by Fidelity, 11 percent took out a loan from their plan during the 12
months ended June 30, the company said, up from 9 percent at the same
point a year earlier. By the end of the second quarter, plan participants
with loans outstanding against their 401(k) accounts had reached 22
percent versus 20 percent a year earlier."
We all like to keep up with "the Joneses", in at least some ways.
But perhaps if we focused on "What's Enough?" we would have a more balanced
perspective.
What are your thoughts on this subject?
JimK:
One major way we struggle to keep up with the Jones's is with
housing. Of course nowadays that has turned into a bit of a joke,
but that is a little glimmer of light that maybe we can use to illumine
other ways we chase rainbows.
Status is a common factor in much of our chasing. So we can look
at 1) to what extent is it smart to try to achieve whatever level
of status; 2) to what extent will investing a lot in stuff type
X actually gain us status?
An important consideration in status is community of various
types, especially family and work team. We want our children to
grow up happy and to have friends who will lead them in good directions.
Society does run on status, and high status opens up lots of valuable
doors. But there is also some paradox here - if a person is seen
as a status seeker, they actually lose status.
Does a big house really gain a person high status? It can make
a person look like a status seeker! And it can be so expensive that
one cannot afford the car, schools, country club, clothes, vacations,
fitness club, etc. that can also earn status.
Just some thoughts here to seed discussion.
John T:
A neighbor of ours once said, “I will stay where I am and meet
the Joneses coming back.” A worthwhile motto is, strive to be a
good neighbor.
allenwrench:
We seldom question if more of a "good thing" is desirable for
our supposed happiness in life. The question, that Voluntary Simplicity
helps answer, is the question of what IS enough so we may be happy
right now in the present.
A life of Voluntary Simplicity focuses our attention on the fact
that "everything we own take a little piece ~ peace of us." And
in doing so, we can let go of peace and life destroying rituals
and possessions and replace them with a contented, satisfied and
complete life in the present moment instead of a life that revolves
around the next thing to be acquired in hopes of satisfying our
insatiable appetites.
Greed is never satisfied by attainment - it is only satisfied
by contentment. This orientation of conscious thought to simplify
ones life in whatever activity the individual is engaged in is the
foundation of success when it comes to simple living...mindfulness
of our direction in life.
Voluntary Simplicity is the tool I use to counter this desire
to constantly expand my life with more complexities, stress and
problems and to live within my comfortable boundaries for a serene
life. I started with 12 step programs in 1974 to work on various
addictions. As such, I find a less complex life very useful to my
addictions recovery work. The 12 Step programs do actually touch
on the VS topic, although it is not specifically called VS. Here
are a couple of quotes that can be taken as their efforts at applying
VS to one's life.
........From page 76 of the 12 & 12 of Alcoholics Anonymous........
"The chief activator of our defects has been a self-centered
fear-primarily that we would lose something we already possessed
or would fail to get something we demanded. Living upon a basis
of unsatisfied demands, we were in a state of continual disturbance
and frustrations. Therefore, no peace was to be had unless we could
find a means of reducing these demands."
I cannot tell you that I have no 'unsatisfied demands' in my
life; but, I will say that since joining the simple living movent
my unsatisfied demands can now be counted on one hand, whereas in
my prior life, I needed a notebook to record them all.
........Taken from pages 122-125 of the 12 & 12 of Alcoholics
Anonymous.......
"In later life he (the addict) finds that real happiness is not
to be found in just trying to be a number one man, or even a first-rater
in the heartbreaking struggle for money, romance, or self-importance.
He learns that he can be content as long as he plays well whatever
cards life deal him. He's still ambitious, but not absurdly so,
because he can now see and accept actual reality. He is willing
to stay right size."
End of quote.
I find VS to be a very important state of mind to be in. It shows
which direction a person is pointed in with their life. The same
way an addiction has 3 roads to go down, so it goes with VS. An
addict can be expanding their addiction, freezing their addiction
or reducing their addiction. A person suffering from an overly stressed
or complicated life can be expanding the complications, freezing
the complications or reducing the complications.
Thoreau says that we need food, shelter, fuel and clothes as
necessities. In modern times, I will add transportation to the list
depending on your local. Everything else is pretty much optional.
If we have these needs met and are not happy, then their is no end
to our supposed needs for that elusive state of happiness that we
seek. We all seem to have no shortage of supposed needs or wants
as complexity addicts. We only want to go in one direction...more.
Life does not go in one direction no matter how wealthy you are,
life is always up and down. My goal in life prior to joining the
VS movement was to get rich and buy anything I wanted to. My goal
now is to live within my means, comfortably fit within my space
and gratefully accept my current position in life.
VS has contributed to this recovery and continues to do so each
day. I make it a practice to wake up with VS, eat lunch with VS
and to go to bed with VS the same way I do with my 12 step program
work and without this constant awareness of how daily decisions
affect my VS or 12 Step program, I'd be back on the road to my prior
sick life.
We should not confuse Voluntary Simplicity with the misnomer
of 'Voluntary Poverty' VS is not about living low, it is about making
choices and balanced living. We can take a vow of poverty and not
have a pot to piss in-yet we can still live a complex, sickly life
full of unneeded rituals and stress. What it does take is introspection
and balance coupled with working towards inner peace.
You get out what you put in with VS. If you do not cut back enough
on the complexities that rob you of living life, then all you have
is your same complex life back that you started with. If you cut
out too many complexities and are unhappy or bored, don't worry,
you can always add them back.
We suffer from no shortage of stress
and complexities of living, especially if you have a family. Life
gives us plenty of problems for free. You can even trade the complexities
that offer no reward other than more problems for new complexities
that offer rich rewards or good feelings.
For instance, I gave up some of my
computer compulsion time and put that time into yoga class and meditation.
I started with VS in 1996 by canceling some subscriptions to 5 business
newspapers and magazines and pulled out about 50-60 rosebushes that
we could not care for.
After that, I saw the beneficial results and kept at it, questioning
everything and experimenting with which complexities could be removed
and which needed to stay in order to live a balanced life. We make
what we want of VS, there are no rules other than if you do not
do enough you do not get any results.
There are no VS police to boss you around and tell you what is
right or wrong. We have to decide this for ourselves as individuals.
As I have said before, the program is the final judge of your success,
not you, not me, not anyone else.
A lady wrote in asking if she could be into VS and still have
a gold chain? Yes, we can have a gold chain, we can even have 10
gold chains if we please. Can a person have 100 gold chains and
still be into VS?
No, I could not say with a straight face I was into VS and own
100 gold chains. But, the person that has scaled back from owning
1000 gold chains could definitely say they have applied VS to their
lifestyle by cutting back from 1000 to 100 gold chains.
It is all relative and all up to us and what we wish to derive
from our efforts at simplicity. Another fellow posted how he wanted
a canoe, but his wife said he could not have one and be a VS devotee.
It is not up to others to tell us what we can have - our recovery
or VS program will tell us. If the canoe would comfortably fit within
a financial budget, and a person has the comfortable space required
to store it and the object does not cause a person any undue harm
or problems such as maintenance that they cannot upkeep, legal problems
or rob them of time they cannot afford to give, I see no problem
in having it.
A person wrote me and asked, "Is writing your long 5 page post
really simple living?" My response was, "Yes, writing 5 pages or
even 5000 pages is vastly superior to living the old, sick life
that I used to live." Critics are all around us and work to tear
down programs instead of building them up. Either our efforts at
simplicity or recovery will promote our peace or destroy our peace
- so put peace first. Always listen to your recovery program instead
of the critics - it has the final say.
Below are some definitions of VS from the book The Circle of
Simplicity ~ Andrews.
"For me, voluntary simplicity is living consciously, trying to
eliminate the unnecessary, the superficial clutter. It is trying
to live morally and ethically in the global economy by using less."
"I think that voluntary simplicity as living on purpose, making
sure I have the time to do the things I want to do, not wishing
my time away."
"I think voluntary simplicity is being true to yourself, true
to the environment. It's finding that place for every facet of my
life and defining how much is enough. For me it is spiritual."
"It's choosing to enhance one's life by surrounding yourself
with what really brings you fulfillment. It is defining my own standard
of success and prosperity, community and fun."
"Voluntary simplicity is balancing the realities of my life (limited
economics, time and energy) with my values and implementing them
into a lifestyle that is comfortable and rewarding. I think voluntary
simplicity is an "art of living." I believe it is an art to live,
to be true to yourself and to be open to innovation."
An in-depth discussion and clarification of the term "Voluntary
Simplicity" by Philip Slater
All personal solutions to wealth addiction involve one form or
another of what has come to be called Voluntary Simplicity. This
doesn't not necessarily mean going "back to nature" and does not
mean living in poverty and discomfort, although some people may
elect forms of simplicity that would be highly uncomfortable for
the rest of us. Above all, it does not mean forcing yourself to
give up something you really enjoy, out of some pious conviction
that it's the "right thing to do." Voluntary Simplicity merely means
trying to rid one's life as much as possible of material clutter
so as to concentrate on more important things: creativity, human
survival and development, community well-being, play.
The key word in Voluntary Simplicity is "voluntary," which means
that the giving up of the material clutter is not coerced either
from the outside or from the inside. As Andre Vanden Broeck observers,
only those who have experienced affluence are in a position to have
a "choice divorced from need." The poor aren't in a position to
make such a choice-they are stuck with a scarcity that is neither
simple nor voluntary.
Nor is Voluntary Simplicity coerced from within, for to deprive
yourself out of some ideological conviction is merely to feed the
Ego Mafia. The word "simplicity" may have overtones that arouse
our suspicions: a vaguely puritan ring, conjuring up images of drab
smocks, self-righteousness and flagellation. But if this is in the
spirit in which Voluntary Simplicity is embraced the result will
most certainly be noxious.
There is an old Zen story about two monks traveling together
who encounter a nude woman trying to cross a stream. One of them
carries her across, much to the consternation of the other. They
continue in silence for a couple of hours until the second monk
can stand it no longer. "How," he asks "could you expose yourself
to such temptation?" The first monk replies, "I put her down two
hours ago. You're still carrying her."
Addiction is internal; if you experiment sincerely with Voluntary
Simplicity and find yourself still thinking of money and possessions,
your simplicity is a fraud and you might just as well go back to
pursuing wealth until you've had your fill of it. To achieve its
goal, Voluntary simplicity must be undertaken in the spirit, not
of Puritanism or self-flagellation, but out of adventure. All adventurers
throughout history have, after all, been people who abandoned comforts,
possessions, love and security to seek new experiences in faraway
places.
Richard Gregg, who coined the term in 1936, once complained to
Gandhi that while he had no trouble giving up most things, he could
not let go of his books. Gandhi told he shouldn't try: "As long
as you derive inner help and comfort from anything, you should keep
it." He pointed out that if you give things up out of a sense of
duty or self-sacrifice they continue to preoccupy you and clutter
your mind. To talk of "denying oneself" is to use the language of
despotism. Simplicity is an affirmation, not a denial of oneself.
It is always nice to have our own work confirmed by others that
have gone before us as well as those that follow us. Many years
ago I coined the phrase "Everything you own takes a little piece
~ peace of you." A couple years ago I came across Richard Gregg's
original work on Voluntary Simplicity penned in 1936 and this is
what he said on the subject of peace disturbance or as he termed
it "SIMPLICITY A KIND OF PSYCHOLOGICAL HYGIENE".
Taken from the original work:
Pendle Hill Essays Number Three
THE VALUE OF VOLUNTARY SIMPLICITY
RICHARD B. GREGG
Acting Director of Pendle Hill 1935-36
Chapter X. SIMPLICITY A KIND OF PSYCHOLOGICAL HYGIENE
There is one further value to simplicity. It may be regarded as
a mode of psychological hygiene. Just as eating too much is harmful
to the body, even though the quality of all the food eaten is excellent,
so it seems that there may be a limit to the number of things or
the amount of property which a person may own and yet keep himself
psychologically healthy. The possession of many things and of great
wealth creates so many possible choices and decisions to be made
every day that it becomes a nervous strain. Often the choices have
to be narrow. The Russian physiologist, Pavlov, while doing experiments
on conditioned reflexes with dogs, presented one dog with the necessity
of making many choices involving fine discriminations, and the dog
actually had a nervous breakdown and had to be sent away for six
months' rest before he became normal again.
Subsequently, American psychologists, by similar methods, produced
neuroses in sheep by requiring many repetitions of mere inhibition
and action; and as inhibition is an element in all choices, they
believe it was that element which may have caused the neurosis in
Pavlov's dog. Of course, people are more highly organized than dogs
and are easily able to weigh more possibilities and endure more
inhibitions and make more choices and nice distinctions without
strain, but nevertheless making decisions is work and can be overdone.
I'll leave you with a snip of wisdom from Thoreau from his book
Walden.
"The twelve labors of Hercules were trifling in comparison with
those which my neighbors have undertaken; for they were only twelve,
and had an end; but I could never see that these men slew or captured
any monster or finished any labor. They had no friend Iolaus to
burn with a hot iron the root of hydra's head, but as soon as one
head is crushed, two spring up."
VictorianTech:
"What's enough" is a learned behavior. We get it from our upbringing,
our schooling, and our media influences. There is no objective standard;
all concepts of "enough" are subjective and culturally based.
My mother swallowed the Hollywood/Madison Avenue agenda hook,line
and sinker. All her life she was miserable, angry and bitter because
she didn't have the mansion, new car, servants and diamonds she
saw on tv and in the movies. Her life was consumed by and wasted
in loathing of being less than rich. It always angered me, because
what did she expect, with no education, no valuable skills, and
of all things married to a quasi-hippie country boy? But she truly
believed that what she saw on tv was the way life was supposed to
be.
Her constant viperish bitching deeply influenced me; so I bought
into a different version of consumerist propaganda. Just get a highly
advanced college education, it said, and the world will be at your
feet. So I did. I came oh-so-close to making it. But when my health
collapsed, so did everything.
I learned that the very best remedy for "keeping up with the
Joneses" is complete finacial collapse. And a financial collapse
is not complete until it results in homelessness.
The experience of homelessness does an amazing job of reprogramming
one's beliefs about "what's enough". It's a highly unpleasant and
very effective way to learn what is truly important. Like a roof
over your head, food, and warmth. You learn to have vast gratitude
for simply being able to look out the window at the rain, instead
of being out in it. For being able to wash your hair whenever you
wish, or having a toilet at your disposal whenever needed. A warm
soft place to sleep with some semblance of security is a wonderful
thing.
In a society that is so drenched in consumerism, people come
to believe they will just die if they don't get the latest
(fill in the blank- car, iPhone, fashions, whatever). I know better.
But I only know better because I got there first, and then
lost it. A person who has never gotten there has nothing to compare
to, so they rely on what others tell them is the proper goal for
"enough".
There are needs, and there are wants. I think whether you end
up content with your life depends on whether your personal definition
of "enough" lies close enough to the needs end of the scale, and
not the wants end. And knowing the difference between the two.
sl:
I am uncomfortable with attributing the excess "stuff" that most
Americans accumulate to either greed or a quest for status.
My observation would be that the "stuff" accumulated was borne of
a desire for an experience.
Someone desires the experience of riding a bicycle so he/she goes
out, buys the bike, the shoes, the Lycra, the panniers, the rack
for the car, the hooks to hang it in the garage, the shoes, the
helmet, the lights, a patch kit, etc, etc, etc. add it up, even
for a relatively benign low-impact hobby like riding a bike one
starts to accumulate a lot of stuff.
Then suppose that person wants to go hiking. Innocent enough. Again,
shoes, tent, sleeping bag, pad, bug spray, mosquito netting, sunscreen,
GPS,
etc, etc, etc.
Then that person wants the simple pleasure of grilling outdoors.
BBQ, tongs, lighter fluid, briquettes, etc.
I go to garage sales, estate sales, and auctions. I see the crap
that Americans are trying to shed. They weren't trying to impress
anyone and they weren't indulging in an orgy of consumption.
They just had an appetite for a type of experience.
Even an experience such as travel entails accumulating 'stuff'.
Often the experience desired is hosting one's friends and family
to a nice dinner or party, that entails a ginormous amount of 'stuff',
much of which will rarely get used.
But it was not an appetite for the 'stuff' that drove it, but a
hunger for an experience. We all want to be good hosts, right?
The challenge is to get more people to hunger for understanding
as opposed to indulging a whim for an 'experience'.
Good luck with that. That goes back to Socrates.
Humans crave novelty, or in Socrates day, 'relishes', and this restless
hunger for new experiences leads inevitably to more and more 'stuff'.
coriolis:
That's an interesting perspective on the matter. I don't want
to judge anyone's motivation in their acquisition of stuff, but
the quest for these experiences can be similar to a quest for material
goods. I do see people jumping into their experiences on an impulse.
Buying that bike and all the gear could easily require an investment
of thousands of dollars, and after that thirst for the experience
is satisfied, the person may never ride it again. That whole exercise
could have been a quest for some status, or just a passing fancy.
Either way, it becomes a collosal waste. Now contrast that to the
person who has an old beater of a bike, loves the sport, and gradually
upgrades the equipment as things wear out. That person might end
up with a large collection of top of the line stuff, but the difference
is, it's useful, and the experience became a way of life.
I don't disagree that the desire for experience causes the accumulation
of stuff, but soemone who flits around from one experience to another
is not unlike the person who has bought into unrestrained consumerism.
In both cases, its seeking gratification with a short attention
span.
[Aug 14, 2010] How much car can you afford?
bakho says...
The best rule-of-thumb we've seen
is that monthly payments shouldn't exceed 8% of your gross monthly
income. If that's $3,000, for example, then the payments should
be no more than $240 a month.
Nor should you stretch your loan out over more than 48 months,
or four years, to lower payments enough to fit that rule.
New cars and trucks start depreciating as soon as they're driven
off the showroom floor. Stretching payments
out for 60 months or more virtually guarantees buyers will be "upside-down"
for much of the loan. That means they'll owe more
than the vehicle is worth, making it difficult to sell or trade.
Yet extending payments over five, six or even seven years is
how dealers persuade customers to spend -- and borrow -- record
amounts for new cars and trucks.
According to the Federal Reserve the average length of an auto
loan was 61.1 months in May and the average amount financed reached
an all-time high of $27,163. At 7.8% annual interest, the average
rate for such loans, the monthly payment would be a hefty $540 a
month.\
Exactly a month ago I put up a post
If a Social Security Annual Report Vanishes into the Forest noting
that not only was the Report months overdue but that nobody seemed to
notice or care that there was no official announcement about the reasons
for the delay or a new release date. The date that had been floated
back in April was June 30th, then later some were saying 'July' and
then when July rolled around word around the Capitol was 'August'. But
nobody who knew anything was talking on the record. Then last week of
all papers it was the Spokane Spokesman-Review that reported August
5th. But that news was only semi-officially confirmed this week when
it was announced that AEI was having a briefing on the Report on Friday
the 6th (today) and NASI was having a bigger event on Monday the 9th.
But as for any official announcement there was nothing, not at SSA,
nor at Treasury or HHS or Labor. Nor was the Report up on the web Thursday
morning. It wasn't until an hour before official Report release that
Labor issued a news release with a link to the pdf of the Report. Well
I was ready, a live link to it was up here at 11:22 Eastern, beating
the official time by 38 minutes. But all of this leaves this question.
Why the secrecy? Three Cabinet Secretaries and the Commissioner of Social
Security were scheduled to release a public Report that had implications
for every worker and retiree in the country and yet no one knew nothing
Well the Report appeared and proceeded to make about as little noise
as it did when in vanished into the woods, as I type a search on '2010
Social Security Report' turns up no MSM links in the top ten, unless
you consider HuffPo MSM, and two of the top six results are to my posts
here. Now Heritage and the Washington Times (which I don't consider
MSM) had what appear to be canned pieces up claiming that the Report
confirmed their gloomy views but didn't seem to address the actual numbers
but for the most part there is very little coverage.
Now you can call me a cynic but some of this secrecy and effective
non-coverage may stem from the fact that the Report did not match the
current narrative of 'Crisis'. Instead Trust Fund depletion remained
pegged at 2037, the date that cash surpluses vanish moved from 2016
to 2015 while the 75 year actuarial gap actually dropped significantly
from 2.00% to 1.92% putting it right back to 2001 levels. Meaning that
a decade of 'Crisis' has gone by with no action at all and Social Security
emerges unchanged. Which leaves all the "we can't afford to wait!" "delay
will only make the cost larger and more abrupt!!" folk with a little
egg on their faces. Social Security-still not broke.
More notes and an interesting graph under the fold.
For those joining this party late the 'Trust Fund Ratio' is the Trust
Fund balance expressed as a percentage of cost in any even year with
the offical target being a TF Ratio of 100, meaning one year of reserves.
This is called by the Trustees 'actuarial balance'. Although we generally
talk about THE Social Security Trust Fund, there are actually two, the
OAS (Old Age/Survivors) and the DI (Disability) Trust Funds. In this
figure OAS is the dark line and DI the light one. Additionally though
we also tend to talk about Social Security going deplete in some future
year or being able to pay out some percentage of benefits at that date
in doing so we are generally referring to what the Trustees call the
'Intermediate Cost Alternative' in this figure denoted as 'II'. However
they also give us two other Alternatives, a more pessimistic one called
'High Cost' here 'III' and a more optimistic one called 'Low Cost' here
'I'. Low Cost and High Cost are fairly artificial in construction as
each takes each of the variables that together determine solvency and
varies them in the same direction, either better for solvency in the
case of Low Cost or worse for High Cost. Since in practice it is not
likely that every economic and demographic variable will move in the
same direction in the same magnitude these two alternatives have to
be regarded as being on the extremes of the probability spread. On the
other hand this depends crucially on whether Intermediate Cost has in
fact captured the true mean for each variable, if Intermediate Cost
can be shown to be on the whole too pessimistic then Low Cost outcomes
become more probable, and of course the converse is true. But that will
have to be the subject of future posts.
A very common claim about Social Security
is that there is no way that we can grow out of 'crisis'. Well this
figure puts that claim in doubt, because while Low Cost may not be totally
likely it is at least possible and if it comes about OAS projects to
never have a TF Ratio lower than 300, and since the target is only 100
can be said to give a result of 'over-funded', if it
seems to be coming about then the policy question in the year 2020 will
begin to revolve around when to cut FICA and by how much to get that
tail pointing closer to 100 than to 450 and rising as it leaves the
projection period, Because oddly enough an over-funded Trust Fund is
in its own way a bigger threat to Social Security long-term than an
under-funded one. (I can point to some older posts on this if anyone
cares).
Which brings us to an important point. While it may well be that
Low Cost is unlikely, it is not an optimal outcome anyway, instead the
sweet spot is somewhere between I and II in this figure and to get there
we don't have to hit every number of Low Cost, just enough of them in
the right magnitudes to pull II's tail up so that it intersects 100
at the end of the projection period or at least dips below actuarial
balance (the same thing) as far in the future as possible. And many
of those numbers are susceptible to deliberate policy choices. For example
Social Security outcomes improve with higher immigration and higher
fertility, and since immigrants, at least those from developing countries,
tend to be more fertile sticking to a policy of closed borders, while
maybe appealing to younger Teabaggers in the here and now, plays a certain
amount of hell with their future retirement outlook. Equally Social
Security solvency is positively correlated with more employment and
higher real wage although the effect is offset by the fact that the
increased income also results in increased costs in the form of higher
benefit checks. But from the perspective of the worker this is all good,
it means that any future percentage cut in benefits would be from that
much higher a baseline, which means that solvency effects aside a deliberate
policy targeting employment and real wage will result in a better Social
Security outcome. (Minimum wage increase anyone?). Similarly improvements
in productivity, even if they don't pass through perfectly to Real Wage,
increase affordability by holding down the percentage of GDP needing
to be devoted to Social Security, or perhaps assisting us to achieve
Prof. Jamie Galbraith's appeal to enhance Social Security benefits rather
than cut them.
Which suggests a second prong to the NW Plan. The first prong simply
assumes Intermediate Cost numbers and programs in the revenue increases
needed to target actuarial balance, the second would be to advocate
for policies that make some or all of those tax increments unnecessary.
The right answer is not to just passively accept our fate and schedule
benefit cuts prematurely, the numbers needed to substantially cut the
payroll gap even in the absence of tax increases are by no means out
of reach, add a few tenths of a point to productivity and a good deal
of 'crisis' simply vanishes.
Bruce Krasting
The High Cost projections you refer to show that the SS surplus
peaks in 2011 (starts in 50 days....) and it peaks around 2.6T.
Look at the assumtions used. The next 24-36 months economic results
will be substantially less than those assumed by the Fund in the
High Cost. in other words, SS will top out very soon now. No sense
of urgency there. Right Bruce? What the heck. It is about 1.4T shy
and five years early. No problem right?
Bruce Webb
Why are you assuming High Cost? Everyone else officially works
off of Intermediate Cost.
And this is garbled:
"The High Cost projections you refer to show that the SS surplus
peaks in 2011 (starts in 50 days....) and it peaks around 2.6T.
"
High Cost shows surpluses peaking at $114 bn in 2012, a point
at which the TF balance will be $2.8 trillion, but with continuing
though shrinking surpluses through 2019 at which time the TF balance
will be at its peak of $3.3 trillion.
Plus Social Security uses Calender Years and not Fiscal Years.
So I have a 'What the heck' question myself. What the heck Report
are you reading? Not to mention that you have fatally confused the
concepts of 'surplus' and 'trust fund balance'. And even if you
are thinking cash flow, High Cost doesn't show that going negative
again until 2015.
Methinks you started your gloating a little early here. (Or maybe
Happy Hour comes early in your time zone).
coberly
Bruce,
you give Krasting a better answer than he deserves. The peak
of the Trust Fund, even under High Cost Assumptions means exactly
zilch. Some day, sooner or later, the Trust Fund is going to run
out of money (down to the one year reserve). then Social Security
will return to normal business as usual with what looks like a tenth
of a percent increase in the payroll tax from time to time. That's
about eighty cents per week about every four years according to
present estimates. It is VERY unlikely it will ever be much more
than that, and more than likely it will become a lot less than that
as the Baby Boom dies off, and the increase in life expectancy reaches
asymptotically to some natural limit.
Krasting is like most of the innumerate people in this country.
He hasn't the slightest idea what he is talking about, but big numbers,
and "running out" work powerfully on his endocrine system so he
treats us to his sweaty thoughts. Unfortunately he has powerful
friends and a hapless country which has been taught to believe THE
END OF THE TRUST FUND is a LOOMING CRISIS1. It isn't even a problem...
except for the hysteria that comes from letting them frame the issue
this way.
john
Bruce-This is a great post. I was wondering if have ever spoken
with any of the report's actuaries? After looking at TableII.C1
and then at Section V. ,I was wondering if the actuaries have run
numbers using a variety of asumptions such as HC unemployment with
LC mortality with IC productivity? I am concerned that the current
"recovery" will become the New Normal. A future somewhere between
IC and HC possibly? But as Dale will remind me in a minute, IT DOESN'T
REALLY MATTER! Thanks.
ilsm
Bruce,
Thanks for the charts.
What is the premise for keeping the rate of "other non interest
spending" the same through the "outyears". Forgive me I have spent
a lot of my life working the warfare state cabal budgets.
In the 2010 unified budget the war machine takes 20% approx of
the outlays within a percent of SS and more than Medicare.
In the UK the ministry of defence, which is less a minitruth
label than national (epmpire) security, plunders just 7% of their
unified outlays.
Suppose those charts showed that empire security robs 7% of the
unified budget outlays in 2012? And other corporate welfare is reduced
from 20% to 8%.
In that case the SSTF which is accumulated deferred taxes from
the general funds can be redeemed instead of the cash being wasted
on the empire and corporate welfare.
I propose that if the rate of "other non interest spending" remains
the same for a few more years the goose which lays the golden eggs
will be dead and SSTF will not matter.
The US can abide just so much plundering before it is wasted.
Bruce Webb
CBO mostly works on a 'Current Law' basis. I think the assumption
here is that currently authorized programs, at least ones that are
not sunsetted, are likely to be reauthorized. Either that or they
are just relying on Paygo rules that assert that new spending has
to be offset by cuts to old spending (or by taxes).
ilsm
Entitlements are 57% of unified outlays in 2010.
The empire security aparatus and corporate welfare which are
a command economy dependent upon the taxpayer for succor consume
the remaining 43%.
Entitlement go to people and hospitals for food, services and
health care that benefit millions of individuals.
The war machine takes resources away from producing things for
people and makes aircraft carriers to go and make 'shows of force'
to the Red Chinese who have missiles and such so that those useless
shows of force could become expensive if the Chinese sink one of
our carriers.
So, let's forget the 'show of force' to intimidate the Chinese
who hold more than a trillion in US debt and worry about taking
care of the millions of citizens who make the country, despite the
factthe owners are making money on Chinese slave labor.
How can the US have a war machine to intimidate the holders of
our debt?
And that war machine be so harmful as to make the vicious circle
where US has to import from the object of the war machines fear
and intimidation?
Actually it's not only T-bills: TIPs and gold also somewhat compensate
for inflation. TIPs compensate partially and gold is very volatile so take
you poison...
Q: The new edition of The Black Swan includes what
you call "10 principles for a Black-Swan robust society." One of them
is: "Citizens should not depend on financial assets as a repository
of value and should not rely on fallible 'expert' advice for their retirement."
Can you explain what you mean?
Taleb: The problem is that citizens are being led to invest
in securities they don't understand by people who themselves don't quite
understand the risks involved. The stock market is probably the best
thing in the world, but the true risks of the stock market are vastly
greater than the representations. And this leads to extremely strange
situations in which, say, someone has a bakery, is extremely paranoid
about suppliers, very careful about risks, and protects his business
with appropriate insurance. Then, at some point, he puts his $122,000
in savings in a fund that he knows nothing about, based on risk measures
he knows nothing about, in companies very few people know much about.
People use "risk measures," but you're really not measuring anything
like you measure temperature or distance. You are making a speculative assessment of a future event. That's
not measuring, that's estimating. And as we saw with
BP (BP),
with the banking system, and with Toyota (TM),
companies themselves are hiding risks from the security analysts.
They're cutting corners. Companies have
a tendency to hide risks.
So someone extremely careful and prudent
in the management of his own affairs will be completely careless with
the half of his savings invested in the stock market. I'm saying: Don't
use the stock market as a repository of value. It has vastly more risks
than you think.
I was at an investment conference last week with mutual fund managers
and financial advisers. There were a surprising number of mentions of
the possibility of "Black Swans," and your name came up. Do you think
those people understand the concept?
No, they don't get it. My Black Swan idea is very different: There
are events that you can't forecast, and you need to be robust to these
events. If I think that someone doesn't understand Black Swans, I'm
sure that whatever bad news happens to him will be Black Swans for him
but "white swans" for me.
What should you do with your savings?
We have this culture of financialization. People think they need
to make money with their savings rather with their own business. So
you end up with dentists who are more traders than dentists. A dentist
should drill teeth and use whatever he does in the stock market for
entertainment.
People should have three sources of variation in their income. The
first one is their own business that they understand rather well. Focus
on that. The second one is their savings. Make sure you preserve them.
The third portion is the speculative portion: Whatever you are willing
to lose, you can invest in whatever you want.
In the second category—preservation of value—you should have the
consciousness that there is something called inflation. You should avoid
some classes of investments that are very fragile.
What are are potential sources of fragility or danger that you're
keeping an eye on?
The massive one is government deficits. As an analogy: You often
have planes landing two hours late. In some cases, when you have volcanos,
you can land two or three weeks late. How often have you landed two
hours early? Never. It's the same with deficits. The errors tend to
go one way rather than the other. When I wrote The Black Swan,
I realized there was a huge bias in the way people estimate deficits
and make forecasts. Typically things costs more, which is chronic. Governments
that try to shoot for a surplus hardly ever reach it.
The problem is getting runaway. It's becoming a pure Ponzi scheme.
It's very nonlinear: You need more and more debt just to stay where
you are. And what broke [convicted financier Bernard] Madoff is going
to break governments. They need to find new suckers all the time. And
unfortunately the world has run out of suckers.
You're saying that what is supposed to be the safest place to
invest, government debt, is in some ways the most dangerous?
Unless you invest in your own home currency in very short-term Treasury
bills. Because governments can print more
of their own currency, the risk comes from a rise in interest rates
rather than a government default. When you have hyperinflation,
deficits, or debt problems, with short-term bills you can catch higher
interest rates to compensate you for the inflation or whatever return
you've missed.
The Dow Jones Industrial Average last week ended up pretty much where
it had been a little more than a week earlier. A rousing 200-point rally
on Wednesday mostly made up for the distressing 200-point selloff of
the previous Friday.
The Dow plummeted nearly 800 points a few weeks ago -- and then just
as dramatically rocketed back up again. The widely watched market indicator
is down 7% from where it stood in April and up 59% from where it was
at its 2009 nadir.
These kinds of stomach-churning swings are testing investors' nerves
once again. You may already feel shattered from the events of 2008-2009.
Since the Greek debt crisis in the spring, turmoil has been back in
the markets.
At times like this, your broker or financial adviser may offer words
of wisdom or advice. There are standard calming phrases you will hear
over and over again. But how true are they? Here are 10 that need extra
scrutiny.
1 "This is a good time to invest in the stock market."
Really? Ask your broker when he warned clients that it was a bad
time to invest. October 2007? February 2000? A broken watch tells the
right time twice a day, but that's no reason to wear one. Or as someone
once said, asking a broker if this is a good time to invest in the stock
market is like asking a barber if you need a haircut. "Certainly, sir
-- step this way!"
2 "Stocks on average make you about 10% a year."
Stop right there. This is based on some past history -- stretching
back to the 1800s -- and it's full of holes.
About three of those percentage points were only from inflation.
The other 7% may not be reliable either. The data from the 19th century
are suspect; the global picture from the 20th century is complex. Experts
suggest 5% may be more typical. And stocks only produce average returns
if you buy them at average valuations. If you buy them when they're
expensive, you do a lot worse.
3 "Our economists are forecasting..."
Hold it. Ask your broker if the firm's economist predicted the most
recent recession -- and if so, when.
The record for economic forecasts is not impressive. Even into 2008
many economists were still denying that a recession was on the way.
The usual shtick is to predict "a slowdown, but not a recession." That
way they have an escape clause, no matter what happens. Warren Buffett
once said forecasters made fortune tellers look good.
4 "Investing in the stock market lets you participate in the growth
of the economy."
Tell that to the Japanese. Since 1989 their economy has grown by
more than a quarter, but the stock market is down more than three quarters.
Or tell that to anyone who invested in Wall Street a decade ago. And
such instances aren't as rare as you've been told. In 1969, the U.S.
gross domestic product was about $1 trillion, and the Dow Jones Industrial
Average was at about 1000. Thirteen years later, the U.S. economy had
grown to $3.3 trillion. The Dow? About 1000.
5 "If you want to earn higher returns, you have to take more risk."
This must come as a surprise to Mr. Buffett, who prefers investing
in boring companies and boring industries. Over the last quarter century,
the FactSet Research utilities index has even outperformed the exciting,
"risky" Nasdaq Composite index. The only way to earn higher returns
is to buy stocks cheap in relation to their future cash flows. As for
"risk," your broker probably thinks that's "volatility," which typically
just means price ups and downs. But you and your Aunt Sally know that
risk is really the possibility of losing principal.
6 "The market's really cheap right now. The P/E is only about 13."
The widely quoted price/earnings (PE) ratio, which compares share
prices to annual after-tax earnings, can be misleading. That's because
earnings are so volatile -- they're elevated in a boom, and depressed
in a bust.
Ask your broker about other valuation metrics, like the dividend
yield, which looks at the dividends you get for each dollar of investment;
or the cyclically adjusted PE ratio, which compares share prices to
earnings over the past 10 years; or "Tobin's q," which compares share
prices to the actual replacement cost of company assets. No metric is
perfect, but these three have good track records. Right now all three
say the stock market's pretty expensive, not cheap.
7 "You can't time the market."
This hoary old chestnut keeps the clients fully invested. Certainly
it's a fool's errand to try to catch the market's twists and turns.
But that doesn't mean you have to suspend judgment about overall valuations.
If you invest in shares when they're cheap compared to cash flows
and assets -- typically this happens when everyone else is gloomy --
you will usually do very well.
If you invest when shares are very expensive
-- such as when everyone else is absurdly bullish -- you will probably
do badly.
8 "We recommend a diversified portfolio of mutual funds."
If your broker means you should diversify across things like cash,
bonds, stocks, alternative strategies, commodities and precious metals,
then that's good advice.
But too many brokers mean mutual funds
with different names and "styles" like large-cap value, small-cap growth,
midcap blend, international small-cap value, and so on. These are marketing
gimmicks. There is, for example, no such thing as "midcap
blend." These funds are typically 100% invested all the time, and all
in stocks. In this global economy even "international" offers less diversification
than it did, because everything's getting tied together.
9 "This is a stock picker's market."
What? Every market seems to be defined as a "stock picker's market,"
yet for most people the lion's share of investment returns -- for good
or ill -- has typically come from the asset classes (see No. 8, above)
they've chosen rather than the individual investments. And even if this
does turn out to be a stock picker's market, what makes you think your
broker is the stock picker in question?
10 "Stocks outperform over the long term."
Define the long term? If you can be down for 10 or more years, exactly
how much help is that? As John Maynard Keynes, the economist, once said:
"In the long run we are all dead."
With $16 trillion in retirement accounts, baby boomers and their
parents have become a prime target for scam artists who push overhyped
investment returns, unsuitable annuities and Ponzi schemes. Kimberly
Lankford, contributing editor of Kiplinger’s Personal Finance Magazine,
shares tips that can help you avoid retirement rip-offs:
Ignore the hype Be suspicious of any sales pitch that
promises unrealistic returns. Anyone
who guarantees annual returns of 12% or higher isn’t in the ballpark
— that’s even higher than the long-term average return
for large-company stocks, and much higher than guaranteed investments.
Be particularly wary of claims that you can retire early based on
those high returns — a common pitch salespeople use when they hear
that a company is making early-retirement offers.
Be skeptical of ‘free lunch’ seminars Salespeople often
make their initial contact with seniors in “free lunch” seminars.
But in a sweep of these types of seminars,
the Securities and Exchange Commission found unethical business
practices in nearly half. And don’t trust a salesperson
just because he or she has a professional designation that focuses
on seniors. Such credentials sometimes require little more than
paying a fee and passing an easy take-home test.
Do background checks Before doing business with a broker,
check his or her background using the Financial Industry Regulatory
Authority’s BrokerCheck tool at
www.finra.org.
Look for disciplinary actions taken
against the broker, as well as red flags, such as if the broker
has frequently changed firms. For insurance and annuities,
check whether the agent is licensed with your state insurance department
(see www.naic.org for
links). And check on certified financial planners at the CFP Board
of Standards (www.cfp.net).
Get investment information in writing Maintain notes
of conversations with salespeople about your investments and keep
copies of broker mailings and sales presentation handouts. After
speaking with a broker about your investment goals,
ask him or her to summarize your discussion
in writing. Ask the broker to rate an investment’s risk on a scale
of one to 10 and put the answer in writing, too.
Ask about surrender charges and guarantees
--[those are usually bogus; think about deferring
retirement till 70 if you need annuity -- Social Security is the
same thing but a much better deal] Before buying an annuity, ask specifically about surrender charges
and how much money you can withdraw each year.
Many deferred annuities levy a surrender
charge if you try to withdraw your money within the first seven
to 10 years. Also ask about interest guarantees.
Some annuities offer a bonus in the first year, after which the
minimum guarantee drops to 2% or 3%. Ask for a written summary of everything you discuss with the
salesperson.
Set up an account To avoid falling prey to a Ponzi scheme,
establish an account at an independent
financial institution (typically a brokerage) to hold your money.
Never write a check directly to an individual — only
to the custodial institution, which must send you quarterly statements.
Don’t feel pressured Consult
with your adult children or another financial adviser before investing
your money.
Ask regulators for help If you have questions or
discover that you or your parents have been sold an unsuitable investment,
contact your state securities department (go to
www.nasaa.org for links)
or contact your state insurance department (
www.naic.org) for complaints
about unsuitable insurance or annuities
More scammers -- often elderly themselves--try to con retirees "Seniors
who suffer from isolation and diminished capacity make ideal targets"
Annuities. Reverse mortgages. Life insurance pools. Principal-protected
notes. The options being offered to senior citizens hoping to ensure
a comfortable retirement are dizzying. And in a growing number of cases,
that may be the intention as more scammers--often
elderly themselves--try to con retirees. Though hard
numbers are difficult to come by, many lawyers and advocates for the
elderly say more seniors than ever are being lured into investment schemes
that are unsuitable for people of their age or are outright swindles.
says Steve Riess, a San Francisco attorney who represents elderly victims
of con artists peddling bogus investments.
One out of five Americans over the age
of 65 has been the victim of a financial scam, according to the Washington-based
Investor Protection Trust, a nonprofit that promotes shareholder education.
That means more than 7.3 million seniors have been taken
advantage of financially through inappropriate investments, high fees,
or fraud, which insurer MetLife says comes at a cost of more than $2.6
billion a year. "Older people are being targeted because, as 1930s robber
Willie Sutton said when asked why he robs banks, 'that's where the money
is,'" says Kathleen Quinn, executive director of the National Adult
Protective Services Assn. in Springfield, Ill.
Many of today's scammers have a particularly good understanding of their
victims--because the fraudsters themselves are of retirement age, if
not exactly retired. More elderly con artists than ever seem to be preying
on retirees, perhaps because senior citizens put more confidence in
someone their age, says Denise Voigt Crawford, president of the North
American Securities Administrators Assn. "It's astounding that you can't
even trust older people anymore," Crawford says.
In November, William Kirshner, 84, a financial adviser in Corpus
Christi, Tex., was sentenced to five years in prison for stealing more
than $100,000 from senior citizens and other clients who invested in
promissory notes issued by his company. Ronald Keith Owens (above),
74, was sentenced to 60 years in prison in January 2009 for persuading
investors, including retirees, to put more than $2.6 million into nonexistent
bank-related investments. And William Walter Spencer, 68, a Franklin
(Tenn.) financial adviser, sold elderly members of his church promissory
notes that turned out to be bogus. He pleaded guilty to fraud in May
and is expected to be sentenced in August.
It looks like the author is wrong: from his data it looks like life
expectancy plus 10% gives a good estimate of longevity. Also few people
understand their surroundings after 90. And for most people it is
stupid to expect to live till 100. Difference between men and women in longevity
is substantial.
To understand his point, let’s take a look at an example. Suppose you’re
a 65-year-old man who uses the life expectancies in my prior post to
plan a drawdown strategy for your 401(k) balances. You’d see from the
post that your average life expectancy is 18 years, for an average age
at death of 83. Suppose you then decide you can draw down your 401(k)
balance so that it will be exhausted after 18 years. This would be a
bad move, since there’s a 50-50 chance you’ll live beyond those 18 years.
In fact, there’s a 25-percent chance (one out of four) that you’ll live
five years beyond your life expectancy to age 88,
and a 5-percent chance (one out of twenty)
that you’ll live 12 years beyond your life expectancy to age 95.
The life expectancies I described in my earlier post combine the numbers
for both healthy and unhealthy people. If you get moderate exercise,
keep your weight at healthy levels, and don’t smoke or abuse alcohol,
you’ve dramatically increased your odds of living longer than the average
life expectancy -- --[That's not true, much
depends on you genes -- NNB]. And you need to plan
for that.
Let’s look further at the numbers. Suppose you’re a 65-year-old woman.
Your average life expectancy is 21 years, for an average age at death
of 86. But there’s a 25-percent chance that you’ll live five years beyond
your life expectancy to age 91, and a 5-percent chance that you’ll live
13 years beyond your life expectancy to age 99.
One more example: Suppose you’re a 65-year-old man with a 62-year-old
spouse. Given the odds, there’s a 50-50 chance at least one of you will
live for an additional 26 years. If either of you is healthy, chances
are good you’ll beat the averages. For example, there’s a 25-percent
chance your money needs to last 30 years, and a 5-percent chance your
money needs to last 37 years. Now that’s longevity risk!
The bottom line? When planning a drawdown strategy for your 401(k)
balances, I recommend you plan for at least the 25-percent likelihoods
mentioned above, and maybe even the 5-percent likelihoods, particularly
if you take care of your health.
Many retirement planning software programs ask you to input how long
you expect to live. I suggest that you use a life expectancy calculator
which takes into account your lifestyle and family history, such as
the calculators at
www.bluezones.com
or www.livingto100.com.
Then, I’d add five to ten years to the resulting life expectancy, just
to be sure you won’t outlive your money. In this case, it’s better to
plan for the best case scenario than the worst!
Another thing to remember is that it takes a boatload of money to
be retired for so long. This is one of many reasons I encourage you
to do the math to see how much money you need to retire, and consider
working in your “early” retirement years. You don’t want to live it
up in your sixties and seventies, and then be forced to look for work
in your eighties! Making smart decisions now will help you enjoy
all your retirement years.
Here is an advice from the man
with whom I generally disagree
that I can agree with :-). If you have substantial
401K savings try to see if you can delay getting Social Security until you
are 70.
Four years from 66 to 70 make a dramatic difference in monthly payments,
so you can live, say, on $60K a year you need, say $60K*4=$260K from you
401K and other savings to do this trick (actually slightly less then that,
for example $223K that if you use ladder of CDs and bonds with average 3%
return). "If you have a reasonable life expectancy, delay taking Social
Security until you are 70; it is the cheapest, safest
"annuity" you can "buy.". Spend all your 401K, to the last dollar,
if necessary. Don't buy annuity with you hard
earned 401K dollars -- this is a much better plan.
As for 2-3% rule Bernstein advocates, this is pure stupidity: he probably
can't spell Excel correctly ;-). Get you life expectancy from good life
expectancy calculator, add 10% and model it in Excel. It takes
15 minutes to calculate. For example, if I have $500K in 401K savings
and draw $48 a year till $66 (expecting to be able to earn $12K supplementary
income until you are 66), $60K from 66 to 70 and $20K a year after that
my savings will last approximately till 84, if we assume 3.5% average return
(achievable with bond/CD laddering). Average healthy 60 years old male life
expectancy in the USA is approximately in this range. If you are married
and both of you can delay retirement until 70 you probably can get $60K
a year from Social Security alone.
Money manager and The Investor's Manifesto author William Bernstein
on the challenges of investing well for a comfortable retirement
Rather than relying on Monte Carlo simulations, I'd suggest a
simple rule: If you're a 60-year-old withdrawing 2 percent of your
retirement savings annually, you'll be as safe as can be; at 3 percent,
you're probably safe; at 4 percent, you're taking real risks; at
5 percent, you've a good chance of an Alpo diet. (At 70, you can
perhaps add 1 percent to 1.5 percent to these numbers.)
One other recommendation: If you
have a reasonable life expectancy, delay taking Social Security
until you are 70; it is the cheapest, safest "annuity" you can "buy."
Yes, if you die before age 82 or so, you "lose." But losing by living
too long with inadequate income has far more serious consequences.
For 95% of the population stocks, bonds, and paper investments
are an incredibly stupid investment vehicle. Unless you own the
investment bank of course. Boomers, Xers, and Yers would be smart
to realize this. Your Broker is "broker than you" because he gets
paid to sell, not create returns. The Broker gets paid even if you
don't make money, conflict of interest? STOP BUYING THEIR PRODUCTS,
you'd be better off just paying off your debts and saving the excess.
My plan is working well. No debt, ever.
Owning a business that creates profit without accounting trickery,
owning real estate (no debt) that produces a cash return.
I get richer without working much at all. It's hard work for the
first 10 years but it gets exponentially easier after that. Instead
of me being chased by the snowball, I'm chasing it.
PA_Observer:
I'll let others do the moralistic bombast. If your going to maintain
your lifestyle after retirement, you're going to have to be saving/investing
20% of your gross income from day one of employment. The 20% includes
whatever company match you might get. Now, since you're probably
already in debt for that U degree, getting a crappy salary and paying
a ridiculous amount for rent and car insurance, I might as well
said that you needed to save 20 unicorns per year. The honest fact
is, the majority Gen-X's and Y's are going to die in poverty while
the brokerage industry bilks them for every possible cent. If it
was me, CD's at your credit union are good place to keep that small
amount of money that you manage to save.
Goldman’s Behaviour Exposes Fatal Systemic Structural Weaknesses
Debts Owed and Assets Pledged versus Maturity Level of Debts Owed
As witnessed during the S&P’s decline to 666, the stock market
significantly overstates the current value of wealth contained therein.
From the DJIA high of XX,XXX, the decline to X,XXX represented a
loss of XX trillion in wealth. However, only X trillion of cash
was extracted, and that amount is overstated several multiples based
on “trading activity (gambling)” versus actual “redemptions for
cash.”
The stock market represents a hope for future value, yet it is
presented and perceived by most to be a store of value whose present
value--measured by the number of shares you own multiplied by the
last closing price--is equal to your current cash value.
If anything, the last two years should galvanize in every person’s
mind, the absolute fallacy in that way of thinking.
The stock market trades on the margin.
Wealth measured by such a vehicle is elusive at best.
The current recession was brought on because of the occurrence
of a severe mismatch in debts owed versus the ability to pay off
those debts—in CASH. Cash being the ultimate measure of the liquidation
value of an asset.
When the debts owed were due (or called in) it became clear that
nobody had the cash to make the repayment. Assets (those collateralizing
the debts and all other assets for that matter) simply did not have
the cash value people thought the assets represented..
Is this a ponzi scheme? No, not necessarily. It could be simply
a mismatch of Debt Maturity Date versus the Economy’s ability to
repay those debts—in cash.
Except, of course, in this case the Debts Owed were and are based
on Asset Values that are suspect at best. Faulty, and as time went
on even criminally negligent valuations of Debt were put forth and
Cash extracted from the Economy. This is self-evident because those
who sold the Debt (whose valuation was criminally negligent) took
out side bets indicating their belief the Debt they just sold would
NOT be repaid.
What company in America manufactures a product and then makes
a bet the product will FAIL? And, we are not talking about product
liability insurance here, we are not even talking about running
out and betting the number 8 horse at Aqueduct. We are talking about
using a stacked deck to deal a lousy hand to your partner in a poker
game and deal yourself a Royal Flush.
The net result of this has been to expose the system as broken.
The widely held belief of Value which investors have held for years
is shown to be seriously flawed. Your
401(k), your mutual funds, your stock portfolio, your municipal
bond portfolio, your promised pension…they are, very simply, not
worth what you think they are. And they are worth significantly
LESS than you believe.
How much less? Probably much more than you can even imagine.
Does the Government understand what has happened and are they
working to solve the problem?
The simple answer is NO. Government is expanding entitlement
programs and ratcheting up their spending in the face of a private
sector that is providing less tax revenue.
Simple, the government will raise taxes. Wrong answer. Raising
taxes will certainly occur, but once again there is an obvious mismatch
in the Maturity of Debts Owed and the ability to liquidate assets
for CASH to pay those Debts.
Society will be forced to borrow from itself because there is
simply not enough outside investment to provide the CASH owed to
meet the Maturing Debts.
What happens at that point? In fact, what happens when it is
clear that is the only path available to keep the system going?
This is where we are now.
And rest assured, the money will be printed to keep the system
going.
My thoughts do not lead me to think inflation/hyperinflation.
Instead, I think about printed dollars paying for more and more
people’s basic needs and from a wider economic perspective, average
personal consumption declining and “assets” heretofore valued on
a “cash basis” being generally recognized to be worth significantly
less.
One real question is when people “admit” the “cash value” they
believe their “asset” is worth is not a “valid” cash value, how
many will decide they would prefer to have “cash” and see how events
unfold.
The real black swan is likely to be a dash for cash more than
anything else.
When it comes to the fixed-income portion of their portfolios, investors
have a choice: individual bonds or bond funds -- be they open-end mutual
funds or exchange-traded funds (ETFs). For many investors, bond funds
make sense, because of their convenience and diversification. However,
there are many reasons individual bonds are preferable. To demonstrate
the pros and cons of each choice, let us introduce two retirees.
Meet
Betty, who prefers individual bonds. On Saturday mornings, after fiddling
with the engine of her Mustang convertible, she likes to take a walk
with her neighbor, Fred. He is also a retiree, but the fixed-income
portion of his portfolio is in mutual funds. In fact, that's what everyone
says about him. "That Fred sure is a real fund guy."
During their walks (which sometimes lead them to the beach, other
times to the park, occasionally to a monster-truck rally), they often
discuss money. They've found that they're both looking for stable, safe
income from their fixed-income investments. However, their respective
choices have led to significantly different consequences. Those differences
can be broken down into three categories.
1. The "fixed income"
Betty recently invested $10,000 in corporate bonds that will pay 6%
a year for the next seven years. As with most bonds, the interest is
paid semiannually. Thus, she'll receive two payments a year of $300
each. She can plan on this, and budget accordingly.
On the same day, Fred put $10,000 in the Hideyhole Intermediate-Term
Corporate Bond
Mutual Fund, which pays a monthly dividend, as most fixed-income
funds do. Its yield is currently around 6%.
However, the "fixed income" of a
bond fund is not fixed. The payment changes, depending on the bonds
the
fund manager has bought or sold, and the prevailing
interest rates. Fred doesn't know exactly how much he'll receive
from month to month.
2. Safety of principal
On the day that Betty's bond matures, she will receive $10,300: the
$10,000 she originally invested, and the last interest payment. She
knows beforehand when this will happen and can plan accordingly.
As for Fred, he won't know how much his initial investment will be
worth in seven years, or even seven weeks. That's because the net asset
value (NAV) of the fund (i.e., the price of each share of the fund)
changes daily, again depending on the bonds in the fund and interest-rate
fluctuations.
In fact, during the worst of the financial crisis, most bond funds
dropped in value. Here's approximately how much several ETFs dropped
in 2008 from Sept. 9 to Oct. 10.
iShares iBoxx $Invest Grade Corporate
Bond (NYSE:
LQD)
19%
iShares iBoxx $High Yield Corporate Bond
(NYSE:
HYG)
26%
Source: Yahoo! Finance.
People who invested in bonds hoping they would hold up while stocks
fell (the S&P 500 declined by 27% during this period) were in for a
surprise. Fortunately, four of those six ETFs have recovered their losses
and are actually higher today. But they turned out to be more volatile
than many investors expected.
On the other hand -- and this is a really big hand -- Betty
will get her $10,000 back only if the issuer is still in business. Investors
in General Motors, WorldCom, and Lehman Brothers bonds can tell you
that this doesn't always happen. Diversification is important with bonds,
too, and you get that instantly with a bond fund, which owns hundreds
of different issues.
3. Costs
Betty -- whom Fred affectionately refers to as "The Bond Bombshell"
-- bought her bonds through a discount broker. She paid $50 in commissions,
plus a 1% markup, the profit the bond dealer makes on the transaction.
Fred -- whom Betty calls "Elmer Fund" -- pays an annual expense ratio,
as do all mutual fund investors. His fund charges 0.77% per year, which
is about average for a bond fund, although bond ETFs are much cheaper.
That means that his share of the expenses to run the fund is $77 a year.
In seven years, when Betty's bonds mature, her costs will still have
been $150. Over those seven years, Fred will have paid $539 -- assuming,
for simplicity's sake, that the fund's NAV doesn't change, which is
unlikely.
Fred did make sure to buy a no-load fund (i.e., an open-end mutual
fund that doesn't charge a sales commission). Had he chosen a fund that
charged a 3% load, for example, his costs would have risen by $300,
plus there would be $300 less of his principal to earn interest.
Both sides of the fence, and common ground
When Betty and Fred get into a really heated discussion of bonds --
as we all do -- their arguments boil down to these.
Betty: "Retirees buy bonds for stable, reliable income, and they
want to know that they'll get their principal back. You don't get that
with bond funds, and you pay ongoing expenses."
Fred: "Well, you put all your faith in a handful of companies. What
if one of those companies defaults? I've diversified by investing in
a fund that owns hundreds of bonds; if one or two of the issuers go
belly-up, I won't lose my shirt."
Finally, Betty and Fred agree that the "bond vs. bond fund" dilemma
is an individual choice that should be made after thorough research
-- and then forgotten to make more time for monster-truck rallies.
The long-term, capital-gains tax will rise from 15 percent to 20
percent. The tax on dividends will rise from 5 percent or 15 percent
(depending on your income) to a maximum of 39.6 percent, because it
will be treated as ordinary income.
Municipal Bonds
Given that scenario, more investors than
usual may be tempted to look at municipal bonds, which are largely exempt
of state and federal taxes.
Barbara Lane, partner at Citrin, Cooperman & Company in White Plains,
New York, says before investing in municipals, investors should look
at what the effective rate or the rate after taxes if you invested in
something taxable; your net might still be higher with a taxable investment.
"You have to see what kind of rates you can get on both sides and
what kind of tax bracket you are in," she says.
High-grade municipal bonds returned between 11.5 percent and 13 percent
in 2009, as the economy shrank and interest rates fell; few expect the
same kind of performance even with the current Treasury market rally.
Investors also need to know that unlike Treasurys or government-insured
deposit bank products like CDs or money market funds, there is a default
risk with municipal -- or state -- bonds.
The two main varieties are general obligation bonds, which are secured
by a government pledge to use resources such as tax revenues to repay
investors -- and essential service revenue bonds as good examples, which
cover things such as water and sewer systems and projects.
The bottom line: if you're buying them for yield and are willing
to hold them to maturity, then many financial advisors think that municipal
bonds are a great place to be in light of anticipated higher income
taxes.
Education & Health
Another way to offload some income is to make a five-year, tax-free
contribution to a 529 college savings plan. You essentially piggy back
on the annual gift tax exclusion, which for this year is $13,000, and
take five years worth in one tax year. You don't even need to file a
gift tax return.
Raftery says 529s look even better when tax rates
are on the way up -- all of the income and capital gains earned within
the the plan grow tax free, as long as the proceeds are ultimately used
for educational expenses.
"So if I keep my $65,000 in my bank account and I'm earning interest
on it, I pay tax on the interest that the $65,000 earns," says Raftey.
"If I put it into a 529 plan, there is no income tax on the assets in
the 529 plan, and if the income taxes I have to pay are going up, hey,
the tax free investment of the 529 plan looks even better," he says.
For many taxpayers, 2011 will be just the beginning.
Starting in 2013, more new taxes will be
introduced to help pay for the health care reform law. Investment income
and capital gains will likely be subject to an extra tax, say experts,
so those who can might want to cash in on extra income in 2012.
Change aside, experts say investors should not forget about tried-and
true-tax planning strategies of the past.
Steve Wallman, founder and CEO of Folio Investing in McLean, Vir.,
recommends that everyone should look at their investments with an eye
to hold on to good performers and offload losers to strategically harvest
tax losses.
Lane agrees, adding that no matter what
you do for tax-planning purposes, it should also be a good investment
decision.
Yes, willful ignorance is endemic to too many politicians.
In some ways I think this is the advantage of a commission. Certainly
Erskine Bowles understands the math and the public forum provides
at least some hope for public education. Or else it could just be
yet another ideological food fight. We'll see.
My reading of why Simpson was appointed
is to undermines the excuse from the right wing if they refuse to
participate. No one is going to argue that Obama
is stacking the deck with RINO shills, the way Bush did in his Social
Security Commission that only invited members who believed in private
accounts.
Anyway, the commission is going to recommend raising payroll
taxes (hopefully by raising the taxable maximum) and raising the
retirement age. There is probably some sentiment for some kind of
means testing (so-called "progressive price indexing") although
I think that comes at the price of raising minimum benefits or benefit
levels for those beyond some age.
As I recall, Reagan and Tip O'Neill
came to a compromise that did "save" or extend the solvency of SS
back in the early 80s. Unfortunately, the money raised was used
for other purposes instead of being put into a "lock box."
I can't cite you chapter and verse, but when Bush was trying
abolish SS, a lot was written on how the doomsday numbers were by
no means a certainty... How it wouldn't be that hard to fix whatever
problems there were through gradual tax increases... And how transitioning
to a private accounts system, even a partial one, was going to cost
about a trillion...money that could be used to shore up the system.
The real problem appears to be Medicare
and Medicaid.
If we were REALLY thinking long-term, we'd also say that
this great Boomer bulge is just that,
a bulge. After we, the bulge, pass through the snake, the demographics,
I believe, are likely to return to more manageable levels, where
the ratio of workers to retirees is more in balance.
The bulge, however, will consume the entire purse of money. As
you say, the system can be fixed with sizable tax increases, but
doing that all but negates the benefit. In short, people in my generation
will be asked to increase our contribution to the system during
our working years, but our benefit on the back end (in retirement)
will decrease. Thus, the system becomes more of a hindrance than
a benefit.
Your generation has had some pretty good sized tax cuts, and
those of your generation who make over $100,000 per year are paying
a smaller percentage of their total income than my generation did
during my last working years. You can just as easily afford to pay
more FICA to cover the future needs of Social Security as my generation
could afford to pay the high income tax rates we had.
By far the biggest difference in our generations is that my generation
was willing to pay our share of taxes without the constant whining.
Yours isn't.
Each time the Catfood Commission holds its secret meetings, Alex
Lawson of Social Security Works has been outside with his camera, shooting
video of the closed front door as
FDL runs a live stream on our front page. The Washington Post
wrote it up recently. As committee members go in and out of
the room Alex asks them questions when he can, and yesterday he had
an exchange with Alan Simpson that was…well, extraordinary.
Simpson is apparently a graduate of the Bobby Etheridge school of
charm. Alex Lawson was incredibly respectful and polite as the crankly
Simpson berated, interrupted and cussed him. Simpson has been a long-time
supporter of rolling back the New Deal, and when asked about cuts he
would recommend to the President and Congress
on CNBC, Simpson said “We are going to stick to the big three,”
meaning Social Security, Medicare and Medicaid. His sentiments
haven’t changed.
CJR’s
Trudy Lieberman recently ran down Simpson’s history of delicate
statements on the subject of Social Security. He is equally
decorous on camera with Alex, who clearly knows a great deal more about
the subject than he does. Simpson starts from the premise that
the Treasury will default on the bonds issued to the Social Security
trust fund, because all the best people apparently know that it’s better
to default on America’s senior citizens and plunge them into poverty
than it is to default on, say, the Chinese.
Despite Simpson’s assertions, raising the retirement age to 70 IS
a benefit cut. It would put an estimated
1.5 million senior citizens into poverty. After two years
of watching billions of dollars in taxpayer money being paid out to
Wall Street CEOs in lavish bonuses while the White House
breaks every promise they’ve made to rein them in, that takes a
fat load of nerve.
The commission is also looking into cutting Medicare benefits, because
the deal guaranteeing no-bid Medicare contracts to the pharmaceutical
industry by both Republicans and Democrats can’t possibly be abrogated.
The committee claims it’s independent, but it’s not THAT independent.
So, old people, too bad for you.
Erskine Bowles has returned to run
the same play he ran during the Clinton administration, when he
negotiated the secret deal between Bill Clinton and Newt Gingrich to
cut Social Security benefits. Despite warnings from both
John Boehner and John Conyers that the commission will report its
recommendations to a lame duck Congress who could pass it before the
end of the term. Both Harry Reid and Nancy Pelosi have promised
to bring the commission’s proposals
up for votes.
In the absence of any transparency coming from the committee about
what transpires in its secret meetings, Simpson’s comments to Alex are
the best insight we have into what is being discussed there.
Bottom line: bon apetite, Grandma!
ALAN SIMPSON: We’re really working on solvency… the key is
solvency
ALEX LAWSON: What about adequacy? Are you focusing on adequacy as
well?
SIMPSON: Where do you come up with all the crap you come up with?
SIMPSON: We’re trying to take care of the lesser people in
society and do that in a way without getting into all the flash words
you love dig up, like cutting Social Security, which is bullshit. We’re
not cutting anything, we’re trying to make it solvent.
SIMPSON: It’ll go broke in the year 2037.
LAWSON: What do you mean by ‘broke’? Do you mean the surplus
will go out and then it will only be able to pay 75% of its benefits?
SIMPSON: Just listen, will you listen to me instead of babbling?
In the year 2037, instead of getting 100% of your check, you are going
to get about 75% of your check. That’s if you touch nothing. If you
like that, fine. You’ll be picking with the chickens yourself when you’re
65.
So we want to take care, we’re not cutting, we’re not balancing the
budget on the backs of senior citizens. That’s bullshit. So you’ve got
that one down. So as long as you’ve got those two things down, you can’t
play with anymore, that we’re not balancing the budget of the United
States on the backs of poor old seniors and we’re not cutting anything,
we’re stabilizing the system.
LAWSON: Thanks for being so frank. My question is: raising
the retirement age, is actually an across-the-board benefit cut?
SIMPSON: There are 15 different options being discussed in
here today, and why nail one of them…[inaudible]…if you would like to
get one of them that pisses your people off.
LAWSON: Alice Rivlin was just on CNBC saying that that was
one of the favorite methods.
SIMPSON: There are 15 of them in there. All of them have to
do with stabilizing the system, which we are told is insolvent, it’s
paying out more then it’s taking in.
LAWSON: Right now?
SIMPSON: Yes.
LAWSON: But what about the $180 billion in surplus that it
brings in every year?
SIMPSON: There is no surplus in there. It’s a bunch of IOUs.
LAWSON: That’s what I wanted to actually get at.
SIMPSON: Listen. Listen. It’s 2.5 trillion bucks in IOUs
which have been used to build the interstate highway system and all
of the things people have enjoyed since it has been setup.
LAWSON: Two wars, tax cuts for the wealthy.
SIMPSON: Whatever, whatever. You pick your crap and I’ll pick
the real stuff. It has to do with the highway system, it was to run
America. And those are IOUs in there. And now there is not enough coming
in every month. You’re paying in every month for me. I appreciate that,
I really do.
LAWSON: Which is how the system was setup, that the current
generation funds the retirees.
SIMPSON: When I was your age there were 16 people paying into
the system and 1 taking out and today there are 3 people paying into
the system and 1 taking out.
LAWSON: But isn’t that the good news.
SIMPSON: And in 15 years there will be 2 people paying in,
what’s good news about that?
LAWSON: Didn’t they plan for that, which is why they’ve been…
SIMPSON: Of course not because they thought … the retirement
… they that you would die at 57 and that’s why they set the date at
65. If you can’t get through this stuff, then why do you spread this
crap. The thing was setup when the life expectancy was 57 years and
that’s why they set 65 as the retirement date. Now the life expectancy
is 78, whatever it is, and so we have to adjust that and make it work
for the future people like you in the United States.
LAWSON: But here’s one question on that, and thanks again for
being so frank, life expectancy is not equally distributed across the
income spectrum.
SIMPSON: That’s true. We know that.
LAWSON: The life expectancy gains is actually this 5.5 years
difference between the wealthiest…[inaudible]…and the…
SIMPSON: We know that, we talk about that. We talk about everything
you know. But if you just want to use flash words…
LAWSON: No flash words. I just wanted to zero in on a few things
and you’ve hit most of them. The worthless IOUs.
SIMPSON: Use honesty.
LAWSON: I am. I’m being honest.
SIMPSON: No, no you’re not.
LAWSON: The worthless IOUs that actually goes back to 1936.
SIMPSON: They’re not worthless, there are IOUs in there.
LAWSON: Backed by the full faith and government, full faith
and …..
SIMPSON: You’ve got it, full faith and credit.
LAWSON: Full faith and credit.
SIMPSON: That’s absolutely true.
LAWSON: There we go. They’re bonds just like any other bonds.
That the government has to pay back.
SIMPSON: That’s right. But there are not people involved. It
is the government and the government.
LAWSON: Well, it’s actually the government and the citizens,
right? The government doesn’t actually own the bonds, it’s the government
owing…
SIMPSON: Let me say things in a way so your fans will understand
this, so you can go and be a hero. There is not enough in the system
by the month to pay in, to pay out what comes in. In other words, there
is more going out, than coming in. That happened 3 or 4 weeks ago.
So, what do they do? They go to that trust fund and say, ‘We need
the IOUs out of it.’ And they say, ‘You can have them, but you have
to pay for them.’ So you’re taking a double hit on your own government.
Makes no sense. The government goes and says, ‘Hey, here’s that 2.5
trillion IOUs, now we need some money out of that system because we
haven’t got enough to pay this month.’ And they say, ‘Great.’ So the
government gets a double hit.
LAWSON: Thanks so much Senator. We obviously have a very different
understanding of the system.
SIMPSON: Yes we do. But we are all involved in one thing, not
secrecy.
LAWSON: No, I understand that. But in my understanding from
actually looking at the 1983 commission, they actually started prefunding
the retirement of the baby boom by building up that huge surplus.
SIMPSON: They never knew there was a baby boom in ’83.
LAWSON: But actually they knew there was going to be demographic
issues when the set up Social Security, so they actually predicted…
SIMPSON: They never dreamed that the life expectancy from 57
years of age to 78 or 75 or whatever. Who would dream that? No one.
They just died. People worked. Social Security was never a retirement.
It was setup to take care of poor guys in the Depression who lost their
butts, who were digging ditches, and it was to give them 43% of their
wages…when they got out…and that’s what it was. It was never a retirement.
It was an income supplement.
LAWSON: Well it’s actually an income insurance, right? It’s
a wage insurance program to replace lost wages due to death, disability
and old-age. But, it’s definitely an insurance program meaning that
the people own the insurance, right, their giving money in, in expectation
that it’s their money to come out.
SIMPSON: That’s right. And they’re going to get their money.
But right now, to get their money, which has all been used and consists
of Treasury Bills, the government has to go and get it out of there
and pay it and say, ‘Here’s some money for you.’ So you don’t diminish
the 2.5 trillion bucks. So it’s got your government putting up money,
which increases the deficit to get this money out to go to the beneficiary.
LAWSON: But that’s not Social Security that’s increasing the
deficit, because it’s still bringing in more money than goes out.
SIMPSON: The government of the United States has to take separate
money out of some stack to get the IOUs out of Social Security, that’s
a double hit and that increases the deficit.
LAWSON: But what I’m telling you is Social Security is separate though,
from the general budget, right? It’s totally in the green.
SIMPSON: But it wasn’t. Just four weeks ago, there wasn’t as
much coming in as going out.
LAWSON: Except you’re not calculating the interest paid on
the bonds, because, if you do include that, it’s still in the green
this year.
SIMPSON: Well you can go through all the sophistry of babbling
that you want to.
LAWSON: It’s not sophistry. It’s just what the SSA says. So
I’m just going on the numbers.
SIMPSON: You need to read the report of the Social Security
Administration, the one that was given to us. Have you got a copy?
LAWSON: I’d love a copy.
SIMPSON: I’ll get you that. In fact, I’ll have a guy give that
to you. You need to have that. And it’s good for you.
LAWSON: That would be fantastic. Thanks so much Senator
I know where you’re coming from. I’ll never forget getting my statement
and realizing that thanks to the stock market (remember when we were
supposed to privatize Social Security?) I had lost more than my annual
salary in one month.
SIMPSON: Whatever, whatever. You pick your crap and I’ll pick
the real stuff.
I am guessing the rest of the Catfood Commission feel the same way
about their two wars. Actually Pete Peterson is one of the biggest warprofiteers
and financial arsonists of anyone. But they think “our crap” are wars
and redistribution of more wealth to the more wealthy. So “their crap”
is Highways?
Perhaps someone should call up the Veal Pen and tell AARP about Peterson’s
opinion of the elderly. That they are old and in the way and why do
they not die sooner. The old people need to be patriotic and stop living
so long and help the millionaires and the billiionaires of the Catfood
Commission.
Simpson said “We are going to stick to the big three,” meaning
Social Security, Medicare and Medicaid.
Someone ought to tell Simpson that the “big three” are Iraq, Afghanistan
and Korea. The trillion dollars we’ve already spent on Afghanistan would
have gone a long way to paying back the Soc. Security fund. But, hey,
I guess that’s way too easy.
Someone should also tell Mr. Simpson that since no one over the age
of 50 can find a job nowdays, if they tinker with the retirement age
they might as well send everyone over 50 a loaded gun so they can just
shoot themselves and help the Beltway crowd keep those wars going at
all costs.
Let’s see: all Republicans will vote with Simpson’s and Bowles’s
recommendations, and so will the Blue Dogs.
The Secretary of Treasury is the Chairman of the Boards of Trustees
of the Social Security and Medicare trust funds. He serves with five
other trustees, three from the Federal government (the Commissioner
of Social Security, the Secretary of Health and Human Services and the
Secretary of Labor) and two public trustees who are appointed by the
President and confirmed by the Senate.
Unless FDL helps mobilizing physical demonstrations, the one pronged,
inside the Beltway track approach is not going to stop the Obama driven
American train wreck.
So now the newest talking point on Social Security from a Republican
Senator is that the Social Security Trust Fund is all IOU’s due to funding
our Interstate Highway System???
Someone please explain, if our Social
Security Fund is full of IOU’s and there is no surplus as stated by
Senator Simpson, is he implying that all FICA taxes immediately coming
to the Trust Fund are sent back out to current recipients? This does
not make sense. And…why were previous administrations “allowed” to leave
IOU’s in the Trust Fund? Aren’t those “IOU’s” government bonds? We can
fund endless wars but not repay the government bonds for Social Security???
Kiplinger presents idiotic figure $1 million as need for retirement
if you wish to have $40K a year. Use spreadsheet with your data to find
out real figure (life expectancy estimates can be obtained from various
sources see Calculators;
just do not lie too much entering the data ;-). Kiplinger data
are blatantly incorrect. For most couples with Social security (let's say
$2K for husband and $1K for a wife), and life expectancy 84 for a husband
and 90 for a wife $500K is enough, if we assume retirement age 62.5, living
of savings till 66, getting Social security and 0% after inflation return
(TIPS). What is important is to have as much as possible of this savings
in Roth so that you use after tax savings and Roth the first 10 years in
retirement when you can still active, can travel and such. Avoiding taxes
the first 10 years is very important (for example medical expenses
are not taxed in flexible medical accounts). Without Social Security
$800K is enough for the same couple.
May 30th, 2010
constantnormal:
Kind of a deceptive chart … applicable
ONLY if one is generating their entire retirement income from savings
(as in IRA/401K). But that is rarely the case, as
most people (at least for a little while longer) will be able to
get something out of Social Security (a damn sight less than they
put in, to be sure, but then Social Security never has been a savings
plan — it is instead and always has been — a literal Ponzi scheme,
dependent upon new contributors to pay the benefits of existing
retirees), and again most people will have some meager pension income,
despite the severe whackage that corporations have delivered to
their pension plans in the past several decades (at least the employee
pensions, executive pensions remain robust).
Instead of looking first at how much
you need to save, I think it is much better to try and estimate
how much income you will require, then set about building some sort
of financial scheme to deliver that income. And as
for the amount needed to live on in retirement, I can tell you to
expect to spend AT LEAST as much as you were spending when you were
working. That old canard about needing less money to live on in
retirement is bunk, having been shattered by rising taxes, soaring
health care expenses, and a general unpredictability about the future.
This may not apply to the uppermost 1%, but they already have their
retirement covered, courtesy of a societal money pump that has operated
for many decades, delivering a sizable advantage to the wealthy
over those less fortunate.
And as you are constructing your personal models of where your
income will arrive from, you may as well steer toward the safe side,
and omit Social Security, as about the only remaining approach to
preserve that system is to implement later retirement ages, and
tax the bejesus out of any individual savings you have managed to
accrue.
And in your retirement planning,
don’t forget to consider spending your retirement outside the USofA,
in some nation with a working health care system, that doesn’t tax
you to death, and has a considerably lower cost of living. Such
places exist.
gorobei:
With 30 year TIPS yielding 1.8%, you can pretty much give up
on the financial planners that talk about “average 8% growth” or
whatever. The current world is not constrained by a lack of capital,
so don’t expect excess returns because you have $100K to offer for
the long term: we arbed that out years ago, and the move to IRAs,
etc, was a one-time boost.
So, you have 50 years (age 20-70) of work to support yourself
for 20 years (70-90.) You should be saving around 30% (call Social
Security 13%, so please sock away 17% extra per annum.)
Feel free to adjust if you are in a special situation, e.g. real
income growth potential (most people do not.)
constantnormal:
Another thing that strikes me as nonsensical is the assumption
in the chart that people will be able to postpone retirement indefinitely.
At some point, the inability of the senior employees to change with
the business, and learn new ways of doing their jobs (which can
be counted on to change radically), will push them out the door
into a retirement they are not prepared for, or into a pointless
and fruitless quest for minimum wage work, competing with high school
kids and illegal aliens.
CitizenWhy:
I wonder about the numbers in this scheme. My retirement savings
(at 67) shriveled to a piddling $175,000. This gives me a guaranteed
minimum of nearly $10,000 per year (higher this year). I get a much
higher amount from Social Security. If I play things right I pay
no taxes. I have no work expenses, like suits. So my take home income
is pretty good, especially since I moved to a nice, big, cheap apartment
in a nice minority-majority neighborhood that is gentrification-resistant.
And I have no car, with the pubic bus stopping at my door. I do
not use prescription drugs but buy certain supplements. I live very
modestly but can afford events in the arts, eating out often enough,
small luxuries, a gym membership. I never owned a house.
I am the poor relation but I get along fine. I’d much rather
live in my neighborhood than in “prestigious” neighborhoods. People
can live more modestly, and better, than they think. Keep things
simple.
RW:
The living solely on savings AKA million bucks model is simple
minded and probably not a good fit for most people or at least those
who would consider being sent out to pasture rather tedious.
For example, accepting the 4% drawdown figure for the moment
(not unreasonable), it’s obvious that earning $1000 bucks a month
from any other source — part-time work, hobby, eBay, etc. — means
you would only need $700,000 in savings to make the same monthly
$ nut a million bucks would generate (12,000/yr = 300,000 x 4%).
If you can reliably (and pleasurably) earn money going forward
and have accumulated an adequate disaster fund — major medical,
inability to work, go to hell money, that kind of thing — then fretting
about how far away you are from a net-worth of a million bucks doesn’t
make much sense; it’s not the model you are following.
Tarkus:
I think it is a misnomer to use the word “Save” anymore. What
they really mean is “Are you INVESTING properly for retirement?”
With rates so low on saving accounts, the Fed is basically forcing
you to seek risk just try and maintain parity (“try”, as all investments
will entail some risk of loss). Also, the hidden tax of inflation
is an incentive to spend now before it is worth less (a “savings”
disincentive). It is a treadmill that continues to speed up, and
according to Wall St, you must also now become a good, knowledgeable
financial analyst because they do not provide good advice (translation
– you must do whatever job you happen to be doing, AND do their
job better than they do – for yourself).
franklin411:
I wonder if this chart takes the difference in life expectancy
into account. People live about 15 or 20 years longer now than they
did in the 1920s. This means that the people who made it to retirement
in the 1920s either died quickly or they had really good genes (meaning
they had low medical costs in retirement).
Today, people live longer and having a few bad genes isn’t automatically
a death sentence, meaning that medical costs are higher.
How the Common Man Sees It :
I think CitizenWhy laid out one of the best benefits of retirement.
Because you are no longer dependent upon a stationary job you have
mobility. Most of the best jobs also are in large population areas
which tends to increase your cost of living. By moving to a place
that has a smaller population you can reduce your costs. If you
move to a warmer climate you can reduce your expenses that way too.
The chart also lays out what costs look like in 2010. Buy the
time most of us are retiring in 10 – 40 years that number will be
closer to 2 – 8 million but it is the cash flow that matters most.
It is better to get a 20% return on 1 million than it is a 4% return
on 3 million.
rileyx67:
Always saved 10% of income, which was the “advice” some years
back, and when unable to do so, worked a second part-time job to
cover and meet the “deficiency”. Spent last 5.5 years with my company
taking a 25% pay cut “building an ESOP, whose value reached over
$400,000, but by the time I retired and able to sell, was less than
$40,000. Same company( United Airlines) subsequently, in bankruptcy
court was permitted to void themselves of all Defined Benefit pension
plans, so thus left with one third former from the PBGIC! Am completely
comfortable and anxiety free, thanks to that 10% “rule”, plus some
sound investing advice from this and other sites.
... AND for those “thinking” will
need to work past the normal retirement age, good luck with your
health to be able to do so…but “good luck” is hardly a PLAN!
But will Main Street exit? Will we ever learn? No. The Wall Street
casino makes mega-billions for insiders like Blankfein and the Goldman
Conspiracy. Yet "The Casino" is still below the 2000 record of 11,722.
So after accounting for inflation, Wall Street lost over 20% of Main
Street's 401(k) retirement money between 2000 and 2010. Yes, Wall Street's
a big loser the past decade. Their advice is self-serving. Period.
... ... ...
Correction or new crash...
...Gary Shilling said price-to-earnings ratios are at a "nosebleed
22.5 level." The Dow was around 11,000. Money manager Jeremy Grantham
recently said the market's overvalued 40%. That could mean a collapse
to 6,600. Last week in Reuters' "Markets Could Be Derailed Again," George
Soros echoed a "game over" warning with a "stark warning ... that the
financial world is on the wrong track and that we may be hurtling towards
an even bigger boom and bust than in the credit crisis."
Looks like 401K investors are being taken further and further
out to sea without a life jacket. And all they will be hearing from
the crew when the boat go overboard, are going to be recommendation
like "have a nice swim, suckers".
The other problem is that every form of wealth accumulation
has ultimately been stolen from the middle classes and they are
not inclined anymore to play those games. You cannot steal from
people with inflation and then taxes and then stagflation and then
debt encumbrance and then... you know that list too.
Worst of all, the middle class is counting on transfer payments
to bail them out. Wait until they discover that the value of the
transfer payments will be inflated away. Even if they have an alleged
inflation tracking mechanism in their pension,
the bogus CPI calculation will assure
that it doesn't track actual living expenses.
The government must be planning on
a deadly epidemic or a meteor strike to bail it out, because there's
going to be a lot of very unhappy middle-class boomers hitting retirement
over the next 20 years, and no way to keep them fed and housed.
Mr Slippery :
sm_landlord wrote:
there's going to be a lot of very unhappy middle-class boomers
hitting retirement over the next 20 years, and no way to keep them
fed and housed.
I met a lady at a volunteer function Thursday whose father, age
74, was forced out of retirement after losing half his retirement
funds in 2008 melt down. She told me he was 100% in stocks at the
time.
Byzantine_Ruins:
Mr Slippery wrote:
I met a lady at a volunteer function Thursday whose father,
age 74, was forced out of retirement after losing half his retirement
funds in 2008 melt down. She told me he was 100% in stocks at
the time.
Yah. After the meltdown in 2008, I got to talk with a lot
of well-off people due to lucky circumstances.
70 year old men, mourning they had been wiped out.
BROKERS selling complex securities that they once contended were
safe and sound have saddled individual investors with billions in losses
since the credit bubble burst. Remember auction-rate securities? Those
were peddled to investors as just as good as cash — until they no longer
were after that market seized up in 2008.
Questions about how Wall Street marketed yet another complex product,
sold as solid and secure, are now emerging in investor arbitration cases.
The instrument is named, inaptly as it turns out,
“100 percent principal protected absolute
return barrier notes.”
These securities are essentially zero-coupon notes sweetened by tying
the return, in part, to the performance of an equity index, like the
Standard & Poor’s 500 or the Russell 2000. The securities promise to return an investor’s principal, typically
at the end of 18 months, with the added gain from the index’s performance
if that index trades within a certain range. Brokerage firms often issued
these securities.
For an investor in one of these notes to earn the return of the index
as well as get the principal back, the index cannot fall 25.5 percent
or more from its level at the date of issuance. Neither can it rise
more than 27.5 percent above that level. If the index exceeds those
levels during the holding period, the investors receive only their principal
back.
Convoluted enough for you?
Yet, these securities appear to have
been sold to conservative individuals whose financial market forays
were usually limited to certificates of deposit. Many of these investors,
to their great misfortune, bought principal-protected notes issued by
Lehman Brothers.
They are now worth pennies on the dollar.
CORINNE and Gregory Minasian were two of these investors who, at
the suggestion of their broker at
UBS, sunk almost $100,000 — more than
half of their savings — into Lehman notes in early 2008.
They lost everything and have filed an arbitration case against the
firm to recover their losses.
The Minasians are a retired couple who live on Long Island.
They contend that their UBS broker pushed
the investment when one of their C.D.’s matured. The
broker failed to explain the risks in the security, the Minasians said,
and did not provide them with a prospectus. They did not even know their
investment had been issued by Lehman Brothers until the firm collapsed.
“I am not a sophisticated investor,” said Mr. Minasian, a former
engineer who is 68. “Many years ago I dabbled in the stock market, but
I learned my lessons. Over the past 10 to 15 years my wife and I invested
in C.D.’s.”
But that approach changed in January 2008, when, according to the
Minasians, their UBS broker began calling with an investment idea —
principal-protected notes. “We questioned him over and over,” Mr. Minasian
said. “We initially told him we weren’t sure and that we wanted to think
it over. Maybe the next day he called us and told us he was putting
his father into the same notes and his father is very conservative.”
The Minasians said they decided to buy the instrument because they
were assured by UBS, a financial adviser they had dealt with for years,
that it was safe. The thing was called a “principal protected” note,
after all.
Eight months later, Lehman went bankrupt. The note was virtually
worthless.
Mrs. Minasian, 67, said she and her husband
did not receive notice of problems with the investment until mid-October,
when they received a form letter from UBS saying the value of their
investment was “unavailable.”
“I opened the letter and said, ‘Why are we getting this?’ ” Mrs.
Minasian said. “As I read it and we were wondering if it in fact did
pertain to us, my heart sank. I almost fell on the floor.”
UBS sold $1 billion of these notes to investors.
Commissions were 1.75 percent, far higher
than those generated on sales of C.D.’s. When Mr. Minasian asked about
the commission, he says, his broker said there was none.
A spokeswoman for UBS, Karina Byrne, said, “UBS properly sold Lehman
structured products to UBS clients, following all regulatory requirements,
well-established sales practices and client disclosure guidelines.”
Client losses, she added, were the result of the “unprecedented failure”
of Lehman Brothers.
... ... ...
Add these securities to the growing pile of Wall Street inventions
that benefit ... wait for it, wait for it ... Wall Street.
[Apr 23, 2010]
time-to-replace-the-4-ruleRetirement-Savings Withdrawal Strategy Is
Flawed, but Replacement Is Complex
What a f*#cking retards those guys are. Did they ever suspect about
the existence of Excel and longevity estimators?
How much -- when the time comes -- should you withdraw from your
accounts earmarked for retirement? Answer that question correctly and
you get to enjoy the retirement of your dreams. Answer it incorrectly
and you either outlive your assets or you leave more money to your heirs
than planned.
Conventional wisdom suggests that you withdraw on average 4% adjusted
for inflation. Now comes a paper co-authored by William Sharpe, the
winner of the 1990 Nobel Prize in Economics, challenging the conventional
wisdom.
"It is time to replace the 4% rule with approaches better grounded
in fundamental economic analysis," wrote Sharpe in his paper "The 4%
Rule -- At What Price?" (That paper appeared in The Journal of Investment
Management in 2009, but resurfaced last week in the financial-adviser
community and is sparking debate anew.)
"Supporting a constant spending plan using a volatile investment
policy is fundamentally flawed. A retiree using a 4% rule faces spending
shortfalls when risky investments underperform, may accumulate wasted
surpluses when they outperform and, in any case, could likely purchase
exactly the same spending distributions more cheaply."
Having a surplus is a problem. It means that you spent less than
you could have in retirement, that you short-changed yourself. It means
you could have spent more traveling to exotic places or visiting family
and friends or splurging on your hobbies and philanthropic endeavors.
Having a shortfall is a much bigger problem, however. It means that
you lived too large, too fast. And while it might not mean eating dog
food late in life, it sure as heck could mean a much lower standard
of life as you age.
According to Sharpe, who is also the founder of Financial Engines,
the typical 4% rule recommends that a retiree annually spend a fixed,
real amount equal to 4% of his initial wealth, and rebalance the remainder
of his money in a 60%-40% mix of stocks and bonds throughout a 30-year
retirement period.
What's more, he shows the price paid for funding what he calls "unspent
surpluses and the overpayments made to purchase its spending policy."
According to Sharpe, a typical rule allocates 10%-20% of a retiree's
initial wealth to surpluses and an additional 2%-4% to overpayments.
By the way, the improvements to the strategy include changing the
amount to withdraw based on market performance, or the length of the
plan, or the portfolio mix, or the rebalancing frequency, or the confidence
level.
Sharpe's study, in essence, shows that retirees waste money by adopting
the 4% rule. "The 4% rule's approach to spending and investing wastes
a significant portion of a retiree's savings and is thus prima facie
inefficient," Sharpe wrote.
Instead, he suggests that retirees consider "maximizing their expected
utility," an approach advocated by financial economists. "While we still
may be far away from such an ideal, there appears to be no doubt that
a better approach can be found than that offered by combinations of
desired constant real spending and risky investment. Despite its ubiquity,
it is time to replace the 4% rule with approaches better grounded in
fundamental economic analysis."
These are points, said Boston University economics professor Zvi
Bodie, "that have long been known to academics."
The only problem with what academia knows to be right and what's
practical in the field -- even by Sharpe's own admission -- is this:
"Many practical issues remain to be addressed before advisers can hope
to create individualized retirement financial plans that maximize expected
utility for investors with diverse circumstances, other sources of income,
and preferences," Sharpe wrote in his paper.
Nothing Better Than 4% Rule
E. Tylor Claggett, a finance professor at the Perdue School of Business
at Salisbury University, said the question of whether it's time to toss
the 4% rule in the circular file is an old one and it has always been
perplexing.
"The truth is, no one has a crystal ball," he said. "Therefore, no
one knows how long the retiree will live, what his or her actual future
financial needs will be (due to health issues and the like) and the
future year-to-year performances of the various capital market components.
If all of these were known, we would not have to have this discussion.
Instead, we are left with looking for 'rules-of-thumb' to increase the
probability that a retiree's needs will be met given his or her asset
base at the time of retirement."
Others agree.
"It may be true that from an academic standpoint the 4% rule is less
efficient than a more fine-tuned, more complicated approach that adjusts
the withdrawal percentage based on time horizon and ongoing performance,"
said Rande Spiegelman, vice president of financial planning, Schwab
Center for Investment Research. To Spiegelman, any rule of thumb, no
matter how useful for long-term planning purposes, has limitations when
applied to individual facts and circumstances.
So instead of slavishly following any approach, Spiegelman says it's
always a good idea to remain flexible. "The 4% rule is easy to understand
and follow, and provides a good starting point for the average investor
looking for a ballpark idea of how much they need to save or, conversely,
a ballpark estimate of how much they can safely withdraw," he said.
Meanwhile, Stephen P. Utkus, a principal with the Vanguard Center
for Retirement Research, agrees that the 4% rule is flawed. But he also
notes, as did Sharpe, that there's no practical mechanism to replace
it with and that further research is required.
In the paper, Sharpe hinted at one strategy, which involves the purchase
and sale of a complex set of options, but this, said Utkus, is "a technique
that is not practical today and doesn't not exist in the real world
of consumer finance."
Right now, Utkus said there's a big gap between academic theory and
practice.
"Until academic methodologies come to a more practical set of solutions
for households, they remain conceptual approaches, not strategies that
can be implemented today with real-world clients and investors," said
Utkus. "Over time, of course, the challenge is for academic models to
become more real-world, and for real-world practitioners to learn from
the academic models. Right now, there is a sizeable gap."
Meanwhile, academics are debating various models of what optimal
draw-down methods should be, though by no means is there any settled
consensus on the issue. What Sharpe's statement is saying is that, according
to an economic model we have constructed, the 4% rule is flawed. Fair
enough.
Robert Powell is the editor of Retirement Weekly.
Robert Powell has been a journalist covering personal finance
issues for more than 20 years, writing and editing for publications
such as The Wall Street Journal, the Financial Times,
and Mutual Fund Market News.
Price:$20.45 & eligible for FREE Super Saver Shipping
Why are we in such a financial mess today? There are lots of
proximate causes: over-leverage, global imbalances, bad financial technology
that lead to widespread underestimation of risk.
But these are all symptoms. Until we isolate and tackle fundamental
causes, we will fail to extirpate the disease. ECONned
is the first book to examine the unquestioned role of economists as
policy-makers, and how they helped create an unmitigated economic disaster.
Here, Yves Smith looks at how economists
in key policy positions put doctrine before hard evidence, ignoring
the deteriorating conditions and rising dangers that eventually led
them, and us, off the cliff and into financial meltdown.
Intelligently written for the layman, Smith takes us on
a terrifying investigation of the financial realm over the last twenty-five
years of misrepresentations, naive interpretations of economic conditions,
rationalizations of bad outcomes, and rejection of clear signs of growing
instability.
In eConned, author Yves Smith reveals:
why the measures taken by the Obama Administration are mere
palliatives and are unlikely to pave the way for a solid recovery
how economists have come to play a profoundly anti-democratic
role in policy
how financial models and concepts that were discredited more
than thirty years ago are still widely used by banks, regulators,
and investors
how management and employees of major financial firms looted
them, enriching themselves and leaving the mess to taxpayers
how financial regulation enabled predatory behavior by Wall
Street towards investors
how economics has no theory of financial systems, yet economists
fearlessly prescribe how to manage them
I have been a huge fan of author Yves Smith's Naked Capitalism
blog for years now, and this book is a major triumph, putting in
one place and fully developing the major themes that Smith has explored
on her blog over the course of the recent financial crisis. While
this might appear to be well-plowed territory,
Smith tells it as an economics story
that is really a story of a failed democracy.
The linchpin of her work is the ascendant power of Wall Street
over Main Street during the Greenspan era and now the Bernanke era.
Complicit with politicians, financial regulators, and the revolving
door of government service, the big
Wall Street firms and banks have, according to Smith, seized the
political process to serve their narrow, financial interests instead
of those interests that serve a well-functioning polity.
However, despite the seemingly inflammatory thesis, this book
is no rant. Smith, an industry insider, is one of the smartest
and expert observers of the flawed process that we now have, and
the book is loaded with incisive explanations that pull it all together
for the average reader in clear and at times thrilling language.
In the broadest sense, this is a
moral tract as much as an economics and political one.
The moral outrage, while controlled and polite, is palpable
on every page. In essence, this is a deeply informed book that does
what economics and political tracts almost never do: it tugs at
the heart as well as at the mind.
10% annualized return is probably unrealistic and mathematic is incorrect,
but the idea of a comparison is valuable. It just need to be recalculated
with average 4.5%-5.5% return as a more realistic possibility (1% over inflation
is an achievement for a typical 401K investor in 10 year periods). Also
if we assume that taxes will increase that also changes that dynamic. It
might be better to pay roughly 30% in taxes today and maxout ROTH.
Here’s an exercise I did. I assumed $50k salary, 28% income tax bracket,
3.5% inflation, and 10% investment return over 30 years. I considered
4 scenarios: contributing $5000 to each of a 401(k) with no match, a
401(k) with a 50% match, a Roth IRA, and regular taxable accounts. For
comparison, I calculated the future value of the income tax that is
paid today in each scenario. The math shows
that a 401k without a match really isn’t worth it. Let
me know if you find an error in my calculations.
$5000 contribution to 401k with a $2500 match.
Taxes are 28% of $45000=$12,600.
In 30 years, that investment is worth ~$119k. Taxes are $33,312 (28%
income tax)
The future value of the $12,600 income tax you paid is $35,366.
NET FUTURE INCOME: 118,973-33,312-35,366 = $50,295
$5000 contribution to Roth.
Taxes are 28% of 50000=$14,000.
In 30 years, that investment is worth ~$79k. Taxes are $0 (not taxable)
The future value of the income tax you paid is $39,295.
NET FUTURE INCOME: 79,315-39,295-0 = $40,020
$5000 contribution to Taxable account.
Taxes are 28% of 50000=$14,000.
In 30 years, that investment is worth ~$79k. Taxes are $11,897 (15%
capital gains)
The future value of the income tax you paid is $39,295.
NET FUTURE INCOME: 79,315-39,295-11,897 = $28,123
$5000 contribution to 401k.
Taxes are 28% of 45000=$12,600.
In 30 years, that investment is worth ~$79k. Taxes are $22,208 (28%
income tax)
The future value of the $12,600 income tax you paid is $35,365.
NET FUTURE INCOME: 79,315-35,365-22208 = $21,741
Make Your Social Security Choice Wisely by Robert Powell
If you're married, you'll need to figure out what impact your decision
regarding the timing of your Social Security benefits will have on both
spousal benefits and widow's benefits.
Calculating the best age to take Social Security benefits is tricky,
but critical.
Many Americans take Social Security early, at age 62, because they
really need it. They're in poor health or unemployed or both. Others
take benefits early because they're worried they'll lose out on what's
rightfully theirs if benefits are reduced. But few people try to figure
out the best age to take Social Security -- and that's a serious mistake.
Even though it's challenging, calculating the best time to take benefits
is well worth it, especially given that Social Security represents about
one-third of the average retiree's income.
What's key is evaluating the so-called break-even period to determine
whether it would be better to delay Social Security benefits (delaying
them means a higher monthly benefit), take a reduced benefit early,
or start them at "normal" retirement age. Of course, there's a good
reason why so few people really do the calculations.
"When to begin Social Security retirement benefits is a challenging
question that vexes many financial planners and clients," Michael Kitces,
editor of The Kitces Report, wrote in a recent issue.
Living beyond the break-even point can produce large amounts of wealth
relative to the risk. But delaying Social Security benefits does represent
a serious risk, Kitces said: If you wait and then die before claiming
your benefit, it really messes things up for your widow. Still, there
are situations in which delaying Social Security retirement benefits
can pay off significantly.
"Is it better to begin payments early, or to delay Social Security
and forfeit current payments to receive a larger income stream in the
future?" he said. "Although the analysis of such a question would seem
relatively straightforward, the complex rules of Social Security make
the evaluation more difficult, especially when evaluating the implications
of living beyond the so-called 'break-even' point."
Putting It Off Can Pay Off
One of the biggest risks to your retirement
plan is unexpected longevity -- living longer than you expect and having
to fund additional years of retirement. "The decision to delay Social
Security provides tremendous additional value, at the exact time that
it is needed," Kitces said.
Another risk: High inflation. "To the
extent that inflation turns out to be unexpectedly high, delaying Social
Security benefits also turns out to be an effective inflation hedge,
because the value of delaying increases in higher inflation environments,"
he wrote. Though not the case now, during high inflation,
which many predict on the horizon, you would get larger cost-of-living
adjustments.
Also, a low rate of return on investments poses a risk. "The decision
to delay [benefits] also turns out to be an indirect hedge to poor returns
in the portfolio," Kitces wrote.
How to Decide
"At the most basic level, the decision about whether or not to delay
Social Security retirement benefits represents a very straight-forward
trade-off," Kitces wrote. "You can either receive cash payments now,
in your pocket, to spend or invest however you choose, or you can give
up those payments in exchange for receiving a higher stream of income
for life at a future date."
Here are the things you should consider to make a more informed decision.
1. What's Your Normal Retirement Age?
The first order of business: You need to know what your normal retirement
age, or NRA, is. If you were born in 1937 or earlier it's 65. If you
were born in 1970 or later it's 67. And if you were born between 1938
and 1969, it's somewhere in between. Of note, if you were born in 1943,
your NRA is 66. And since it's now 2009, that means anyone born in 1943
is now at NRA, the age at which you can receive your full Social Security
benefit.
Once you know your NRA you can calculate how much Social Security
benefits will be increased or decreased if you choose to take your benefit
later or earlier than your NRA. Take your benefit before NRA and it's
reduced by 5/9ths of 1% for each month the benefits begin early, up
to a maximum of 36 months before your NRA. Take your benefit after your
NRA and the benefit is adjusted upward, depending on the year in which
you were born, due to the "delayed retirement credit." With delayed
retirement credits, at least under current law, a person can receive
his or her largest benefit by retiring at age 70. A person born in January
of 1943, for instance, who waited until 50 months after reaching full
retirement age would have a benefit 131.25% of their primary insurance
amount.
2. Will You Be Working?
Next, you need to determine whether you'll be working, especially
if you have not yet reached full or normal retirement age, according
to Kitces. Because of Social Security's earnings test, Kitces says it's
almost always a bad idea to take Social Security benefits early if you
have earned income greater than the earnings test threshold. Social
Security withholds benefits if your earnings exceed a certain level,
called a "retirement earnings test exempt amount," and if you are under
your NRA.
But it's also important to note that one of two different exempt
amounts applies, depending on the year in which you reach your NRA.
Under the earnings test, your Social Security benefits are reduced by
$1 for every $2 of earned income that you have in excess of $14,160
per year. But if your NRA is 2009, your benefit is reduced $1 for every
$3 of earned income in excess of $37,680.
3. How's Your Health?
At the end of the day, Kitces said the most significant factor in
the entire process of evaluating the decision to delay Social Security
is whether you're likely to live long enough to receive value from higher
monthly benefits. The shorter your life expectancy, be it because of
health, genetic, or other relevant factors, the less prospective value
to delaying Social Security. If you're not expected to live long enough
to reach the break-even point or you're so unhealthy that you may only
live a few more years, "it will virtually always make sense to begin
benefits as soon as possible, and get as many payments as possible,"
Kitces said.
Now the tricky part here is two-fold: First, what's your life expectancy?
In 2006, life expectancy at birth for the total population reached 78.1
years, according to the Centers for Disease Control and Prevention.
But a man aged 62 has a life expectancy of about 19 years, and a woman
of the same age has a life expectancy of 22 years.
Besides calculating your life expectancy, you need to calculate your
personal break-even number. According to Kitces, once you factor in
such things as the time value of money with an appropriate discount
rate and the inflation adjustments for the increased benefits when delaying
Social Security benefits, break-even points vary from 15 years to 23
years. So don't blindly accept some rule of thumb that you've read --
crunch the numbers.
The Tradeoffs
Now, if you don't plan to automatically defer benefits or start benefits
early, Kitces said, "you have to evaluate the prospective tradeoffs
between electing benefits early, or delaying benefits with the risk
of not living to the break-even period and the opportunity for wealth
creation by living beyond it."
To do this, you first have to pick a conservative growth rate, as
well as an assumption for inflation. What's more, you need look at your
retirement cash-flow needs and other income sources and investments,
the risks you might face in retirement, and your longevity. Once you
have a sense of the tradeoffs, you can come up with the best possible
answer for your situation, rather than the rule-of-thumb case.
The Caveats
If you're married, you'll need to figure
out what impact your decision regarding the timing of your Social Security
benefits will have on both spousal benefits and widow's benefits. Also,
you'll need to figure the effect of taxes on your decision.
"Social Security benefits have their own unique rules for determining
the amount of benefits that will be subject to taxation, and there is
significant interplay between the taxation of Social Security benefits
and other aspects of the client's planning situation that may create
taxable income and affect the taxability of Social Security," Kitces
said.
There you have it. You can certainly take Social Security early if
you want. Goodness knows many do. But given that Social Security might
represent one of your largest assets and perhaps your most dependable
income stream, wouldn't you rather know that you had it as close to
right as possible?
Copyrighted, MarketWatch. All rights reserved. Republication or redistribution
of MarketWatch content is expressly prohibited without the prior written
consent of MarketWatch. MarketWatch shall not be liable for any errors
or delays in the content, or for any actions taken in reliance thereon.
The two argue that stories also influence the optimism
and pessimism of, and toward, entire nations and economies.
They give the fascinating example of
José López Portillo (left), a Mexican president of the 70s and 80s,
who presented his country, Mexico, in the context of an ancient story
about the Aztec god Quetzalcóatl (also the title of a novel López Portillo
had once written). The god was expected to reappear at a special time
to make Mexico great again.
As it happened, this was during the oil shocks of the 70s and oil
was being discovered in Mexico. Perhaps Quetzalcóatl’s time was now?
It did not go unnoticed that the presidential jets were named Quetzalcóatl
and Quetzalcóatl II. The country and foreign investors liked the story,
and Mexico’s economy surged.
Until it stopped surging, of course. That’s when a different story
took over.
The point, as Akerlof and Shiller put it, is this:
Great leaders are first and foremost creators of stories…
Indeed, the power of stories is such that
We might model the spread of a story in terms of an epidemic.
Stories are like viruses. Their spread by word of mouth involves
a sort of contagion.
Jag:
Hi Andreas – firstly thanks for getting the etymology of idiot
into the august pages of the Economist…. and in your excellent Hannibal
blog born article no less (loved your phrase “speciousness of the
speech”).
Secondly since sending the link to the FP article, have read
the book it was excerpted from and thought you might enjoy additional
snippets/nuances from the relevant chapter.
Social psychologists Schank & Abelson argue
“peoples’ memories of essential facts
are… indexed in the brain around stories”. Implying
facts that don’t fit the dominant story are often not remembered.
Hence such inconvenient truths become less factive. Put another
way denial isn’t just an individual psychological mechanism and
collective denial, in the form of dominant but distorting narratives,
is why democracies need Socratic needling… and to borrow a phrase
from your profession – why we must always be on guard against “narrative
bias”.
Schank and Abelson also say “human
conversation tends to take the form of reciprocal story telling”.
And that we take deep seated delight in telling stories that provoke
a reaction. A motive I sense is strong in your blogging.
Re ur-stories – Polti 1916 only 36 basic dramatic plots, Tobias
1993 only 20 fundamental stories
Finally – re viral stories, sticky truths and in the words of
one of our ages most successful story tellers (there has been no
week when at least one book of his was not in the NYT bestseller
list for the last decade) and himself noted for having altered the
language and metaphor (=simple analogous story) we use to describe
viral spread of memes….
Gladwell’s Stickiness Problem
There’s a danger in crafting ideas
that are more compelling than accuratehttp://bit.ly/5y6qOp
from Psychology Today
The two argue, and are probably wrong that stories also influence the
optimism and pessimism of, and toward, entire nations and economies. I think
they got it in reverse. Real human conditions affect people and generate
storyline no matter what official propaganda claims. This storyline is sticky
and might persist despite changes economic conditions: both when good times
turn into bad and vise versa. So it has some lag with the actual economic
conditions.
The human mind is built to think in terms of narratives, of sequences
of events with an internal logic and dynamic that appear as a unified
whole. In turn, much of human motivation comes from living through a
story of our lives, a story that we tell to ourselves and that creates
a framework for motivation. Life could be just "one damn thing after
another" if it weren't for such stories. The same is true for confidence
in a nation, a company, or an institution. Great leaders are first and
foremost creators of stories.
More... Social psychologists Roger Schank and Robert Abelson have
argued that stories and storytelling are fundamental to human knowledge.
People's memories of essential facts are, they argue, indexed in the
brain around stories. Facts that are remembered are attached to stories.
We keep in mind a story of those memories, a story that helps define
who we are and what our purpose is.
Politicians are one significant source of stories, especially about
the economy. They spend much of their time talking to their public.
In doing so they tell stories. And since much of their interaction
with the public concerns the economy, so also do these stories.
You just received a call from your financial adviser. After a few
pleasantries and a brief discussion about the weather, he lays this
on you: "I've made a slight change to the way I manage investment portfolios.
Rather than selecting mutual funds that try to beat the markets, I'm
starting to use index funds." He continues: "But I'll only use index
funds for efficient markets. In inefficient markets, I believe actively
managed funds will provide superior
investment performance."
Welcome to "Core and Explore", also known by "Core and Satellite,"
"Barbell," "Core Plus" and a variety of other witty names. The theory
suggests that index funds (or ETFs) work best in large and liquid markets
and that actively managed funds work best in small and less liquid markets.
Accordingly, a combination of index funds and active management generates
higher returns than an all index fund portfolio.
Here’s something that oughta give the marketing wizards at traditional
Wall Street firms a heart attack: Timing beats buy and hold,
according to a study by finance professors at the New York University
Stern School of Business.
I doubt its pure timing — my best guess is, the fund managers involved
more likely used aggressive risk management tools and capital preservation
strategies. To the unknowing, these look like timing but are not.
The profs found that fund managers who invest based on macroeconomic
trends — and are willing to adjust their portfolios as those trends
change — are the managers most likely to add value for investors.
How you define “macroeconomic trend changes” and the basis of portfolio
adjustments is a key factor — one that is not delineated all that clearly:
“By analyzing data from January 1980 through December 2005, the
study identified the top 25% of actively managed equity mutual funds
based on their ability to select stocks during expansionary economic
periods. The report noted that this same group showed proficiency
at market timing during recessions as well.
This group outperformed other funds in both risk-adjusted terms
and after expenses, according to the study.”
Cash has beaten stocks for the past 10 years; Even worse, Bonds have
beaten Stocks since 1966. To me, this suggests that an active asset
allocation program (rather than pure market timing) is the way to go
for most high net worth investors.
Despite the weak stock performance, expect massive pushback
on this from the long-only, fully-invested, fee-based actors on the
street.
Already, we see critiques from Morningstar. Russel Kinnel, the director
of mutual fund research, carped that “the 1980s were littered with funds
that blew up because managers tried to follow macroeconomic trends.”
The Street will this line of thought tooth and nail, but given the
horrific performance if the LOFIFB firms, they have their work cut out
for them . . .
There are several additional problems here. First of all this is inflation
which realistically can be assumed around 3% per year. That means that for
all practical proposes real 401K returns for investors using cost averaging
returns will be zero or negative.
The second problem is that losses of 401K investors using stocks (even
without self-defeating moves like selling low and buying high) for the last
15 years are substantially higher then the author assumes. My calculations
had shown that for 401K investors who started in Jan 1996 and used cost
averaging investing 100% in S&P500 underperformed Vanguard stable value
fund approximately 30% (assuming today's S&P500 value 1100). For PIMCO Total
Return it's even more. That tells us something about Siegel.
If we assume that stable value returns match average inflation, 401K
investors who use S&P500 can lose close to half purchasing value of their
savings before retirement. So assumption of positive returns (after inflation)
in 401K in my view is pseudo-science and assumption of positive returns
in S&P500 in case of cost averaging is even worse (Lysenkoism ?).
In stock universe all profits will be stolen by executives (profits
will be siphoned off via stock options) and Wall Street, the role of 401K
investors will limited to the role of bag holders. As Jake Chase noted
in his comment: "No published financial statement of any bank or public
corporation is anything but a trap for the gullible, a convenient fiction,
an outright fantasy. Any investment decision is nothing but a bet, and we
might as well all be monkeys throwing darts at the financial pages."
The article below first appeared in our
Washington Post column yesterday.I’m reproducing it in
full here because there is an important correction, thanks to a response
by Andrew
Biggs. I’ve fixed the mistake and added notes in brackets to show
what was fixed. Also, I want to append some additional notes about the
data and some issues that didn’t fit into the column.
Recent volatility in the stock market (the S&P 500 Index losing almost
50% of its value between September and March) has led some to question
the wisdom of relying on 401(k) and other defined-contribution plans,
invested largely in the stock market, for our nation’s retirement security.
For example, Time recently ran a
cover story by Stephen Gandel entitled “Why It’s Time to Retire
the 401(k).”
However, the shortcomings of our current retirement “system” predate
the recent fall in the markets, will not be solved by another stock
market boom. The problems are more basic: we don’t save enough, and
we don’t invest very well.
We ran several scenarios of what a typical two-adult household that
entered the job market last year at age 22 might expect to receive on
retirement at age 65 in 2051. For each scenario, we assumed that our
household would earn the median amount for its age group every year.
We began with data from the
U.S. Census Bureau on 2008 earnings by age group, and assumed that
real incomes would grow by 0.7% per year (the average growth rate for
the 1967-2008 period). According to analysis by Andrew Biggs, medium
earners typically accumulate Social Security benefits equivalent to
52% of their pre-retirement income, which comes to $40,265 per year.
(All figures are in 2008 dollars.) For our scenarios, we used different
estimates of the household’s savings rate and of the rate of return
it would earn on its savings. [Correction: I initially used the
online Social Security
Social Security benefits calculator, which says it provides estimates
in "today's dollars," but actually uses wage-indexed dollars. See
Biggs's explanation
of the difference.]
For the first scenario, we assumed the average economy-wide savings
rate of 2.4% over the last ten years (1999-2008) and a real rate of
return of 6.3% — the long-term average real return for the stock market.
(In his book Stocks for the Long Run, Jeremy Siegel calculates
the annual real rate of return from 1871 to 2006 as 6.7%; updating that
figure through 2008, we get 6.3%.) At retirement, this yields accumulated
savings of $298,064. Today, a 65-year old couple could convert $298,064
into a joint life annuity of $18,467 (we did an online search for annuity
rates), meaning that they would receive that amount each year (not indexed
for inflation, however) as long as either person were still alive. (Anything
other than buying an annuity is gambling that you won’t outlive your
money.) $18,467 is only 24% of the household’s income at age 64. Combined
with Social Security, the couple would receive $58,732 per year, or
a respectable 76% of its pre-retirement income of $77,432. [Correction:
Originally this was 59%; all later figures were also 17 percentage
points too low.]
Savings were unusually low over the past decade. The current savings
rate (first three quarters of 2009) is 3.6%. Plugging this into our
spreadsheet, we get an annuity of $28,092 and retirement income of $68,357,
or 88% of pre-retirement income.
But this overlooks the fact that people
do not earn the rate of return of the stock market. Even
assuming that people are investing in stocks, most do so via stock mutual
funds which, on average, do worse than the stock market as a whole.
For example, in the 1990s the average diversified stock fund had an
annual return
2.4 percentage points lower than the Wilshire 5000 Index (which
reflects the performance of the overall market).
The main reason for this underperformance is that
mutual funds have to
pay fees to their
managers — who, on average, do not earn those fees through superior
stock-picking (to put it mildly).
If we use a 3.9% annual return instead of a 6.3% annual return, now
our annuity is only worth $15,347 per year, and combined with Social
Security our household is only earning 72% of its pre-retirement income.
But wait — it gets worse.
The average investor
in mutual funds does not even do as well as the average mutual
fund. The reason is that investors tend to chase returns.
They take money out of funds that have recently done
badly and move it into funds that have recently done well. Because of
mean reversion (the tendency for trends away from the average to return
back to the average), this means they take money out of funds that are
about to go up and put it into funds that are about to go down. Among
large blend stock funds (the category that includes S&P 500 index funds),
research from Morningstar shows that the gap between mutual fund
performance and investor performance ranges from 0.9 to 2.2 percentage
points, depending on fund volatility. (It can be much higher —
over 10 percentage points — for other types of funds.)
Taking an average gap of 1.6 percentage points, our expected annual
returns are now just 2.3%. Now our cumulative savings are only $172,853
and our annuity is only $10,709; combined with Social Security our household
is only earning 66% of its pre-retirement income.
Now, you can get close to that 6.3% expected return through a simple
strategy: buy a stock index fund and don’t touch it. But this has another
problem — you are 100% invested in stocks, the riskiest of the major
asset classes. Whatever your expected cumulative
savings, there is a 50% chance that your actual savings will be lower,
and they could be a lot lower.
Since we’re talking about survival in old age, ideally our household
would not take any risk at all. The closest you can get to this is to
invest in inflation-protected Treasury bonds. 20-year TIPS (Treasury
Inflation-Protected Securities) currently yield 1.96% on top of inflation.
[Note: In the Post column I used 2.4%, the yield at the latest
auction; however, that was back in July, and long-term bond yields have
come down since then, so this is the current yield according to Bloomberg.]
This provides a final annuity of $9,925; combined with Social Security,
that’s 65% of pre-retirement income. That’s not very much. And the only
way to get higher returns is by taking on risk.
Bear in mind that we’re assuming that Social Security will be around
in its current form, as will Medicare (or else seniors will have sharply
higher health care costs than they do today). Also, we’ve made a number
of optimistic assumptions along the way: that life expectancies do not
increase by 2051 (this would reduce the annuity you can get with the
same savings); that median-income households save money at
the average rate for all households, which is untrue (richer
households save at a higher rate, making the average savings rate higher
than the median savings rate); and that the savings rate is constant
over age (since older people in fact save at a higher rate, the money
has less time to build up). In addition, we haven’t started talking
about below-median households, who save at a lower rate. [Note:
I assumed you can get an annuity yielding 6.2%, from
this online site; Biggs, who probably knows better than I, uses
5.4%, which yields lower annuities for the same amount of savings.]
The problems, in short, are that we don’t save enough and we don’t
invest very well. One could argue that these are a matter of choice.
People could save more, and they could make smarter investing decisions.
But given that they don’t, we could very well see tens of millions of
seniors without enough money to live decently in retirement. Given that
prospect, perhaps we should question leaving retirement security to
individual choices and free markets.
***
Andrew
Biggs argues that the numbers show that the retirement system is
doing OK. After all, if you assume just a 2.4% savings rate and a 6.3%
real return, you get 76% of your pre-retirement income. The system is
doing better than I thought it was before Biggs pointed out my error,
but that’s almost entirely due to Social Security. Social Security
is replacing 52% of pre-retirement income (not 35% as I initially calculated)
and private savings are replacing anywhere from 13% to 24%, depending
on the scenario. I think the 13% scenario is the most accurate, since
is the lowest-risk option; anything else is not retirement saving, it’s
retirement gambling.
Biggs also thinks (email to me) that my savings rates are too low,
especially with auto-enrollment into 401(k)s on the rise. This is a
plausible point; we don’t really know where the savings rate will end
up after this recession. If the median worker is auto-enrolled in a
401(k) — and, even better, if he gets an employer match — he may be
OK. Then we may be talking about a problem that affects a significant
number of lower-income households (who are less covered by 401(k)s and
employer matches than higher-income households), though not the median
household.
This is the
spreadsheet with the scenarios. WordPress.com won’t let me upload
an Excel file, so I embedded it in a Word file and uploaded that.
There’s a legitimate question about 2008 vs. 2051 living standards.
For example, in our most pessimistic scenario, we still end up with
an annuity of $50,190 in 2008 dollars. That might not seem so bad. After
all, median income in 2008 was only $53,303, and this is all in real
terms, right? However, I don’t think that’s the right approach to take.
Living standards will improve on average between now and 2051, and therefore
an income of $50,190 2008 dollars will feel very different in 2051 than
it felt in 2008. This is why I think the right comparison is to pre-retirement
income; that tells you the drop in living standards that people
will suffer at retirement. (In practice, most people probably won’t
buy annuities, and won’t adjust their living standards down immediately
— but that just means they have a higher chance of outliving their money.)
Another possible objection is that we’re leaving out capital gains
from housing. Even if the average return that investors get from stock
mutual funds is only 2.3%, the fact is that many people invest in their
houses and seem to get higher returns. However, I think that we can’t
count on these higher returns. First, these returns are largely a product
of leverage and subsidized interest rates; real housing prices underperform
the stock market. Second, a given house doesn’t really change in real
value (the utility it provides to people), even if its price changes;
in general, its value goes down, unless you put money into
it for maintenance and improvements. If the price of equivalent houses
goes up in real terms, that just means that (on average) one generation
of home owners is taking money from the next generation of home buyers
in the form of higher prices. In other words, it’s a multi-generational
Ponzi scheme that can’t go on forever. Third, of course, not everyone
owns a house.
In doing the research for this column I came across a paper by Andrea
Frazzini and Owen Lamont called “Dumb
Money: Mutual Fund Flows and the Cross-Section of Stock Returns.”
They find that, at least when looking at historical data, you can make
money by doing the opposite of what investors do with their
mutual funds. That is, money flowing into mutual funds is a valid predictor
that the stocks in those funds will, on average, go down relative to
the market. The real beneficiaries are corporate issuers of stock, who
are able to issue stock at high prices when demand for it is high. I
also like the way they put their findings into context: “These facts
pose a challenge to rational theories of fund flows. Of course,
rational theories of mutual fund investor behavior already face many
formidable challenges, such as explaining why investors consistently
invest in active managers when lower cost, better performing index funds
are available.”
Finally, I hate making mistakes. So I wholeheartedly endorse Biggs’s
call for the Social Security Administration to
fix its misleading
calculator.
By James Kwak
spencer
By using current real data you are ignoring inflation that would
make the situation worse than you describe.
You are assuming a savings rate of 2.4%.
If you ignore inflation that yields a constant saving stream
in real terms.
But in an inflationary environment of for example 2% to 3% annually,
and go back and apply a 2.4% savings rate to nominal earnings some
20 years the dollar savings you get are only about half of current
earnings in real terms. To achieve the 2.4% average real savings
in an inflationary environment in savings rate in earlier years
has to be higher to offset the impact of inflation on averages wages.
jake chase
When you assume the financial future will be roughly like the
past, you disregard the sea change in financial markets caused by
swaps and OTC derivatives: over leveraged risk is a guerrila army
bearing nuclear grenades moving in quantum jumps through the investment
landscape. They can blow up anywhere, any time. Exposure is entirely
hidden. No published financial statement of any bank or public corporation
is anything but a trap for the gullible, a convenient fiction, an
outright fantasy. Any investment decision is nothing but a bet,
and we might as well all be monkeys throwing darts at the financial
pages.
In the past ten years, a stock index fund returned nothing. To
the extent corporations achieved growth in profits, the dough was
siphoned off in executive stock options. Today, you get nothing
in government bonds, unless you want to take thirty year risk. If
you want a good investment, buy a laundromat (and a gun).
Tom S
I think the biggest mistake in your estimate is that you assume
people will begin saving at age 22. From what I have seen of the
typical college graduate, they will often spend maybe six months
unemployed and often spend the first couple of years paying off
debt and getting on their feet. Alternatively, there are many young
people (like myself) getting graduate degrees which means more years
of no saving. If I did such a calculation I would assume no saving
begins until at least age 25, maybe 28. This will really crunch
your already low values.
It's important to create a simple spreadsheet at least to decide whether
you should take you SS at 62.5 or 66.
Even after suffering significant losses last year, many remain overly
optimistic about their investment returns and the ability of their savings
to fund their expenses after they stop working.
... ... ...
Perhaps even more startling is the extent to which their savings
are falling short of their goals. On average, these pre-retirees expected
they would need $800,000 to fund their retirement. However, most had
only saved about $300,000.
Despite their inadequate savings, nearly
two-thirds of the group lack any formal plans for retirement savings
or spending strategies.
Of the 35 percent of those who had a written plan for retirement,
only slightly more than half — about 52% percent — say they had updated
it in the past year during the market downturn.
Hanky Panky and Govt Sachs having secret "social" events in a bugged
room of a hotel... Nah, can't possibly be true.
C'mon fellas, a little vodka, a little kgb, some hookers ... gimme
a break.
...the true nature of these "wall street insider's" over the past
two years ... scumbags who would sell their grandmothers into slavery
for the cost of a sandwich.
A friend sent this along, and we thought it was worth publishing
an extended excerpt. This is Part 1 of the essay, and we look forward
to Part Two – Managing Your Own Money – Take Action Now.
That is really the challenge isn't it. Most people are financial
non-specialists. Their lives are full enough as it is, with things that
they understand and that are important to them.
Too often the call to 'take control of your own money' is a prelude
to 'and buy into my advice, what I wish to sell to you.'
Financial advice is a difficult thing to provide in a blog. It would
be like a doctor writing a prescription for the public at large, fitting
for some, inappropriate for others, potentially deadly for a few. This
is why I do not do it. Ever.
The prescription I use for my personal situation is the most that
I will share, in addition to general opinions and analysis of the markets
and the economy. I am 58 years old, and have amassed a fair amount of
savings over the past twenty years. My general rules for the current
period now are:
1. Get liquid. Have little or no debt. Be in cash and diversified.
Reduce living expenses to essentials.
2. Get as far away as you can from Wall Street and riskier assets as
is practical.
3. Put something you can spare from discretionary retirement savings
into long term assets that are not directly contingent on anyone else
whom you cannot trust:
a. Personal food production, preservation, and preparation
b. Precious metals as insurance against monetary inflation / breakdown
c. Essentials for daily living and personal health care
d. Investments in practical education
e. Personal infrastructure and efficiency
f. Have a contingency plan for a systemic shock.
4. Above all be flexible. If this stagflation we are in becomes a protracted
deflationary spiral or an emerging hyperinflation, both possible outcomes,
we will see it happening and may need to adjust. This is where being
light on debt and long on liquidity is most helpful. There is no one
right plan for the unexpected, ever.
If you have 401k plans you cannot
cash in, you might consider some very long term 'leap' puts to hedge
them. But Cash or short term Treasuries
is preferable. I have all my discretionary cash scattered
across several very highly rated banks within FDIC limits. I have some
money available for investment in foreign currencies although I have
cashed in my loon and aussie dollar positions now. I have sold some
'collectible assets' that might have done very well if we get a prolonged
period of high inflation similar to the 1970's in order to raise cash
levels. I may regret this, but so be it. The cash can be deployed as
the situation develops. Cash can otherwise
be kept your home currency which you use on a daily basis, as long as
it is safe and liquid.
If you wish raise your voice or to peacefully demonstrate, be prepared
with a simple set of coherent positions and specific demands, avoiding
anger. The mainstream media likes nothing better than to portray demonstrators
as cranks or fools. In general they are not sympathetic to the less
powerful. They will not lead change, but they will eventually follow.
Try to avoid squabbling amongst yourselves. When the reformers fight
over fine points and petty egotistical issues, the status quo
rejoices, often formulating and encouraging the bickering. Debate television
where no serious discussion occurs, but plenty of sound bites and
ad hominem attacks get thrown, is the model for media distraction.
But it 'works' for the short term opportunists, and generally adds to
the bread and circuses atmosphere masking an historic wealth
transfer and the decline of an empire, as it has done in the past.
And as always, the banks must be restrained, and the financial system
reformed, and balance restored to the economy before there can be any
sustained recovery.
Reality Arbiter The Extinction of Ethics in Finance – The Fallout
by Greg Simmons
October 13, 2009
"...To revisit my original intention in writing this article, I cannot
stress to you the importance of understanding exactly what is going
on in the world. No one is to be trusted
with your money. Not Wall Street, not the banks, not the government
– nobody is to be trusted! Does the investing public not realize that
Wall Street almost lost every penny of American wealth?
Now we’re supposed to believe they’ve saved the day? I beg to
differ. Those parasitic liars nearly took
us to zero. Who knows, they still might.
The grossly deluded public has been at the mercy of brokers, financial
advisors, Wall Street, the Fed, congress, and the US Treasury far too
long. This moral hazard and subsequent uneven playing-field created
by the current financial structure (the trifecta of the Fed, Treasury,
and the “Banksters”) wherein the scales of balance tip only upward,
hence siphoning this nation’s wealth into the coffers of those that
create such hazards. Their current solutions to this crisis, a crisis
of their own making, is nothing more than a replication of the same
idiotic practices that got us here in the first place; corporate bailouts,
homebuyer tax-rebates, foreclosure moratoriums, cash-for-clunkers, all
designed to forego the inevitable sanctification of sins past and deliver
them on to the US taxpayer.
The difference between the past and present is that now we have a
government willing to set up shop and take over entire industries; mortgage
lending, auto, banking, and who knows going into the future. Just wait,
we’ll be in the airline business in no time. I feel like I’m in a perpetual
state of Déjà vu - with a repeat of September 2008 barreling headlong
around the next bend.
That we exist in a quasi public-private
financial system wherein the government in collusion with the Fed and
the “Banksters” take your money essentially by force (specifically through
the leverage of ZIRP) or otherwise and shove it into new toxic instruments,
bailouts, and ill-conceived stimulus programs that even these so-called
best-and-brightest have no concept of the inherent risks, or hazard
of unintended consequences, is proof that the entire game is rigged
against you.
It is time to take control of your money.
Now, with regard to the subject of managing one’s own money, the
rules of the game have officially changed. The EXTINCTION OF ETHICS
in today’s financial markets IS the new rule. You must take total responsibility
for the management of your own money and you must do it now! I don’t
know how to make it any more clear. I
could probably write an entire thesis about the utter abandonment of
morality by today’s so-called investment community. I mean, does everybody
have to cheat each other to make a dollar? The subject literally brings
into question the human thread that binds our social fabric together.
Given the dire state of the global economy and the fact our collective
economic situation has gotten significantly worse, not better, creates
an opportune time to shift any misplaced philosophy of trust in a corrupt
system and recognize that we’re in the middle of a COVER-UP, NOT A RECOVERY!
A comment I always appreciated and have tried to take credit for
but know I plagiarized from somewhere is this; ANTICIPATING BAD LUCK
IS GOOD LUCK; DEPENDING ON GOOD LUCK IS BAD LUCK.
This so-called recovery is merely a papered-over
facade made possible by trillions of newly created dollars.
The time to prevent getting thrown back into the ditch is now. Remember,
do not fall victim to the CNBC-induced epidemic of economic amnesia."
Can you make the risk of stocks go away just by owning them long
enough? Many investors still think so.
"Over any 20-year period in history, in any market, an equity portfolio
has outperformed a fixed-income portfolio," one reader recently emailed
me. "Warren Buffett believes in this rule as well," he added, referring
to Mr. Buffett's bullish selling of long-term put options on the Standard
& Poor's 500-stock index in recent years. (Selling those puts will be
profitable if U.S. stocks go up over the next decade or so.)
As the philosopher Bertrand Russell warned, you shouldn't mistake
wishes for facts.
Bonds have beaten stocks for as long as two decades -- in the 20
years that ended this June 30, for example, as well as 1989 through
2008.
Nor does Mr. Buffett believe stocks are sure to beat all other investments
over the next 20 years.
"I certainly don't mean to say that," Mr. Buffett told me this week.
"I would say that if you hold the S&P 500 long enough, you will show
some gain. I think the probability of owning equities for 25
years, and having them end up at a lower price than where you started,
is probably 1 in 100."
But what about the probability that stocks will beat everything else,
including bonds and inflation? "Who knows?" Mr. Buffett said. "People
say that stocks have to be better than bonds, but I've pointed out just
the opposite: That all depends on the starting
price."
Why, then, do so many investors think stocks become safe if you simply
hang on for at least 20 years?
In the past, the longer the measurement period, the less the rate
of return on stocks has varied. Any given year was a crapshoot. But
over decades, stocks have tended to go up at a fairly steady average
annual rate of 9% to 10%. If "risk" is the chance of deviating from
that average, then that kind of risk has indeed declined over very long
periods.
But the risk of investing in stocks isn't
the chance that your rate of return might vary from an average; it is
the possibility that stocks might wipe you out. That risk never goes
away, no matter how long you hang on.
The belief that extending your holding period can eliminate the risk
of stocks is simply bogus. Time might be your ally. But it also might
turn out to be your enemy. While a longer horizon gives you more opportunities
to recover from crashes, it also gives you more opportunities to experience
them.
Look at the long-term average annual rate of return on stocks since
1926, when good data begin. From the market peak in 2007 to its trough
this March, that long-term annual return fell only a smidgen, from 10.4%
to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007,
you had only $498,300 left by March 1, 2009. If losing more than 50%
of your money in a year-and-a-half isn't risk, what is?
What if you retired into the teeth of that bear market? If, as many
financial advisers recommend, you withdrew 4% of your wealth in equal
monthly installments for living expenses, your $1 million would have
shrunk to less than $465,000. You now needed roughly a 115% gain just
to get back to where you started, and you were left in the meantime
with less than half as much money to live on.
But time can turn out to be an enemy for anyone, not just retirees.
A 50-year-old might have shrugged off the 38% fall in the U.S. stock
market in 2000 to 2002 and told himself, "I have plenty of time to recover."
He's now pushing 60 and, even after the
market's recent bounce, still has a 27% loss from two years ago -- and is even down 14% from the beginning of 2000, according
to Ibbotson Associates. He needs roughly a 38% gain just to get back
to where he was in 2007. So does a 40-year-old. So does a 30-year-old.
In short, you can't count on time alone
to bail you out on your U.S. stocks. That is what bonds and foreign
stocks and cash and real estate are for.
In his classic book "The Intelligent Investor," Benjamin Graham --
Mr. Buffett's mentor -- advised splitting your money equally between
stocks and bonds. Graham added that your stock proportion should never
go below 25% (when you think stocks are expensive and bonds are cheap)
or above 75% (when stocks seem cheap).
Graham's rule remains a good starting point even today. If time turns
out to be your enemy instead of your friend, you will be very glad to
have some of your money elsewhere.
The hypothetical scenario of an investor with a $1 million portfolio
who retired at the peak of the market in 2007 assumes that he was
invested entirely in stocks and was taking monthly withdrawals by
liquidating stocks month to month at a 4% withdrawal rate. This
would be ill advised under any situation, as the article implies.
Retirees planning to draw down their
portfolios must maintain at least three to five years of withdrawals
in cash or short term bonds (ideally, using a bond
ladder over five years). This reduces, but does not eliminate, the
risk of having to liquidate stocks at a bad time. Once this is accomplished,
all that remains is the need to not panic during market declines
and avoid the temptation to sell out at lows.
If the investor with a $1 million portfolio simply had a ladder
of bonds representing spending for years 1 to 5 in the amount of
$200K in total (five years of $40K withdrawals), he could have invested the remaining $800K
in more volatile assets without risk of having to liquidate at the
March 2009 lows. [ Why take
additional risk if you a million ? -- NNB]
I believe that this is precisely why Ben Graham stated that investors
should have a limit of 75% stock allocation - he knew that having
more than that in a portfolio intended to be drawn down over time
could result in poorly timed forced sales of stock.
This was a very timely article and
maybe in the future the five year ladder concept could be fleshed
out in more detail. That would be a practical example
and actionable plan for retirees concerned with volatility.
Well said. If you pay 1.4% to a fund
you are giving them 14% of your expected return of 10%. Most people
don't tithe that much to their church,
why give it to a big financial firm
that is not going to equal the indexes.
If someone is afraid of individual stocks, look at plain vanilla
index ETF's.
Note: The Supreme Court is getting ready to rule that
investors don't have the right to object to obscene fees in court;
that its the exclusive jurisdiction of the directors appointed by
the people charging the obscene fees to decide if the fees are "fair"
even if twice what they would charge in a competitive situation.
Oh and you have to pay a 12b-1 fee too to pay for the marketing
to lure in new investors so that the firm doesn't have to pay its
own marketing costs.
The 10% average return is a compound geometric return which is
only achieved by reinvesting all dividends, something the average
financial advisor failed to understand in the 1990's. Once you start
taking distributions you do not have reinvestment. The long term
rate of return for appreciation only, without reinvesting dividends
is only about 6%. Financial planners have been arguing the rate
of return you can "safely" withdraw since the 2000 crash. If you
don't get it from a dividend or interest payment you shouldn't spend
it unless its an emergency because you are dipping into principal.
The next big issue may be bonds for those that buy bond mutual funds
which never mature. If interest rates spike, holders of long-term
bond funds will have losses similar to that of stocks. With the
huge budget deficits and the rest of the world getting tired of
the ever shrinking vallue of the dollar, some smart people think
its when, not if. If you want bond income, do not buy funds, buy
individual issues so that you know when you will get your principal
back.
It's important to note that almost all financial advisers would
like to bury this column under the Titanic - and for good reason.
The mantra of buy-and-hold has been a financial fiction for as long
as I can remember. And I agree the the last two sentences offered
by Dean Anderson. I'll take it one step further: Insist that your
market broker or financial adviser place either stop-limit or stop-market
orders on your entire stock portfolio. The sad truth is that many
brokers and advisers failed to protect client accounts from the
catastrophic market sell-off in March. If your broker or adviser
can't - or won't - service your accounts properly, it's time to
fire them and find a new one that can. Fool me once, shame on you.
Fool me twice, shame on me.
With today's agency society arrogating to itself far too large
a share of market returns, the outlook for future individual retirement
savings is dire.
The amazing disappearance of the individual stockholder as the backbone
of the U.S. stock market has been one of the least recognized but most
profound trends of the last half-century. As shown in the chart nearby,
direct ownership of stocks by American households has declined from
91% in 1950 to just 32% today. The 9% ownership stake held by financial
institutions in 1950 crossed the 50% mark in 1983, and now totals 68%
of all stocks. It is hard to imagine that our earlier society dominated
by individual stock ownership will ever return.
Of course, individual investors remain major participants in the
stock market, but now do so largely through mutual funds and public
and private pension plans. But such participation lacks the traditional
attributes of ownership such as selection of individual stocks and engagement
in the process of corporate governance.
* * *
But aren't our financial institutions owners of stocks? Not really.
They are owners in name -- agents, in fact, with a duty to act on behalf
of their principals, including our mutual fund owners and beneficiaries
of our retirement plans. Today's agency-dominated investment society
is overwhelmingly composed of those two groups of underlying owners.
At first, the march toward institutionalization was led by pension
plans. Holding less than 1% of all stocks in 1950, they shot up to 19%
in 1980 and 27% in 1989-95, only to ebb to today's level of 21%. Growth
in mutual-fund ownership, on the other hand, was stagnant in the early
years, holding at 3% in 1950 and 1980 alike, rising to just 8% by 1990.
Since then, fund ownership of stocks has risen relentlessly to a record
high of 28% currently. Within the pension segment, public plans are
holding steady while private pension plans are gradually receding. But
the secular decline in defined-benefit pension plans has been matched
by an offsetting rise in defined-contribution thrift and savings plans
in which mutual funds are the major component. So today's dominant stock
ownership by mutual funds seems destined for continued growth.
Institutional investing is now largely the business of giants.
America's 100 largest money managers alone
now hold 58% of all stocks. When such a relative handful
of professional managers substantially displaces a diffuse group of
millions of inchoate individual investors, one might have expected the
managers to more aggressively assert their rights of stock ownership
and demand more enlightened corporate governance focused on shareholder
interests. With few notable exceptions, however (some state and local
pension plans, unions, and TIAA-CREF), our institutional investors have
refrained from active participation in corporate affairs.
What explains the passivity of these institutions that in fact hold
effective control over corporate America? First, too many of our financial
agents have their own interests to serve, often conflicting with the
interests of their investor-principals. It is a truism that principals
are likely to watch over their own money with far more care than they
take in watching over the assets entrusted to them as the agents of
others. When there are many masters to serve, it is the master who pays
the servant whose interests are most likely placed front and center.
Corporate pension plans, for example, are controlled by the same executives
whose compensation is based on the earnings they report to shareholders.
During the 1990s, they arbitrarily raised their projections of future
pension plan returns, enhancing operating earnings to meet "guidance"
targets, even as interest rates tumbled and prospective returns eroded.
Similarly, mutual fund managers are compensated by separate corporations
seeking to maximize the return on their own capital (i.e., to enhance
their own wealth), in direct conflict with their duty to maximize the
returns on the capital entrusted to them by their fund shareholders.
The excessive advisory fees, expenses, hefty sales loads, and huge commissions
on portfolio transactions paid to brokers in return for their sales
support consumed something like 45% of the real returns earned on fund
portfolios during the past two decades.
Second, unlike their predecessors in the '50s and '60s, financial
institutions focus on investment strategies that emphasize short-term
speculation in evanescent stock prices, rather than traditional long-term
investing based on durable intrinsic corporate values.
From 1950 to 1965, equity mutual funds turned
over their portfolios at an average rate of 17% per year; in 1990-2005,
the turnover rate averaged 91% per year. The old own-a-stock industry
could hardly afford to take for granted effective corporate governance
in the interest of shareholders; the new rent-a-stock industry has little
reason to care.
To further complicate matters, today's typical giant private financial
institution -- managing both pension plans and mutual funds -- faces
serious conflicts in its exercise of the rights and responsibilities
of ownership. When a proxy proposal is opposed by the management of
a corporate client, the money manager is unlikely to vote in its favor.
It is not surprising, then, that governance activists among large private
money managers are conspicuous not merely by their scarcity but by their
absence. And it gets worse. Today, it is difficult to separate the owners
from the owned. Through its defined-benefit pension plans, corporations
own 12% of all stocks, and dominate another 11% through defined-contribution
savings plans. What is more, most of our largest money managers are
themselves now owned by giant financial conglomerates. Arguably, this
circularity of ownership allows corporate America to control itself.
The problems created by this new and conflicted world of financial
intermediation are hardly trivial. Excessive return projections for
pension plans have played a major role in creating the current shortfall
of $600 billion in private pension plan liabilities relative to plan
assets. The shortfall in public plans has been estimated at $1.2 trillion,
bringing the total deficit to $1.8 trillion, and rising. Individual
retirement savings are also at dangerously low levels. Only 22% of workers
participate in 401(k) savings plans and only 10% in IRAs (9% have both).
Despite having had a quarter-century-plus to build assets in these tax-sheltered
plans, investors have accumulated balances of but $33,600 and $26,900
per participant respectively, a trivial fraction of what would be required
for a decent retirement.
With today's agency society arrogating to itself far too large
a share of market returns, the outlook for future individual retirement
savings is dire. A citizen entering the work force today has
an investment horizon of at least 60 years. If the stock market were
to earn an average nominal return of 8% per year, $1,000 invested today
would then be worth $101,000 -- the magic of compounding returns. But
if our financial system consumes 2.5 percentage points annually of that
total return -- a conservative estimate of today's reality -- that $1,000,
growing now at 5.5% net, would be worth just $25,000, a minuscule 25%
of the accumulation that could have been obtained simply by owning the
stock market itself. The magic of compounding returns, it turns out,
is simply overwhelmed by the tyranny of compounding costs at today's
exorbitant levels.
The serious shortfalls in retirement reserves that represent the
backbone of the nation's savings have arisen importantly because our
manager-agents have placed their own interests ahead of the interests
of the investor-principals they are duty-bound to serve. Our financial
institutions have failed to exercise the rights and responsibilities
of corporate citizenship; to adequately fund pension reserves; and to
deliver to fund shareholders their fair share of the returns generated
by the financial markets themselves.
* * *
Why? Largely because the radical change from an ownership society
dominated by individual investors to an intermediation society dominated
by professional money managers and corporations has not been accompanied
by the development of an ethical, regulatory and legal environment that
requires trustees and fiduciaries, as agents, to act solely and exclusively
in the interests of their principals. In addition, we have developed
a patchwork of tax-deferred retirement programs -- Social Security,
corporate and public pensions, deferred compensation plans, 401(k)s,
403(b)s, individual IRAs, and Roth IRAs -- and are now considering the
addition of Personal Savings Accounts to the list. We need to undertake
a careful appraisal of this often costly mix, and develop an integrated
retirement system that will enhance savings.
The overarching need is for a clearly enforced public policy that
honors the interests of our citizen-investors and puts these beneficiaries
in the driver's seat where they belong. The ownership society is over.
The agency (or intermediation) society is not working as it should.
Mr. Bogle, founder and former CEO of Vanguard, is author of
"The Battle for the Soul of Capitalism," published this week by Yale.
Of course, people's retirement outlooks vary widely. Some 20 million
workers still participate in a traditional pension plan, and employers
pay pension benefits to millions more retirees (that doesn't even count
government-sponsored public plans), according to Boston College's Center
for Retirement Research.
Those workers are sitting a lot prettier than the more than half
of U.S. families who aren't covered by any kind of pension at their
current job, according to the Employee Benefit Research Institute, a
nonprofit, nonpartisan group. Still, even a well-prepared person may
get thrown off by a job loss or unexpected health-care costs. (Average
medical costs in retirement can run into the six figures even for those
covered by Medicare, according to EBRI.)
And those lucky people with traditional pensions likely are wondering
how long the money will last as the financial crisis shreds employers'
ability to fund such plans for the long haul.
See related story on PBGC.
Defined-contribution plans such as 401(k)s have largely taken the
place of traditional pensions: 67% of workers say they have a DC plan,
up from 26% in 1988, while 31% of workers participate in a traditional
pension, down from 57% in 1988, according to EBRI.
But, while lower-income workers face a worrisome retirement reality
all their own, middle- and upper-middle class workers likely face the
biggest living-standard shock. That's because lower-income people can
replace a good chunk of their preretirement income with Social Security,
and high-income people generally have enough personal savings. But middle-class
workers may see their relatively comfortable life change drastically
come retirement.
July 20, 2009 | http://globaleconomicanalysis.blogspot.com
From the 2002 bottom until the 2007 market top it was hard to go
wrong no matter what you did. Everything from junk bonds to commodities
to emerging markets to the major market indices were all headed up.
This made people feel they were protected
from harm. It was an illusion.
... ... ...
Off To The Races?
People are expecting it's off to the races again with the rally since
May. Not so fast.
Fundamentally the market is very overvalued here. Expected earnings
growth is unlikely to happen for many reasons. Clearly that does not
preclude a further rally, but the above chart shows what happens to
market rallies based on speculation as opposed to fundamentals.
Perhaps the market has bottomed, but perhaps it hasn't. Even if it
has bottomed, where is it going? Consumers are 70% of the economy and
consumer attitudes toward debt, consumption, and risk taking reached
a secular peak. Moreover unemployment is still rising and consumer balance
sheets are in shambles.
Nearly 30 years ago James Fries at Stanford
University School of Medicine put a ceiling of 85 years on the average
potential human life span. More recently a team led by
Jay Olshansky at the University of Illinois at Chicago said it would
remain stuck there unless the ageing process itself can be brought under
control. Because infant mortality in rich countries is already low,
they argued, further increases in overall life expectancy will require
much larger reductions in mortality at older ages. In Mr Olshansky’s
view, none of the life-prolonging techniques available today—be they
lifestyle changes, medication, surgery or genetic engineering—will cut
older people’s mortality by enough to replicate the gains in life expectancy
achieved in the 20th century.
That may sound reasonable, but the evidence points the other way.
Jim Oeppen at Cambridge University and James Vaupel at the Max Planck
Institute for Demographic Research in Rostock have charted life expectancy
since 1840, joining up the figures for whatever country was holding
the longevity record at the time, and found that the resulting trend
line has been moving relentlessly upward by about three months a year.
They think that by 2050 average life expectancy in the best-performing
country could easily reach the mid-90s.
Rises in life expectancy have been habitually underestimated because
it seemed unlikely that the improvement could go on for ever, and just
as regularly the figures have had to be revised soon afterwards. Some
experts now think there may be no theoretical limit at all, pointing
to the huge rise in the number of centenarians in the past few decades.
In America they are the fastest-growing section of the population, with
an increase from 3,700 in 1940 to over 100,000 now.
Why are people living ever longer? Robert Fogel at the University
of Chicago, a Nobel prize-winner in economics, reckons that improved
medical care and technology are only part of the answer.
Another part, he thinks, is something he has dubbed “technophysio evolution”.
Over the past few centuries humans have developed more
resilient physiques because they gained unprecedented control over their
environment and their living conditions. Western people’s average body size has increased by 50% over the
past 250 years. Larger body size (but not obesity), Mr Fogel’s research
has shown, is associated with better health and longer life.
But modern life has its downsides too. Stress is often seen as a
life-shortening factor—though perhaps the effects are not as lethal
as some people think, or else the Japanese, who are famous for working
long hours, would not have the highest life expectancy in the world.
Another hazard of affluence is getting fat. Around 10-20% of the
adult population in many rich countries, and over 30% in America, are
now clinically obese. Overweight people are at greater risk of cardiovascular
and respiratory diseases, cancer, type-II diabetes and other life-shortening
ailments—though it is not yet clear whether the effects are strong enough
to cancel the trend to greater longevity.
And life expectancy can go down as well as up. In much of eastern
Europe it started dropping in the 1980s in response to the upheaval
in the region, and despite a subsequent slight recovery it has still
not regained the level of the 1960s.
People almost everywhere could extend their life spans further just
by doing a few sensible things, such as not smoking, drinking only in
moderation, eating lots of fruit and vegetables and taking regular exercise.
Educated folk are better at keeping to such rules, and as a group they
live markedly longer than those with only basic schooling. Richer people,
unfairly, also live longer than less well-off ones, even in the developed
world.
But all this is tinkering at the edges. Mankind’s dream has been
to conquer ageing altogether, and scientists are working on it. Spare-part
surgery to replace worn-out bits of the anatomy is already well-established
and will get better with the use of stem-cell technology. For a more
general effect, experiments on rodents have shown that a severely restricted
but balanced diet can increase their lifespan by about 30%. But nobody
knows whether this would work in humans, and even if it did, there might
be few takers.
The longer-term hope is to find a way of switching off the ageing
process by manipulating the appropriate genes, which in theory could
make people near-immortal (though they could still die of accidents
and diseases). But if that were feasible, the consequences would need
to be carefully thought through. In Jonathan Swift’s “Gulliver’s Travels”,
the hero meets a tribe of immortals, the Struldbruggs, who far from
being wise and serene turn out to be a miserable lot: “Whenever they
see a funeral, they lament and repine that others have gone to a harbour
of rest to which they themselves never can hope to arrive.”
Hale and hearty
People in the rich world can now expect to live, on average, more
than a quarter of a century longer than they did 100 years ago. Is that
a blessing or a Struldbruggian curse? Clearly it depends on whether
they become old and frail at the same age as before and just limp on
for much longer, or if the extra years are hale and hearty ones.
Most of the evidence supports the more cheerful view. Research led
by Kenneth Manton at Duke University found that in recent years disability
above the age of 65 in America has been falling significantly. In other
rich countries the picture is more mixed. When the OECD recently looked
at 12 member countries, it found clear signs of a recent decline in
disability in elderly people in only five of them (including America).
But other studies produced more optimistic results.
By and large, people do now seem to remain
in good shape for longer. Moreover, the period of ill
health that usually precedes the final goodbye has got shorter in the
past few decades, which demographers call “compression of morbidity”
(as a rule of thumb, the bulk of spending on an individual’s health
care is concentrated in the last year or two of life, and particularly
in the final six months). This compression has a variety of causes,
including the shift from manual to physically less demanding white-collar
work, rising levels of education and much-improved health care and medical
technology, from keyhole surgery to heart pacemakers. Eighty, it is
said, is the new 65.
But even fairly fit older people need
more health care than younger ones, not least because they often suffer
from chronic diseases that are expensive to treat. In
the EU, one estimate puts health-care spending on the elderly at about
30-40% of total health spending. So will the better health of an ageing
population, good as it has been for so many, impose unaffordable costs
on public-health budgets?
Over the past few decades all OECD countries have seen their health
spending grow considerably faster than their economies. Ageing populations
will add further momentum to that growth. Howard Oxley, a health-care
expert at the OECD, reckons that increased spending on health and long-term
care for the elderly could amount to an extra three-and-a-half percentage
points of rich countries’ GDP by the middle of the century—and a lot
more if spending on medical technology continues to go up at current
rates.
Measured by spending on health care as a share of GDP, America already
tops the list, shelling out the equivalent of more than 15% of GDP (see
chart 4). The American government’s health-care spending will be hugely
affected by ageing because of Medicare, the state-funded health-care
programme for the elderly and disabled, and Medicaid, the programme
for the poor (and often also old, because it covers long-term care).
President Barack Obama is determined to reform his country’s health-care
system to improve coverage and, eventually, drive down costs. More money
does not always produce better results. People in America are less healthy
and die sooner than in Britain, which proportionately spends little
more than half as much on its health care. According to David Cutler,
an economics professor at Harvard who has advised the president on the
reform, even doctors believe that around 30% of money spent on health
care in America is wasted.
Peter Orszag, head of the Office of Management and Budget, has recently
been praising the work of a group of medical experts at Dartmouth Medical
School, led by Elliott Fisher, which has been compiling an atlas of
regional variations in American medical practice and health-care spending,
mainly for people on the Medicare programme. It found that in 2006 Medicare
spending varied more than threefold across American hospital referral
regions. Again, higher spending does not seem to result in better care
or greater patient satisfaction. Because the system has encouraged the
provision of lots of doctors, specialists, hospitals and expensive diagnostic
kit, all of them are kept busy without much regard to results.
The trouble with health care in America, says Muriel Gillick, a geriatrics
expert at Harvard Medical School, is that people want to believe that
“there is always a fix.” She argues that the way Medicare is organised
encourages too many interventions towards the end of life that may extend
the patient’s lifespan only slightly, if at all, and can cause unnecessary
suffering. It would often be better, she thinks, not to try so hard
to eke out a few more hours or weeks but to concentrate on quality of
life.
Take care
But long before they get to that point, growing numbers of old people
will become less able to look after themselves and need more care. Across
the OECD, spending on long-term care is already equivalent to around
15% of total health spending and is rising fast. The great bulk of that
care—an estimated 80%—is still provided by family and friends, the traditional
source of support for the elderly. But more women are going out to work,
so fewer of them have time to look after old folk and formal help is
becoming increasingly important.
In most developed countries only a small minority of over-65s—between
3% and 6%—live in institutions. Keeping old people in nursing homes
or hospitals is expensive, staff is hard to find, and in any case most
people would much rather be looked after at home.
Many countries are now providing grants
to adapt homes, paying families for the care they provide and supplying
helpers to give a hand with things like dressing and bathing.
With far more people reaching a great age, a lot more such care will
be needed in future. How will it be paid for? A few far-sighted countries—including
Germany, the Netherlands, Luxembourg and Japan—have already introduced
mandatory long-term-care insurance schemes. Others may have to follow.
Want to know why GM stock is above zero? Look to
hedge funds and short-term trading.
Long before the June 1 negotiating deadline, it became
quite clear that General Motor s Corp. was headed for bankruptcy. Its
debtholders were going to get crushed. The shareholders were wiped out.
Except that they weren't. As the deadline neared,
shares of GM did a funny thing: They kept trading at more than $1 each.
They didn't disappear.
Last month, shares rose a few pennies during a given
trading day and fell a few pennies the next. Taken as a whole, GM shares
reflected nearly $1 billion in value that did not exist. Even today,
with GM in bankruptcy, the automaker's shares are trading around $1.50.
Market analysts seem baffled, but trading in GM reflects
the sea change that's taken place in the markets during the last decade.
Simply put, the market has slowly given itself to short-term traders.
The traders control volume, and whoever controls the volume controls
the price.
The old notion that profitable companies with good
growth prospects should have rising share prices -- and that failures
like GM should be gone, or at least trading in the pennies -- is history.
Today, a hedge fund investing billions using a quantitative
formula can stall a stock; a couple hedge funds aligned can turn a profitable
company into a Dow laggard. Toss in a few short sellers and you have
the great Wall Street collapse of September 2008.
It wasn't always this way. Before the machines and
the shorts took over Wall Street, stocks were evaluated by an underlying
company's prospects. Buy-and-hold investing ruled the day. Investors
such as Warren Buffett and Bill Miller were the models.
Those fellows are a far cry from this generation's
masters of the universe. Traders are in charge now. They rule the market.
They dominate volume. That stock you bought because you thought the
company was in good shape? It's a pawn in the hands of a computer model
or some supertrader like Steven Cohen at SAC Capital Partners or Bridgewater
Associates' Ray Dalio.
To move a security, they don't need to own it. They
can have a short position. They can put an order to sell 1 million shares
in a dark pool, those anonymous marketplaces that operate outside the
walls of the exchanges. They can own options or futures contracts. Buy
enough GM puts and watch the price begin to fall under the pressure.
Simply having a retirement account is not enough. Much of the discussion
this past year has focused on getting more workers to open a 401k. The
problem is that the big majority of retirement accounts don't really
hold nearly enough money.
According to Bogle's numbers, the median IRA has $55,000 in it. By
his calculations, that's enough to provide a steady income of $2,200
a year -- less than $200 a month. That's it.
The typical 401k holds only $15,000. Bogle argues that to reach the
level of income they hope for in retirement, Americans need to put 15%
of their earnings in retirement accounts for their entire working lives.
Very few do.
One of the biggest differences between
individual accounts and traditional pension plans is that they transfer
what Bogle calls "longevity risk" from pension funds to individuals.
What that means in practice is that you need to save more -- a lot more
-- in your account than a pension plan would include in order to cover
the chance that you'll live to a very old age.
Right now, we have no good solution to this. In theory, you should
be able to put your money into an annuity at retirement that'll cover
this risk. But as Bogle points out, there
are virtually no annuities that will let you do this at a low cost.
So now your underfunded retirement account looks even worse.
One large elephant in the room
that was not discussed is inflation and/or taxes.
All of the money that is being printed by the Feds for various bail
outs, stimulus, budget deficits, is going to lead to either higher taxation,
or printing of more and more paper ruined with green ink.
In my opinion, I expect to see inflation that will make either Zimbabwe
or the Wiemar Republic look fiscally responsible in the near future.
This guy is a regular crazy trader, but some ideas he mentions deserve
a second look.
So, what is a discipline anyway? Here are the standard definitions:
A system of rules of conduct or method of practice.
The trait of being well-behaved.
Training to improve strength or self-control.
It's a process of continually educating
yourself and improving your techniques. The truth is that knowledge
is power, and, in the world of investing, it's also money.
Now, more than ever, we all need to learn to be nimble and flexible.
There is no room for lazy portfolios or
blindly followed tips. We can't afford to fall in love
with any one idea or one stock; cut your losses early, when they're
no more than annoyances.
Several financial planners recommend shorter-term fixed-income investments,
or at the least making sure your bond investments aren’t heavily tilted
toward long maturities, because they are mos.132/search?q=cache:0C86fJ3VQS8J:www.gabrielrobet.com/my_weblog/2008/11/correlation-pitfalls-naive-diversification-and-asset-allocation-strategies.html+naive+asset+allocation&cd=8&hl=en&ct=clnk&gl=us">
Gabriel Robet Correlation pitfalls, naive diversification, and asset
allocation strategies
Correlation pitfalls, naive diversification, and assetallocation strategies
Correlation is the heart of modern portfolio theory and most
asset allocation strategies, where it measures dependence between
financial assets under the assumption of multivariate normally distributed
returns, an assumption almost always violated in real life. Kat
(2002) shows that for correlation to be a good measure of the dependence
structure between the variables involved, it is not enough that
each variable is normally distributed, but one must also verify
that their joint distribution is normal.
If correlations don't work, investors may employ comparatively
unsophisticated strategies for their asset allocation, such as naïve
diversification (also called 1/N heuristics: invest the same amount
in each asset). Naïve diversification is appealingly simple and
usually results in reasonably diversified portfolios. So how well
does naive diversification perform against portfolio optimization
models? DeMiguel, Garlappi and Uppal (2004) test static naïve diversification
against several models of optimal asset allocation and show that
the optimizing models have a higher Sharpe ratio in-sample, but
naive diversification has a higher Sharpe ratio out-of-sample: the
gain from optimal diversification relative to naïve diversification
is typically smaller than the loss arising from the error in estimating
the inputs to the optimizing models.
Kat (2002). The Dangers of Using Correlation to Measure Dependence.
Download pdf
DeMiguel, Garlappi and Uppal (2004). How Inefficient Are Simple
Asset-Allocation Strategies?
Download pdf
What mix of fixed income and equity funds should companies offer
in their 401(k) savings plans to prevent participants from investing
too conservatively or too aggressively? And how should plans deal with
differences in risk aversion across the participant population? Should
plans offer different funds based on age of participants, allowing young
workers to select aggressive, stock-rich portfolios of funds and older
employees to gravitate toward fixed-income funds?
A crucial decision facing retirement savers is how to allocate their
savings across broad investment classes, including the choice of how
to divide investments between domestic and foreign holdings. This study
investigates whether cross-border investing would have been advantageous
to U.S. retirement savers in the past. The analysis is based on empirical
evidence on asset returns in eight industrialized countries that have
reliable historical time series data on stock and government bond returns.
The goal is to determine whether U.S. workers would have obtained higher
expected retirement incomes, with smaller risk of catastrophic investment
shortfalls, if they invested part of their retirement savings in foreign
stocks and bonds without hedging the currency risks of their overseas
investments. The results show that workers could indeed have increased
their expected pensions if they included unhedged foreign assets in
their portfolio and if the portfolio were selected from one on the efficient
frontier. Under many naïve investing strategies, however, increasing
workers’ allocation to overseas assets will not reduce the risk of catastrophically
poor investment performance. The tabulations
show that the risk of obtaining a very low pension replacement rate
actually increases if workers allocate a sizeable percentage of their
savings to overseas investments.
“If another decline in the market is going to bankrupt you or put
you out of business or destroy your retirement account, you should not
go back into the stock market,” said
John C. Bogle, the founder of Vanguard and viewed by many as the
father of index investing. “It’s not complicated. The stock market can
go up and down a lot and nobody really knows how much and when.”
What’s worked for Mr. Bogle may not work for you, but his method
isn’t a bad place to start. “I have this threadbare rule that has worked
very well for me,” he said in an interview this week. “Your bond position
should equal your age.” Mr. Bogle, by the way, is 80 years old.
... ... ...
As to those investors who got out of stocks, Mr. Bogle said it might
be time for some of them to get back in. “But I would take two years
to do it,” he said. “Maybe average in over eight quarters, and do an
eighth each quarter. I am just not in favor of doing things in a hurry
or emotionally.”
And then? “Don’t touch it,” he said, emphatically. “One of my rules
is don’t do something. Just stand there.”
... ... ...
There are different ways to invest your cash and bond holdings.
Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years
of annual expenses in a bond ladder, with an equal amount coming due
every six months. The ladder can include high-quality corporate bonds,
Treasury notes, certificates of deposit or
municipal bonds, depending on the retiree’s tax bracket. Mr. Simon
takes a similar approach using a 15-year ladder of zero-coupon bonds.
He says that investors can start building the ladder in their 50s, with
the first rung coming due the year they retire.
Middle aged men and pensions in the industries. Much wealth has
vanished...I notice a lot of apathy among employees such as teachers
whose state plans have not declared losses yet except generally. The
MA plan declared a 29% "loss" in value, but I have yet to see a clear
statement about what the "loss" implies, how much is perhaps permanent
as in owning worthless paper, and how current revenue can handle the
next few years of retirements of boomers. Can anyone help out in this
evaluation?
Selected comments
Noni Mausa replies:
“Jay said: "...It is better for one person's mistake with
other people's money to affect thousands of workers, rather than one
person's mistake with their own money..."
There's so much wrong with this brief comment that I hardly know where
to start.
Chief among them, though, is that it wasn't
"one person's mistake" that
lost Americans a quarter of their 401(k) investments.
It was a network of liars and thieves and incompetents and ideologues,
regulated by Lady Justice blindfolded and swordless.
Some companies, it's true, scuppered their pension plans under chapter
11 as the only alternative to complete failure. But
many went into chapter 11 as the "neutron bomb" option -- wipe out
(their debts to) their people, while leaving the buildings standing.
And some never maintained their pension funds in the first place, or
raided them for quick cash when they felt like it.
The single key to the mass collapse of the money system was the reduction
of fiscal governance in almost all levels and domains.
Now, it is true the market will take care of itself over time.
But it won't take care of us. The sea always seeks the
lowest level, but this doesn't help when you're drowning.
What will Americans do now, to try to avoid a future skinning like this?
They've been shown that in a "I will gladly pay you Tuesday" scenario,
Tuesday never comes -- that cash-in-hand is the only pay they can be
sure they will get. How would you bargain, Jay, in such
a work environment?
Recently I read three extremely thought-provoking articles. Although
none made me want to rush out and buy stocks, they're certainly worth
bringing to the attention of my readers.
The first: Jeremy Grantham's latest quarterly letter, headlined "The
Last Hurrah and Seven Lean Years" (.pdf file). I encourage everyone
to read it, save it and read it a few more times. This is one of the
best investment articles I've encountered in my 30 years as a money
manager.
Imagining the outcomes
Grantham does a particularly good job of explaining why trying to come
up with guesses about market outcomes -- a fool's game that those of
us in the business are always engaged in -- is more difficult now than
it has been at many junctures in the recent past.
I won't try to paraphrase his view on where we are right now because,
as he notes, in light of the environment, one has to give one's best
ideas a wide berth.
That said, Grantham does present his own probabilities for various
outcomes. He also shares some really interesting insights regarding
investment "rigor mortis," a very seductive and dangerous trap that
catches nearly everyone on occasion and
keeps them from moving when it's time for action.
In addition, he introduces the concept of a recovery that has a "VL"
shape, which I find quite interesting. This is an economy "in which
the stimulus causes a fairly quick but superficial recovery, followed
by a second decline, followed in turn by a long, drawn-out period of
sub-normal growth."
Regarding all the stimuli government is handing out, Grantham makes
a point that I have thought about but not expressed: Stocks react to
stimuli a lot more quickly than the economy reacts.
His expansion of that belief: "If the stock market is many times
more sensitive to financial stimulus in the short term than the economy
is, then we could easily get a prodigious response to the greatest monetary
and fiscal stimulus by far in U.S. history."
For more than two decades, as income inequality increased and job
security decreased, Americans lapped up personal finance columns, books,
and television shows. We thrilled to stock tips and swooned at sensible
strategies for using dollar-cost averaging to
invest in no-load
index funds. Buy and hold, my friends! The annualized gain for the S&P
500 stock index over time is more than 10 percent! You, too, can turn
into the millionaire next door. Carpe diem, folks! Seize the financial
day!
The advice proffered by the vast majority of analysts,
would-be gurus, and television pundits came down to one word: stocks.
Some, like CNBC's infamous Jim Cramer, advocated stock-picking strategies.
Others encouraged mutual
funds. But very few
— at least of those that could get publicity via mainstream outlets
— doubted the efficacy of the market.
That our personal
finances weren't fully
ours to seize didn't seem to occur to many of us until recently, when
the stock market plunged almost 40 percent in a mere year, housing went
into free fall, and the unemployment rate began to climb perilously
toward double digits. All these facts suddenly left the personal finance
industry facing a conundrum of its own making. The backbone of the self-help
complex is the idea that you can do it. You. Singular. But what happens
when you lose your job and can't find a new one before your six months
of recommended emergency savings runs out? Or a good chunk of your retirement
income is in the form of a pension from your former employer — and that
employer is named Chrysler? What then?
"Personal
finance has come to substitute for
the role government should play for people," observes
Nan Mooney, author of (Not) Keeping Up with Our Parents.
"In the past 20 years the myth of the person succeeding on their own
has gotten bigger and bigger. This myth is dangerous. It tells you if
you can't balance everything and you are in debt, it is your fault."
Sounds harsh, but if you are laid off and at the
end of your resources, what other message can you take away from people
like mega-personal finance guru Suze Orman, who continues to argue that
people's main problem with money is ... emotional. (Orman also urges
people to invest for retirement in the stock market, while admitting
the bulk of her savings is in municipal bonds.)
Or Jean Chatzky of everywhere from NBC's Today show
to Oprah's couch, who helpfully tells people in her latest book, The
Difference: How Anyone Can Prosper in Even the Toughest Times, "Overspending
is the key reason that people slip from a position
of financial security into a paycheck-to-paycheck existence." (Note:
Italics original to Chatzky.)
Chatzky forgets to mention
that studies have demonstrated the problem most likely to land one in
bankruptcy court isn't an addiction to designer clothes but, instead,
overwhelming health care expenses.
"Buy and hold" is an age-old investment strategy that made many people
money in years past, but some investment advisers now say that philosophy
is a losing proposition. Gerald Jordan, of Hellman Jordan Management;
and Jack De Gan, of Harbor Advisory; and Doug Kass, of Seabreeze Partners,
discuss.
“We’ve long had a buy and hold strategy, but that’s a strategy only
in a secular bull market, which we’re not in right now,” said Jack DeGan
of Harbor Advisors. He suggested investors be "more opportunistic
around valuations and trade in a core position."
Run on 401Ks coming?
401(k)s Hit by Withdrawal Freezes
Investors Cry Foul as Some Funds Close Exits; Perils of Distressed Markets
By ELEANOR LAISE
Some investors in 401(k) retirement funds who are moving to grab
their money are finding they can’t.
Even with recent gains in stocks such as Monday’s, the months of
market turmoil have delivered a blow to some 401(k) participants: freezing
their investments in certain plans. In some cases, individual investors
can’t withdraw money from certain retirement-plan options. In other
cases, employers are having trouble getting rid of risky investments
in 401(k) plans.
When Ed Dursky was laid off from his job at a manufacturing company
in March, he couldn’t withdraw $40,000 from his 401(k) retirement account
invested in the Principal U.S. Property Separate Account.
That fund, which invests directly in office buildings and other properties,
had stopped allowing most investors to make withdrawals last fall as
many of its holdings became hard to sell.
Now Mr. Dursky, of Ottumwa, Iowa, is looking for work and losing
patience. All he wants, he said, is his money.
“I hate to be whiny, but it is my money,” Mr. Dursky said.
The withdrawal restrictions are limiting
investment options for plan participants and employers at a key time
in the markets. The timing is inconvenient for the number
of workers like Mr. Dursky who are laid off and find their savings inaccessible.
Though 401(k) plans revolutionized the retirement-savings landscape
by putting investment decisions in the hands of individuals, the restrictions
show that plan participants aren’t always in the driver’s seat.
Individual investors mightn’t even be aware of some behind-the-scenes
maneuvers causing liquidity problems in their retirement plans.
Many funds offered in 401(k) plans lend
their portfolio holdings to other investors, receiving in exchange collateral
that they invest in normally safe, liquid holdings.
The aim is often to generate a small but relatively reliable return
that can help offset fund expenses. But in recent months, many of the
collateral investments have gone haywire, prompting money managers to
restrict retirement plans’ withdrawals from the lending funds.
Some stable-value funds also are blocking
the exits. These funds, available only in tax-deferred savings plans
such as 401(k)s, typically invest in bonds and use bank or insurance-company
contracts to help smooth returns. But in cases of employer bankruptcy
and other events that can cause withdrawals, these funds can lock up
investor money for months at a time.
Investors in the Principal U.S. Property Separate Account said they
understood the risk of losses, but didn’t think their money could be
locked up for months or years. Most participants in the 15,000 plans
holding the fund haven’t been able to make any withdrawals or transfers
since late September.
“To sell property at inappropriately low prices in order to generate
cash for a few would hurt the majority of investors and violate our
fiduciary obligations,” said Terri Hale, spokeswoman for Principal Financial
Group Inc., the parent of the fund’s manager. The fund, which had $4.3
billion in net assets at the end of April, still is making distributions
for death, disability, hardship and retirement at normal retirement
age.
As of April 28, redemption requests that had yet to be honored totaled
nearly $1.1 billion, or roughly 26% of the fund’s net assets. Principal
doesn’t anticipate that it will make any distributions to investors
who have requested redemptions until late 2009 or beyond, Ms. Hale said.
Meanwhile, the fund continues to fall, declining 25% in the 12 months
ending April 30.
Some investors have lost hope of recovering their money. Judith Sterner,
a 69-year-old part-time nurse, had more than $12,000 in the fund when
she tried to transfer that balance to a money market last fall. But
her transfer was denied, and her stake has since declined to less than
$10,000.
“This $12,000 represents a year of my retirement money that I don’t
have,” said Ms. Sterner, of Morton Grove, Ill.
Principal still allows new investors into the fund. It categorizes
the U.S. Property account as a fixed-income investment, alongside much
stodgier funds holding high-quality bonds. New investors are warned
of potential withdrawal delays, Ms. Hale said. As for the fixed-income
categorization, she said, “a substantial portion of the account return
is based on income streams from rents, and its returns have been comparable
to fixed-income funds.”
While the problems selling real-estate investments are relatively
straightforward, withdrawal restrictions related to securities lending
stem from far more obscure practices.
Funds often lend out portfolio holdings, through a lending agent,
to other investors. These borrowers give the lender collateral, often
amounting to about 102% of the value of the securities borrowed. Some
of the collateral pools in which funds invest this collateral held Lehman
Brothers Holdings Inc. debt and other investments that plummeted in
value or became hard to trade in the credit crunch.
Though agents who coordinate funds’ lending programs share in profits
from securities lending, the risk of such collateral-pool losses falls
entirely on the funds that have lent the securities and, ultimately,
retirement plans and other investors holding those funds.
The problems have limited retirement plans’ ability to get out of
securities-lending programs, though participants’ withdrawals generally
haven’t been affected.
Retirement plans offered to employees of energy company BP PLC last
fall tried to withdraw entirely from four Northern Trust Corp. index
funds engaged in securities lending. Certain holdings in Northern’s
collateral pools had defaulted, been marked down, or become so illiquid
that they could only be sold at low values, according to a BP complaint
filed in a lawsuit against Northern Trust.
The BP plans halted new participant investments in the funds and
asked to withdraw their cash so it could be reinvested in funds that
don’t lend out securities.
But under restrictions imposed by Northern Trust in September, investors
wishing to withdraw entirely from securities-lending activities would
have to take their share of both liquid assets and illiquid collateral-pool
holdings, according to a Northern Trust court filing. BP rejected that
option, and the companies still are trying to resolve the matter in
court.
Northern Trust’s collateral pools are “conservatively managed” and
focus on liquidity over yield, the company said.
State Street Corp. in March notified investors of new withdrawal
restrictions in its securities-lending funds. Until at least the end
of the year, plans can make monthly withdrawals of only 2% to 4% of
their account balance, the notice said.
Plans wishing to withdraw entirely from lending funds will have to
take a slice of beaten-down collateral-pool holdings.
“Given the current state of the fixed-income market, we felt it was
prudent to put some well-defined withdrawal parameters in place,” said
State Street spokeswoman Arlene Roberts.
"Stock monkeys" like "speak-first-think-later" pundit James Cramer are
so despicable (if not criminal, see
Cramer v. Stewart on Daily Show) ) that I wonder how even openly tabloid
TV channel (CNBC) can keep him on staff. Stewart criticized Cramer
for being a bad journalist-- for sucking up to and being co-opted by the
people he should be covering, for failing to ask these people tough questions,
for failing to treat their answers with appropriate skepticism, for failing
to do independent investigation to discover the problems in the U.S. economy
and the misbehavior of financial elites. Stewart criticized Cramer for being
a Wall Street sycophant, essentially a cheerleader for a financial bubble
("who gives a shit -- put some money in -- roll the dice and see what happens")
and thus had encouraged millions of ordinary Americans to invest in junk
and then lose much of their savings later on. Stewart called him a
corrupt journalist, who served with financial elites helping them to rip-off
the ordinary citizens he was supposed to inform
Years ago, when I wrote a popular financial makeover feature for a major
national newspaper, one of our subjects asked if he should be plowing
his more than $50,000 in savings into gold. It was 1997 and gold was
trading at a little more than $300 an ounce. The financial planner assisting
with the piece laughed dismissively, and the question never made it
into the final write-up. Well, my bad. As I write, gold is hovering
around $900 an ounce.
For more than two decades, as income inequality
increased and job security decreased, Americans lapped up personal finance
columns, books, and television shows. We thrilled to stock tips and
swooned at sensible strategies for using dollar-cost averaging to invest
in no-load index funds. Buy and hold, my friends! The annualized gain
for the S&P 500 stock index over time is more than 10 percent! You,
too, can turn into
the millionaire next door. Carpe diem, folks! Seize the financial
day!
The advice proffered by the vast majority
of analysts, would-be gurus, and television pundits came down to one
word: stocks. Some, like CNBC's infamous
Jim Cramer, advocated
stock-picking strategies. Others encouraged mutual funds.
But very few—at least of those that could
get publicity via mainstream outlets—doubted the efficacy of the market.
That our personal finances weren't fully ours to seize didn't seem
to occur to many of us until recently, when the stock market plunged
almost 40 percent in a mere year, housing went into free fall, and the
unemployment rate began to climb perilously toward double digits. All
these facts suddenly left the personal finance industry facing a conundrum
of its own making. The backbone of the self-help complex is the idea
that you can do it. You. Singular. But what happens when you lose your
job and can't find a new one before your six months of recommended emergency
savings runs out? Or a good chunk of your retirement income is in the
form of a pension from your former employer—and that employer is named
Chrysler? What then?
"Personal finance has come to substitute for the role government
should play for people," observes Nan Mooney, author of
(Not) Keeping Up with Our Parents. "In the past 20 years the
myth of the person succeeding on their own has gotten bigger and bigger.
This myth is dangerous. It tells you if you can't balance everything
and you are in debt, it is your fault."
Sounds harsh, but if you are laid off and at the end of your resources,
what other message can you take away from people like mega-personal
finance guru Suze Orman, who
continues to argue that people's main problem with money is ... emotional.
(Orman also urges people to invest for retirement
in the stock market, while admitting the bulk of her savings is in
municipal bonds.) Or
Jean Chatzky of everywhere
from NBC's Today show to Oprah's couch, who helpfully tells
people in her latest book,
The Difference: How Anyone Can Prosper in Even the Toughest Times,"Overspending is the key reason that people slip from a position
of financial security into a paycheck-to-paycheck existence." (Note:
Italics original to Chatzky.) Chatzky forgets
to mention that studies have demonstrated the problem most likely to
land one in bankruptcy court isn't an addiction to designer clothes
but, instead,
overwhelming health care expenses.
All in all, these might not be the right messages just now. While
Orman's book, no doubt propelled by her continuing celebrity and television
show, remains at the top of the New York Times best-seller list,
Chatzky's book is languishing listless, a very different fate than the
one met by her
last book, which was released in a different era—2006, to be precise.
In the current economic climate, a new group of au current advisers
is coming to the fore. Many of them, like
Peter Schiff, received their initial
boost of fame by predicting various aspects of the current meltdown
and are now trying to make money by telling people how to survive and
thrive in the post-crash world. Schiff's
Crash Proof, currently in its 11th printing, urges
consumers to buy gold to hedge against coming hyperinflation. At the
other end of the spectrum is
Martin D.
Weiss' recently published
The Ultimate Depression Survival Guide. Weiss, a Florida-based
investment adviser, advocates that many people should cut their stock
losses and sell off, as we are entering a period of deflation.
Online gurus are also seeing spikes.
ITulip.com's Eric Janszen says
he received 12,000 new subscribers last year. George Ure, a business
consultant who runs the free site
UrbanSurvival.com and
the subscription site Peoplenomics,
makes predictions about future events based on a linguistics theory
applied to Internet postings and has seen an increase of more than 20
percent in unique visitors year over year. Nonetheless, it's not looking
like the new gurus will be any more helpful than their more conventionally
minded peers. After all, the online world
has been abuzz with accusations that many of Schiff's personal clients
suffered losses of
between 40 percent to 70 percent in 2008.
Which leads to another question: What's next for personal finance?
The past two years have demonstrated over and over again that bad things
can happen to good savers and investors. Very few of us have the wherewithal
to fund both retirement savings and a large enough emergency fund to
sustain us through a bout of unemployment lasting, say, more than a
year. No one, it turns out, really knows what an individual stock, mutual
fund, or commodity like oil or precious resource like gold will be worth
in six months, never mind six years.
Nonetheless, personal finance is unlikely to crawl away and die anytime
soon for a simple reason: We think we need it. "We're kind of screwed
but we don't have a choice but to take care of ourselves because no
one else is helping," admits MSN's personal finance columnist,
Liz Weston.
A number of personal finance gurus have been moving, some ever so
slowly, over toward the idea of pressuring the government for change.
Weston, who has written extensively about what should be and isn't in
pending congressional legislation putting brakes on the credit card
industry,
is begging her readers to contact their representatives about the plan.
Others have gotten more ambitious. Schiff used his burst of fame to
endorse presidential
candidate Ron Paul. Weiss is currently circulating a
petition to stop further bank bailouts.
Me, I'd settle for a few mea culpas from our finance gurus. After
all, I am aware I owe my gold-loving dude an apology. Unfortunately,
I know the planner assigned to the case won't be eating crow any time
soon. I recently received a copy of
his latest book in the mail. It's all about how if you can just
identify your money archetype, financial success will be yours. Oh,
and one other thing. The press release quotes him as advising, "Don't
rush out to buy gold."
Impact varies by account balance: ... those with more than
$200,000 in account balances had an average loss of more than 25 percent.
Impact varies by age and job tenure: 401(k) participants on
the verge of retirement (ages 56–65) had average changes during this
period that varied between a positive 1 percent for short-tenure individuals
(one to four years with the current employer) to more than a 25 percent
loss for those with long tenure (with more than 20 years).
Short-term vs. long-term: While much of the focus has been
on market fluctuations in the last year, investing for retirement security
is (or should be) a long-term proposition. When a consistent sample
of 2.2 million participants who had been with the same 401(k) plan sponsor
for the seven years from 1999–2006 was analyzed, the average estimated
growth rates for the period from Jan. 1, 2000 through Jan. 20, 2009,
ranged from +29 percent for long-tenure older participants to more than
+500 percent for short-tenure younger participants.
Recovery time and future stock market performance: This analysis
also calculates how long it might take for end-of-year 2008 401(k) balances
to recover to their beginning-of-year 2008 levels, before the sharp
stock market declines. Because future performance is unknown, this analysis
provides a range of equity returns: At a 5 percent equity rate-of-return
assumption, those with longest tenure with their current employer would
need nearly two years at the median to recover, but approximately five
years at the 90th percentile. If the equity rate of return is assumed
to drop to zero for the next few years, this recovery time increases
to approximately 2.5 years at the median and
nine to 10 years at the 90th percentile.
Near-elderly with very high equity exposure: Estimates from
the EBRI/ICI 401(k) database show that many participants near retirement
had exceptionally high exposure to equities: Nearly 1 in 4 between ages
56–65 had more than 90 percent of their account balances in equities
at year-end 2007, and more than 2 in 5 had more than 70 per-cent. As
a result of the Pension Protection Act of 2006, many 401(k) plan sponsors
appear to be offering lifecycle/ target-date funds, which automatically
rebalance asset investments into more "age appropriate" allocations.
Had all 401(k) participants been in the average target date fund at
the end of 2007, 40 percent of the participants would have had at least
a 20 percent decrease in their equity concentrations, and consequently,
may have mitigated their losses, sometimes to an appreciable extent.
Millions of mutual fund investors have been sold a pipedream and
they don't even know it. Others know it and they simply don't care.
If you own mutual funds, isn't it time you found out how your funds
have really performed versus corresponding index funds and ETFs?
To that end, Standard & Poor's has just released its analysis of
active mutual fund managers compared to S&P indexes. And the data is
a stunning blow to all would-be market beaters.
S&P's research discovered the majority of active funds in 8 of 9
major stock categories failed to beat corresponding S&P stock indexes.
The S&P 500 (NYSEArca:
SPY -
News) beat 71.9% of
active managers while the S&P MidCap 400 (NYSEArca:
MDY -
News) and S&P SmallCap
600 (NYSEArca: IJR
-
News) outperformed 79.1% and 85.5% of managers in matching categories.
The data was recorded over a five-year period ending in 2008.
'The belief that bear markets favor active management is a myth,'
stated the S&P report. The analysis also revealed similar results of
bear market underperformance by mutual fund managers during the last
downturn from 2000 to 2002.
What does all of this mean?
It means the statistical evidence continues to show that
investors would be better off investing
in dumb index funds and ETFs than investing with dumb fund managers.
Rewarding Failure
One of the key problems with mutual fund management is their convoluted
business practices of rewarding failure. Instead of punishing bad behavior,
they reinforce it. For example, in 2008, Mario Gabelli vacuumed in a
$46 million paycheck from GAMCO Investors (NYSE:
GBL -
News) even though client
assets at the firm fell by 33%. Despite the worst economic and market
conditions of our generation, Wall Street's fund executives are still
cashing in like a bear market never happened. Mr. Gabelli is a Barron's
roundtable contributor and he presides over funds such as the Gabelli
Equity Trust (NYSE: GAB
- News) and the Gabelli
Asset Fund (Nasdaq:
GABAX -
News).
'Having a mutual fund management company is like having a toll
booth on the George Washington Bridge all for yourself,' is what Marty
Whitman, manager of the Third Avenue Value Fund (Nasdaq:
TAVFX -
News) told Forbes Magazine. If that's true, it looks like John Bogle's
'Designing a New Mutual Fund Industry' will have to wait a few more
decades. Sorry Jack. In the meantime, all investors should immediately
start re-designing their own investment portfolios to avoid getting
victimized.
Who's Protecting Who?
Instead of protecting mutual fund shareholders as they should be,
mutual fund titans have resorted to 4th grade techniques, namely, finger
pointing. In a recent letter to mutual fund shareholders, the Chairman
of Fidelity Investments Edward C. 'Ned' Johnson III, gave the financial
services industry a severe verbal licking.
'Although we ended 2008 better than a number of financial firms,
it was a year of painful experience for the financial services industry,
a period laced with toxic investment waste and the casual use of other
people's money by a number of institutions,' Johnson said.
What Johnson failed to mention in his criticisms was the most interesting
of all.
Did you know that Fidelity's fund managers more than doubled their
ownership stake of floundering bailout kid, Citigroup (NYSE:
C -
News) during the fourth quarter of last year? As Citi was sinking,
so were Fidelity's equity mutual funds. In 2008, 64 percent of the firm's
stock funds were beaten by its peers. I wonder if this is this the 'toxic
investment waste' Fidelity's Chairman was referring to.
In contrast, index funds and ETFs have been 'protecting' their shareholders
during this vicious bear market. How? Quite simply, by not doubling
and tripling up on dead-beat stocks like Citigroup. Now that Citi's
market cap has collapsed, so has its rotten-apple influence on the performance
of major stock benchmarks that contain it. By design, stocks with the
lowest market capitalizations have the least amount of influence on
the performance of an index.
The Performance Chasing Mafia (PCM)
There are others who claim they can find mutual funds that do beat
the market. I classify them as official members of the performance chasing
mafia or 'PCM' for short. They remain utterly defiant (and aloof) about
the relevant statistical facts, because they know better.
Take for example, Adam Bold, founder and chief investment officer
of The Mutual Fund Store, a chain of 70 fee-only financial advisers.
He recently told Bloomberg, 'I'm a believer that by indexing, you're
accepting mediocrity. There are a limited number of people who have
shown an ability to consistently beat the market year after year.' Earth
to Adam! Earth to Adam!
The problem, which Mr. Bold doesn't address, is that it's next to
impossible to accurately pre-identify top performing fund managers before
they become top performing fund managers. That leaves people like Bold
with one choice: To chase historical performance. Investors almost never
get what they bargained for and performance chasing advisors get lots
of fees. Nevertheless, Bold has made himself a very successful Wall
Street career in helping people to identify yesterday's winners, as
his $4 billion monstrosity illustrates.
Finding Better Alternatives
Index ETFs are the solution to avoiding underperforming mutual funds.
If you don't want to be limited to ETFs that follow S&P stock indexes,
there are other excellent choices to consider.
For example, Vanguard's ETFs follow MSCI constructed indexes, which
generally tend to be broader and more diversified because they own more
securities. See the Vanguard Large Cap ETF (NYSEArca:
VV -
News), the Vanguard
MidCap ETF (NYSEArca:
VO - News), and
the Vanguard SmallCap ETF (NYSEArca:
VB -
News). All of these Vanguard ETFs charge rock bottom annual expenses
that range from 0.07% to 0.13%.
If you need ideas on how to build a successful all-ETF portfolio,
check out ETFguide's
Ready-to-Go
ETF Portfolios. Our ETF Portfolios just finished their third straight
year of outperforming major benchmarks like the S&P 500 and MSCI EAFE
(NYSEArca: EFA -
News) stock index. Which ETFs can help you reach your investment
goals? Take the time to learn more.
Mutual funds have provided a wide variety of investment styles and
strategies for many years. In fact, the number of mutual funds has almost
eclipsed the actual number of stocks traded in the stock market. This
broad offering of products has presented a challenge to both retail
and institutional investors, as they try to determine the best funds
to reach their desired results in each respective asset class.
The mutual fund rating business has blossomed from a quarterly rating
service to a multimillion dollar industry. Rating agencies provide a
valuable service to customers and keep the fund managers on their toes
with constant scrutiny, which can make or break a fund's success. Still,
while the ratings are important to investors, they can be deceiving.
In bear markets, a high-rated fund can perform just as well (or a badly)
as a low-rated fund can, regardless of strong performance in a bull
market.
The Lipper Rating System
Lipper provides mutual and hedge fund reviews, commentary and tools
used for screening and analyzing data. While Lipper services the institutional
and asset management industry, its mutual fund services are provided
in detail for retail investors of all levels. Lipper's proprietary rating
system, Lipper Leaders, covers more than 80,000 funds and uses consistency,
capital preservation, peer performance and expense management as its
tenets, among other factors. The Lipper ranking system is based on a
scale of one to five (with five being the highest rating). Lipper Leaders
are the funds that rank in the top 20% of their peer ratings, with the
next 20% receiving a rating of four, and so on.
The Morningstar Rating System
Morningstar also uses a ranked system, but it uses stars instead
of numbers as the rating standard. Also similar to Lipper, Morningstar
offers both online and hard copy reports tailored to specific investors'
preferences. Morningstar also created a nine-square style box for both
equity and fixed-income funds, which depicts styles and size categories.
Morningstar presents breakdowns for equity funds into 12 industry groups
inside three primary economic sectors to compare weighting decisions.
Chasing Performance
Performance is likely the most recognizable component of mutual fund
ratings. This component by itself is easy to follow and does not require
in-depth knowledge of the market. However, "chasing performance" has
led many investors into what is known as the "performance trap." This
is when money flows heavily into a fund that was highly rated in the
previous year. More often than not, that same fund does not repeat such
impressive numbers in the following period. In this situation, consistency
comes into play and rating firms add some value. Ratings firms will
apply expertise and evaluate a fund's performance on a relative and
absolute basis.
Because different investing styles tend to display varying results
over market cycles, new styles can be extremely important to an investor.
The rating companies can add much value here, as it is not a good idea
to leave style analysis up to the fund manager.
The Downside of Ratings
One of the biggest problems with mutual fund ratings is that during
a long-term bull market, investors and those who rate funds can easily
become complacent. During volatile market times, mutual funds managers
are susceptible to any temptation to try to increase performance or
protect against downside risk; both factors can lead to rogue trading,
or even fraud.
Also, due to the lengthy process of becoming a highly-rated fund,
up-and-coming funds may not be recognized in time to make a substantial
investment in their early period.
The Bottom Line
The business of evaluating mutual funds has evolved into an industry
in itself. Mutual funds are evaluated on many levels beyond just performance,
including peer group comparisons, sector weightings and cash holdings.
Though not infallible, ratings systems can provide investors with relative
guidance and direction that can lead to decent returns.
Pension funds have been hit hard by the stock market crash, losing
about a third of their value in some cases, and there may be another
problem.
Before the crash, some financial experts warned that pension
funds were making overly optimistic projections of investment earnings
in the decades ahead, often assuming about 8 percent a year.
Investment earnings, the heart of a modern pension system, are
usually expected to provide two-thirds or more of the revenue needed
to pay retiree benefits in the future.
In public employee retirement systems, a rosy forecast of future
earnings means that fewer taxpayer dollars have to be spent to provide
generous retirement benefits.
The giant California Public Employees Retirement System assumes
annual earnings averaging 7.75 percent in the decades ahead. The
California State Teachers Retirement System assumes 8 percent.
Lowering the projection of earnings by even a percentage point
or two would create a funding gap of tens of billions of dollars.
CalPERS, an industry leader, warned its 1,500 local government
members last fall that their employer contribution rates may increase
from 2 to 5 percent of payroll in July 2011 if the stock market
does not recover by June 30, the end of the current fiscal year.
Beyond raising rates to plug the big hole punched in pension
funds by the stock market crash, the problem could get even bigger
if forecasters decide that the critics are right, lowering projections
of future earnings.
After the big drop in the stock market last fall, the CalPERS
investment portfolio, once a high flier, had an average annual return
of 3.32 percent for the last 10 years, well below the forecast of
7.75 percent.
A prominent critic of the high earnings forecasts, David Crane,
was a rare appointee to a pension system board, CalSTRS, with a
big-league background in investments.
Crane, an adviser to Gov. Arnold Schwarzenegger, helped build
a small San Francisco business, Babcock & Brown, into a global investment
firm, becoming personally wealthy along the way.
After the governor put Crane on the CalSTRS board and he had
served almost a year, the Senate refused to confirm the appointment
in June 2006, ousting a board member who had repeatedly questioned
the 8 percent earnings forecast.
Legendary investor Warren Buffet, in his annual letter to Berkshire
Hathaway shareholders in February of last year, questioned the 8
percent earnings forecast common among the pension funds of major
corporations.
“How realistic is this expectation?” Buffet said. “Let’s revisit
some data I mentioned two years ago: During the 20th Century, the
Dow advanced from 66 to 11,497. This gain, though it appears huge,
shrinks to 5.3 percent when compounded annually.”
[Note: On the above calculation, a senior pension fund manager
wrote me: "Don't believe everything you read, take out your calculator."]
The founder of Vanguard mutual funds, John Bogle, told a congressional
hearing on retirement security last month that corporate pension
funds raised their assumed earnings from 6 percent in 1981 to 8.5
percent by 2007, far above historical norms.
“And the pension plans of our state and local governments seem
to be in the worst condition of all,” Bogle said, adding parenthetically:
“Because of poor transparency, inadequate disclosure, and non-standardized
reporting, we really don’t know the dimension of the shortfall.”
The plight of the public employee pension funds has drawn a creative
proposal from U.S. Rep. Gary Ackerman, D-New York, to shore up two
of the nation’s troubled institutions.
Public pension funds would pool some of their money and buy $50
billion to $250 billion worth of stock in banks. In exchange, the
federal government would guarantee the pension funds an annual return
of about 8.5 percent.
Earnings forecasts were not a problem in the early days of California
public employee pension funds, when investments were limited to
fixed-income bonds and mortgages.
In 1966, a ballot measure, Proposition 1, allowed the pension
systems to put 25 percent of their funds into blue-chip stocks.
Advocates said the change would enable increased retirement benefits
and lower employee and taxpayer contributions.
A measure to allow 60 percent of pension funds to be invested
in stocks, Proposition 6, was rejected by voters in 1982. But two
years later voters approved a far broader measure, Proposition 21,
simply requiring that investments be “prudent.”
The ballot pamphlet argument said the measure, still in effect
today, is similar to federal law covering private pension funds
and is needed to prevent inflation from eroding the value of pension
funds.
The ballot argument said pension fund trustees are “personally
liable” if they invest funds without “the degree of care expected
of a prudent person, who is knowledgeable in investment matters.”
The lifting of the restrictions on investing in stocks in 1984
came a few years after legislation allowed public employees to form
unions and bargain collectively for labor contracts, which usually
include retirement benefits.
A state labor law in 1968 covered local government employees.
Teachers were added in 1975 under the Educational Employment Relations
Act, state employees in 1977, and University of California and California
State University employees in 1978.
Many public employee labor unions went on to negotiate contracts
providing generous benefits — up to 90 percent of the final salary
at age 50 for some police and firemen — that are expected to be
paid mainly by pension fund investment earnings.
Retirement benefits provided by a labor contract have strong
legal protection. In a widely watched test case, the City of Vallejo
declared bankruptcy last year and asked a federal bankruptcy judge
to overturn its labor contracts.
In hindsight, after a historic market crash that may force taxpayers
to bail out pension funds, was it prudent to lift the restrictions
on investing in stocks?
Calpensions asked an expert, Alicia Munnell, director of the
Center for Retirement Research at Boston College.
“In the old days (before the mid 1980s), many public plans had
limitations on equity investments,” Munnell replied by e-mail. “Virtually
all have eliminated those constraints. Allowing more freedom to
the investment managers is probably a positive development.
“The controversial area is the rate of return assumed in the
actuarial valuation of pension plans. Public sector sponsors tend
to assume high returns (8 percent or more), which makes the taxpayers’
commitment for future benefits seem small and encourages major expansion.
“Bottom line: a free hand for investment managers is a good idea;
more cautious assumed rates of return would help check major benefit
expansions.”
I always wondered where that 8% came from. With long-term bond yields
at historic lows, this figure is pie-in-the-sky because pension funds
will be lucky to get 8% a year in the next few years.
Investors overwhelmingly hold negative views toward credit rating
agencies and the Securities and Exchange Commission, and they expect
the market slump will continue into next year, a survey by the Greenwich
Roundtable and Quinnipiac University found.
The survey of 89 wealthy private and institutional investors
in late January and early February found confidence in regulators
and in hedge funds was shaken during the credit crisis. It will
take six to 12 months of healthier markets before investors jump
back in, the survey reported.
"Leverage, liquidity and lack of confidence are still keeping
the sophisticated investor on the sidelines," Steve McMenamin, executive
director of the Greenwich Roundtable, said in a statement.
As a result, he said, unprecedented numbers of limited partners
refuse to make new commitments to alternative investments, such
as hedge funds.
Greenwich Roundtable is an organization for investors who allocate
capital to alternative investments, with members representing more
than $6.4 trillion in assets.
Among other findings, more than one-third of those surveyed said
they lowered allocations to hedge and private equity investments
during the past quarter, though more than one-half left allocations
unchanged.
One-third reported that as many as 40 percent of their fund managers
suspended redemptions, while close to one-quarter were dissatisfied
with the way redemption gates were currently structured. Ten percent
of investors complained gates were being abused.
These LPs should have checked those gait clauses more carefully before
committing the big money to hedge funds. It's too late to whine about
it now!
[Note: I am skeptical of any hedge fund ETF that charges 0.9% per
year. Investors should ask who is on this platform and how they performed
over the past 12 months. A better solution for investors looking for
"passive" liquid exposure to hedge funds is to replicate hedge fund
indexes using a few futures contracts (this is tricky too; contact me
for more details).]
But that 8% projection of investment earnings needs to come down.
Pension funds and their stakeholders need to reassess their growth projections
and realize that overly optimistic projections will only aggravate their
pension deficits.
An important information is "There's a special
rule for workplace-based retirement accounts. If you leave your job when
you are 55 or older, you can tap your retirement funds without paying the
10% penalty," One possible step revive your 401K is probably an understanding
that in stock casino only house wins and stop losing money due to excessive
stock allocation. Wall Street firms for which Kiplinger serves as a talking
puppet want you fees and stock funds fees are much better for then then
bond funds or god forbid money market funds fees.
Your best bet is to keep on contributing, stick with stocks and
try not to raid your account.
The economic funk has made virtually everyone anxious about retirement.
In fact, 83% of Americans worry that the recession will have a major
impact on their retirement plans, according to a recent poll by the
National Institute on Retirement Security.
Don't let economic jitters change your savings habits. Sticking with
the tried-and-true practice of socking away as much as possible in your
401(k) or IRA -- or both -- should still put you on track for retirement.
But we don't blame you for being concerned that your 401(k) has turned
into a 201(k). We answer some common questions about how to pump up
your depleted accounts.
My employer has stopped contributing to my 401(k). Should I stop
contributing, too?
Absolutely not. Particularly now, with Standard & Poor's 500-stock
index down 33% over the past year, you don't want to miss the chance
to pick up stock-market bargains. Plus, if you stop putting money in
your 401(k), you'll miss out on a valuable tax deduction. Say you're
in the 25% federal tax bracket. If you contribute $4,000 to the plan,
you'll save $1,000 in income taxes -- and even more when you include
state tax savings.
I've already lost so much in my 401(k). Wouldn't it be better
to keep my savings in cash until the market bounces back?
You're in good company. Nearly one-third of those who participate
in a 401(k) plan lost 30% or more last year, reports Mercer, a consulting
firm.
But if you sit on the sidelines and venture back into the market
only after it turns around, you risk missing out on the market's top-performing
days, which tend to come at the beginning of a recovery. For instance,
if you were fully invested in the S&P 500 from December 31, 1997, through
December 31, 2007, you would have received an annualized return of 4.2%.
But if you missed out on the index's 30 best days during that time period,
you would have suffered average annual losses of 7.2%, according to
an analysis by T. Rowe Price. No one knows exactly when the market will
recover in the future, so it is better to keep your long-term money
invested in stocks for the long haul.
I thought my tolerance for investment risk was pretty high --
until the stock market collapsed. What should I do now?
Investing and risk go hand in hand. How much volatility you can stand
depends on your age, your investment goals and your ability to sleep
at night. If you are within a few years of retiring or close to reaching
the dollar goal you've set for your retirement kitty, lock in your savings
by reducing your risk, says Richard Ferri, chief executive officer of
Portfolio Solutions, an investment adviser in Troy, Mich.
For instance, if you've determined you need $1 million by the time
you're 65 and you have accumulated $900,000 by age 60, take your foot
off the gas and cut your portfolio's stock holdings by 10%. You'll feel
as if you're taking action, but, in reality, the move won't affect your
portfolio that much. Then don't touch it again for at least a year.
"There's nothing you can do about a bad economy except wait for it to
get good again," Ferri says.
The volatile market has left my retirement portfolio completely
out of whack. How do I rebalance?
Decide on a rebalancing schedule -- quarterly or annually works well
-- and stick to it. By rebalancing at regular intervals, you avoid subjective
decisions based on emotion. Plus, you force yourself to sell investments
that have performed relatively well and buy laggards to re-establish
your original asset allocation. About half of all employer-based retirement
plans offer an automatic-rebalancing feature, according to a new study
by Hewitt Associates, an employee-benefits consulting firm.
Or consider investing in a target-date retirement fund, which adjusts
automatically as you approach retirement. More than three-fourths of
employers now offer target-date funds in their 401(k) plan, Hewitt says.
Although these funds suffered in the market meltdown, too, they generally
beat the S&P 500.
My retirement portfolio fell 35% last year. How long will it take
for it to recover?
Unfortunately, it could take years. Let's assume you had a portfolio
of $250,000 that fell 35%, to $162,500. If you don't add anything and
earn pretax annual returns of 5% -- about half of the stock market's
long-term rate of return -- it would take more than nine years for your
account to recover, according to calculations by T. Rowe Price. However,
if you add $4,000 a year and your investments earn 5% annually, your
account would rebound to about $250,000 in six and a half years. Higher
investment returns and larger contributions would produce faster results
and a bigger nest egg.
I have both a 401(k) and a Roth IRA. Is that too many retirement
accounts?
No. It's actually a good idea to have both types of retirement accounts
to diversify your future tax liability. With a traditional 401(k), you
enjoy an upfront tax deduction, but future withdrawals will be taxed
at your ordinary tax rate (not the lower capital-gains rate reserved
for most investments). With a Roth IRA, you pay taxes now instead of
later. But to contribute, your income can't exceed $120,000 if you're
single ($176,000 if you're married) in 2009. Nearly 30% of employers
offer Roth 401(k)s, which provide the same tax-free income in retirement
but without income-eligibility restrictions.
I need to borrow money from my 401(k). What are the pros and cons?
If you're facing a financial emergency and your only choice is between
borrowing from your 401(k) plan or making a hardship withdrawal, it's
an easy decision: Take the loan. You'll avoid the taxes and penalties
that come with a hardship withdrawal. Most 401(k) plans allow you to
borrow up to 50% of your vested account balance or $50,000, whichever
is less.
Although the money and interest you repay go back into your account,
a 401(k) loan can still be costly. Money not invested will stunt the
growth of your retirement savings. And if you fail to repay the loan
on a timely basis -- usually within five years (longer if you use the
money to buy a first home) -- you will owe state and federal income
taxes, plus a 10% penalty if you are younger than 59. Together, the
taxes and penalty can wipe out 40% or more of your balance. And if you
lose your job, you usually have to repay the loan within 60 days or
it will be treated as a taxable distribution. "If you take a loan, make
sure you'll be staying at your job a while," warns David Wray, president
of the Profit Sharing/401k Council of America.
Is there a way to avoid the 10% penalty if I tap my 401(k) before
I turn 59?
Yes. There's a special rule for workplace-based
retirement accounts. If you leave your job when you are 55 or older,
you can tap your retirement funds without paying the 10% penalty, although
you will still owe income taxes. This early-out rule does not apply
to IRAs, so if you roll over your 401(k) to an IRA, you lose penalty-free
access to your money.
Millions of baby boomers born into the dawn of the most spectacular
economic expansion in history are being forced to re-imagine their
retirement futures. Few news outlets have failed to seize upon the
low-hanging pun: the boomers have gone bust.
Among the adjustments
forced by the new circumstances, perhaps the cruelest twist for
many boomers is the need to join younger generations in the roommate
queue. The housing crash has forced record numbers of late-middle
age homeowners to take in boarders or risk becoming boarders themselves.
From California to Vermont, home-share organizations founded to
assist the elderly are scrambling to meet the demands of newly bust
boomers.
“In the last few months we've experienced explosive growth in
interest by homeowners age 50-plus to find rooms and roommates,”
says Jacqueline Grossmann, Chicago coordinator for the National
Shared Housing Resource Center. “The trend now is getting younger
and younger. People in their 50s and 60s are losing their nest eggs
and increasingly willing to give up their privacy in exchange for
rents of $500, $600 a month.”
Boomers are maximizing room occupancy for the same reason that
their kids in their 20s and 30s are still competing for the best
group rentals on Craigslist: they're broke.
The extent to which boomer wealth was based on home values is
highlighted by a new report from the Center for Economic and Policy
Research, entitled "The Wealth of the Baby Boom Cohorts After the
Collapse of the Housing Bubble."
The report details how the collapse has left the majority of
those around retirement-age almost completely reliant on entitlements.
The net worth of median households in the 45 to 54 age bracket has
dropped by more than 45 percent since 2004, to just over $80,000.
Households headed by those aged 55 to 64, meanwhile, have lost 38
percent of net wealth.
The result is that many baby boomers will only have entitlements
to rely on in their retirement.”
Make that entitlements, roommates, and each other.
As more and more boomers scale down their retirement plans and
consider alternative living arrangements, it's worth asking: Is
shared housing such a bad thing for aging boomers? Does a return
to the Communal idea, borne of economic necessity, also have emotional,
social, and environmental benefits? Why wait for the retirement
home or hospice to live with other people? With the nation full
of worthless, ridiculously large, and mostly empty houses, why not
fill them with the newly penurious and like-minded boomers in need
of housing?
Terry S., a 62-year-old self-employed divorced psychologist in
Pittsburgh, is one boomer considering the cooperative housing route.
Until the crisis hit last year, Terry planned to spend her retirement
between Europe and New York City, living off her IRA and savings.
But the crash saw her wealth plummet by 60 percent. “My friends
and I feel betrayed because we are now in the same or worse position
than those who never saved their money, but may have a pension,”
she says. The crisis forced her to rethink retirement, and she now
plans to buy a house with her friends. She explains the logic:
Some of my friends and I shared a communal house in the 70s.
We first came up with this idea [of doing it again] when we were
talking about the possibility of having to live in assisted living
or nursing homes, and we decided it would be far better to all live
together in a big house with friends we knew and loved and hire
a nurse and a cook. One of my friends owns a construction firm and
he says he can put an elevator in any home for less than $100,000.
We have looked at several homes. One was a beautiful house that
backed onto a huge city park and had a pool decks all around and
could easily be converted into four private residences. It was $600,000,
which would only be $150,000 per unit. Much less than the $4,000
a month to have half of a dingy room in a nursing home that smells
like urine.
If the deepening economic crisis does lead the boomers back to
Countercultural values, a generation will have come full circle.
Whether they end up living in a group house, a shared apartment,
or a full-on hippie-style commune, studies show that they will live
longer and more fulfilling later lives. “The results here are truly
amazing,” says Kirby Dunn, pointing to studies that gauge the effects
of shared housing. “Across all programs and age-brackets, people
say they feel safer, are less lonely, happier, and sleep better.
They also call their family less often for help.”
Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble
This paper makes projections of wealth for 2009 for the baby
boom cohorts (ages 45 to 54 and ages 55-64) using data from the
2004 Survey of Consumer Finance. It updates an earlier paper on
this topic from June of 2008 using projections for housing and stock
values that are more plausible given the sharp downturn in both
markets over the last 8 months, and creates three possible scenarios
from best to worst-case for baby boomers’ wealth in 2009.
The projections show:
1) The median household with a person between the ages of 45
to 54 saw its net worth fall by more than 45 percent between 2004
and 2009, from $172,400 in 2004 to just $94,200 in 2009 (all amounts
are in 2009 dollars). If the median late baby boomer household took
all of the wealth they had accumulated during their lifetime, they
would still owe approximately 45 percent of the price of a typical
house and have no other assets whatsoever.
2) The situation for early baby boomers is somewhat worse. The
median household with a person between the ages of 55 and 64 saw
its wealth fall by almost 50 percent from $315,400 in 2004 to $159,800
in 2009. This net worth would be sufficient to allow these households,
who are at the peak ages for wealth accumulation, to cover approximately
90 percent of the cost of the typical house, if they had no other
assets.
3) As a result of the plunge in house prices, many baby boomers
now have little or no equity in their home. According to our calculations,
of those who own their primary residence, nearly 30 percent of households
headed by someone between the ages of 45 to 54 will need to bring
money to their closing (to cover their mortgage and transactions
costs) if they were to sell their home. More than 15 percent of
the early baby boomers, people between the ages of 55 and 64, will
need to bring money
to a closing when they sell their home.
These calculations imply that, as a result of the collapse of
the housing bubble, millions of middle class homeowners still have
little or no equity even after they have been homeowners for several
decades. These households will be in the same situation as first-time
homebuyers, forced to struggle to find the money needed to put up
a down payment for a new home. This will make it especially difficult
for many baby boomers to leave their current homes and buy housing
that might be more suitable for their retirement.
Finally, the projections show that for both age groups, the renters
within each wealth quintile in 2004 will have more wealth in 2009
than homeowners in all three scenarios. In the second and third
scenarios, renters will have dramatically more wealth in 2009 than
homeowners who started in the same wealth quintile.
Homeownership is not everywhere and always an effective way to
accumulate
wealth. For those who owned a home in the last few years, the collapse
of the housing bubble led to the destruction of much or all of their
wealth.
Three Scenarios
The "Three Scenarios" mentioned above relate to projections
of the Case-Shiller housing index looking ahead.
The first scenario assumes that nominal house prices decline no further
from the level reported in the November 2008 Case-Shiller 20-city index
to the 2009 average. The second projection assumes that nominal house
prices in 2009 are on average five percent lower than they were in November
2008. The third scenario assumes that nominal house prices fall fifteen
percent in 2009.
Already we know the first scenario is out. Moreover it is possible
that even scenario 3 is optimistic. So much for the idea the way to
accumulate wealth is through real estate.
Buying real estate may have helped one to accumulate wealth if one
paid off the mortgage rather than continually borrowing against the
equity to take vacations, buy cars, or to "put the money to work".
Nearly everyone attempting to put that money to work has gotten clobbered
doing so.
Net Worth - Households Aged 45-54 in 2004 vs. 2009
click on chart for sharper image
Only those boomers in the top quintile have close to enough money
for retirement. And that is the group hit hardest by the recent selloff.
Think that group is going to be vacationing as much as they thought,
eating out as much as they thought, golfing as much as they thought,
etc.?
I don't.
Moreover, those in the first through fourth quintiles are not prepared
for retirement at all. The fourth quintile was arguably close in 2004.
They are no longer prepared.
Note: There are 14 sets of figures in the CEPR article. It's well
worth taking a closer look.
Structural Demographics Poor
The structural demographics are very poor. Please see
Demographics Of Jobless Claims for still more details. Here is a
key clip.
Structural demographic effects imply that prospects in the full-time
labor market will be poor for those over age 50-55 and workers under
age 30. Teen and college-age employment could suffer a great deal
from (1) a dramatic slowdown in discretionary spending and (2) part-time
Boomer reentrants into the low-paying service sector; workers who
will be competing with younger workers.
Ironically, older part-time
workers remaining in or reentering the labor force will be cheaper
to hire in many cases than younger workers. The reason is Boomers
65 and older will be covered by Medicare (as long as it lasts) and
will not require as many benefits as will younger workers, especially
those with families. In effect, Boomers will be competing with their
children and grandchildren for jobs that in many cases do not pay
living wages.
A structural shift in consumption to savings or at least reduced consumption,
is in store for boomers. Meanwhile job prospects are looking pretty
grim for some time to come across the entire economic spectrum. This
economic backdrop is deflationary.
Attitudes towards debt and consumption
have changed.
Moreover, the above data suggests those attitudes, particularly among
the key boomer group who now needs to draw down on accumulated wealth,
are not changing back anytime soon. And it is attitudes, not Fed actions
that will determine how long the deflationary period we are in lasts.
I touched on the importance of attitudes many time, most recently in
All Manias Leave Something Undervalued. Please take a look if you
haven't already.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Rita Hritz knows several people who have lost more than $100,000
in the stock market recently, and she's not taking any chances.
She pulled out of the market in 2005 because she was tired of the
ups and downs, and she has no plans to invest in anything again except
real estate.
"I would like to invest in the future, but it's so volatile, I don't
know that I would," said Hritz, 50, an ultrasound technician in Chardon,
Ohio. Hritz submitted her story to CNN's iReport.com.
Hritz is just one example of an American
who has lost confidence in the stock market, which has plummeted in
recent months. Confidence among investors as a whole
is a key factor in determining how the market behaves, economists say;
when investors collectively lose confidence
in the market, it is more likely to drop.
In fact, confidence is an example of an "animal spirit," a term referring
to the psychological factors that move the market. British economist
John Maynard Keynes coined the term.
"One of the reasons this recession was not foreseen was that people
didn't perceive the role of animal spirit in how the
economy
works," said George Akerlof, winner of the 2001 Nobel Prize in economics
and co-author of the new book "Animal Spirits: How Human Psychology
Drives the Economy, and Why It Matters for Global Capitalism."
Stories about the nature of the economy that pass from person to
person are another reason why markets go up and down, he said.
The stories that friends tell one another or that are propagated
through the media influence people's confidence in the market and therefore
affect the market itself, he said.
For example, in the late 1990s, the "story" was that there was a
dot-com bubble: People bought stocks in Internet and technology-related
companies that seemed to be rising in value rapidly. When people realized
that they'd been overconfident and that some of the stocks were overvalued,
the bubble burst.
"These stories get passed from one person to another, and because
they get passed from one person to another, it acts like an epidemic,"
Akerlof said.
Another animal spirit is "money illusion." Capitalism produces not
only what people want but what people think they want, Akerlof said.
A person seeking to buy medicine in the 19th century might end up
buying snake oil, a product without curative properties. Similarly,
"snake oil" financial instruments are often sold in unregulated markets.
"We've just been through a period in which people have been buying
assets on the basis that they were overconfident," he said. "They had
too much trust."
It's only now that people are seeing that they had made poor investment
choices, he said.
Where's the bottom?
Some people, like David Lowery, recently decided that they've had
enough of losing money in the market. The 56-year-old truck driver in
Euless, Texas, closed his IRA on Thursday. He had cut his 401(k) contribution
from 7 percent to 1 percent of his paycheck Monday.
"What money you've got, better get it out and put it under the mattress,"
said Lowery, who also shared his views on iReport.com.
Read his iReport
Lowery had hoped to retire in nine years, but now he thinks he may
have to work until age 70. He may put his money in bonds or CDs instead
of stock-based funds.
Some economists say you should take a good look at your
job security
before making investment decisions.
People who are facing layoffs or are unemployed should be more careful
with their investments, but those with secure jobs can afford to take
greater risks, said Lubos Pastor, professor of finance at the University
of Chicago.
"People should not succumb to their fears. They should rationally
assess whether they are able to bear the risk of the stock market,"
he said.
But while it's anyone's guess when the market will pick back up again,
rest assured that it most likely will not hit zero.
"It's implausible that it would be zero unless we're hit by a comet
or the government nationalizes everything," Pastor said.
Expecting history to repeat
Experience with recessions also affects people's investment behavior,
some economists say.
Hritz got laid off and went bankrupt
in 1981, a year that saw a recession. Her previous financial struggle
has made her more cautious about putting money in the market today,
she said.
Read her iReport
Her experience is consistent with research that shows people who
lived through the Great Depression tend to be more cautious with their
stock market allocations, but younger people who did not live through
that recession are more optimistic.
That means that, after this current recession, everyone will be more
cautious than before, Pastor said.
Those who do stay in the market will reap the benefits of any future
rebound, Pastor said. In fact, the market will rally several months
before the end of the recession, but those who sell everything will
miss out on that.
"Going just by on your instincts by fear and by your confidence,
that is usually misleading," he said. "That type of investing leads
people to buy at the peak and sell at the bottom."
As for Hritz, she maintains a cautious
distance from the stock market. Her husband, Jim Schaefer, was originally
going to retire this month, but he has no plans to stop working, she
said.
"We're seeing a decline in value of the
house we're in, but I'm not panicking like I would if I would have played
the stock market," Hritz said.
Drink-and-dashers notwithstanding, thrift has been essential to survival
over time. "I don't think you and I would be here if there weren't frugal
people 100,000 years ago," Lastovicka says. "It's why we've done really
well as a species. Someone figured out that we need to save some of
the crop so we can eat in the winter."
... ... ...
That's the conclusion of a forthcoming study in the 'Journal of Positive
Psychology'. Ryan Howell, assistant psychology professor at San Francisco
State University, asked participants to reflect on a time in the past
three months that they used money to make themselves happy with both
material and experiential purchases. (Experiential purchases were defined
as those in which you get nothing but a memory at the end -- concert
tickets, dinners out, a weekend away, etc. Material items were defined
as tangible objects in their control -- shoes, jeans, electronics --
but excluding pricey purchases such as homes and cars.)
Participants
were then asked to reflect on 26 different questions that had to do
with psychological
needs satisfied by the purchase. "On a scale of 1 to 7, both material
purchases and life experiences were in the positive category," says
Howell. "It's just there were sizable differences between material and
life experience. The idea is you're happy with a material purchase but
you're thrilled with a life experience."
In addition, experiential purchases made people around the buyer
happier as well. "People felt closer to friends and family as a result
of the purchase," Howell notes. "We were also surprised in that experiential
purchases made them feel a higher sense of vigor; they felt more alive
because of the purchase."
The mortgage and credit sickness that brought banks
and brokers to their knees has now infected the companies that insure
our lives and protect our families.
The life insurance companies that millions of Americans entrust to
help protect their families or pay the bills in their golden years are
caught in a downward spiral eerily similar to the one that has brought
down banks and brokers.
Like Bear Stearns and Lehman Bros. (LEHMQ,
news,
msgs), life insurers Hartford Financial Services (HIG,
news,
msgs), Principal Financial Group (PFG,
news,
msgs), Lincoln National (LNC,
news,
msgs) and many others all have significant exposure to mortgage-backed
securities and other risky debt instruments.
They're reporting huge losses that -- if they continued -- could
trigger a meltdown.
That could wipe out shareholders, who already have suffered declines
of 20% to 40% in the past week alone. Customers with annuities
or insurance policies might have to turn to state insurance backstop
funds and settle for only a portion of the money they were expecting.
Health, auto and property insurers are better off. But based on how
far life insurance stocks have fallen, investors are worried many won't
survive at all.
What are the chances this doomsday scenario will play out?
"To know that, you have to gauge how bad this market will get over
the next six months, which none of us know," responds Jim Ryan, an analyst
with Morningstar (MORN,
news,
msgs). It all comes down to how much worse things could get for
the economy and for the debt instruments and stocks that life insurance
companies hold.
"We're telling people to be more careful,
particularly if you are going into longer-range products that involve
significant upfront funding like annuities," says Bob Hunter, the director
of insurance for the Consumer Federation of America.
"You want to make sure that the company
is actually around when you want to get the money out. I'd say there's
a good likelihood some of them will go under."
Yes index funds might be slightly less scam-prone then managed funds.
But the real question is: "Are stocks really necessary in 401K account?"
And if yes should they constitute more then tiny percentage (let's say less
then 20%) of the total ?
The investment implication is clear, according to Mr. Kritzman. “It
is very hard, if not impossible,” he wrote in his study, “to justify
active management for most individual, taxable investors, if their goal
is to grow wealth.” And he said that those who still insist on an actively
managed fund are almost certainly “deluding themselves.”
What if you’re
investing in a tax-sheltered account, like a
401(k) or an
I.R.A.? In that case, Mr. Kritzman conceded, the odds are relatively
more favorable for active management, because, in his simulations, taxes
accounted for about two-thirds of the expenses of the actively managed
mutual fund and nearly half of the hedge fund’s. But he emphasized the
word “relatively.”
“Even in a tax-sheltered account,” he said, “the odds of beating
the index fund are still quite poor.”
The essential fallacy of the 401(k) has been exposed. It took a historic
market collapse -- one that threatens to impoverish workers already
in retirement and those who are nearing it. But then, crushing hardship
is often what's required to usher out an era of ideological illogic
and unconscionable greed.
The advent of the 401(k) in the late 1970s and early 1980s
was a leading indicator of what became a
political mania for shifting the risk and responsibility for life's
big challenges -- health care, an adequate income in retirement -- from
employers and other broad-shouldered institutions to the narrower, weaker
backs of individuals themselves.
It was never sold this way, of course. The pitch for the 401(k) was
a contemporary version of the get-rich-quick scheme: The promise of
strolling along a sun-dappled beach in retirement would be realized
with ease, so long as workers regularly contributed modest amounts to
the accounts, then let the compounding magic of the market work. To
hear the mutual fund companies and the media tell it, only fuddy-duddies
and dinosaur employers would be foolish enough to opt for the old-fashioned
defined-benefit pension, the type employers paid for and professional
managers oversaw, and which guaranteed monthly payments in old age.
The type that gave the hard-boiled men and women of the industrial age
security, but would never reward them with riches.
The offer seemed good to media observers, and to the politicians
who nurtured the do-it-yourself retirement with successive legislative
schemes. During the stock market boom of the 1990s, esteemed business
publications published breathless articles featuring manufacturing workers
who would use their lunch breaks to track their mutual fund balances
and ponder the possibilities of the loan they would take out for a cabin
on the lake or an anniversary trip to Hawaii.
But despite the hype, the data on 401(k)s have never -- ever -- shown
that these accounts were creating a mass of workers who would be able
to retire with security, let alone luxury.
The 401(k)s didn't expand the proportion
of the work force with pension coverage, notwithstanding claims that
shifting to accounts that required workers to contribute would make
employers more willing to offer the benefit. Less than half of workers
have any type of pension coverage from their current employer at all,
according to the Center for Retirement Research at Boston College.
For those who do have retirement accounts, the bottom line has long
been grim. In 2004, the last year for which data are available, the
median balance in IRA and 401(k) retirement accounts was $35,000, according
to the Federal Reserve. For those nearest to retirement -- households
headed by someone between 55 and 64 -- the median balance in 2004 was
$60,000. That's enough to generate about
$400 a month in retirement income, according to the research center.
These numbers reflect balances before the current market meltdown,
which wiped out about $2 trillion in retirement assets when losses in
individual accounts as well as employer-based pension funds are tallied.
How did this happen? Like so many other political experiments of the
last three decades, it was good for the corporate bottom line -- and
therefore, supposedly good for America. The 401(k) plan was first promoted
to supplement, not replace, traditional pensions, according to Alicia
Munnell, director of the Boston College center. Over time, as new businesses
were formed, they opted to provide only these accounts, eschewing traditional
plans.
More recently, even companies with healthy, traditional pension systems
have frozen those plans (effectively abandoning their pledges to longtime
workers) and replaced them with 401(k)s. Why? "Shifting from a defined-benefit
plan to a 401(k) plan will reduce required employer contributions from
7 to 8 percent of payrolls to the 3 percent employer match," Munnell
and a team of researchers wrote in a 2006 paper.
This was never about empowering workers to reap the rewards of financing
their own retirement. It was about reducing corporate costs.
"I think what has become clear is that
we just can't have a system where people are exposed to this type of
market risk," Munnell told me in an interview. Nor, in the age of global
competition, can American businesses solely shoulder pension costs that
in other countries are at least partially borne by governments.
Some new system that might be called "Social Security-plus" must
be developed. Remember that in a year or two, when politicians try to
sell us on the supposed need to "reform" Social Security with something
that really amounts to Social Security-minus.
Switching employees from defined benefit pension plans into 401K was
an intentional major hit to the standard of living of middle class. Now
chickens come home to roost. Like one reader aptly commented: "Thanks D'bya
& Congress. You all did a hell of a job...." I would add that the mainstream
media reached a state of zombification parallel to that of the banks
January 28, 2009 | Washington Post
Millions of American workers lost an
average of 27 percent of their 401(k) retirement savings in 2008, according
to a study released this morning by Fidelity Investments.
The average 401(k) balance went from $69,200 in 2007 to $50,200 last
year because of dramatic market declines, the study found.
Despite such losses, Fidelity's analysis of 11 million participants
in more than 17,000 corporate plans showed that employees continued
to contribute to their retirement savings and took out fewer loans against
the plans than the previous year. In fact, they added an average of
$5,600 in pre-tax earnings to their accounts, a slight increase from
the year before.
"Employees are staying the course and I think this is very good news
because I think it really shows that employees recognize these savings
dollars are a need to have, not a like to have," said Scott B. David,
president of Workplace Investing for Fidelity Investments. "This is
a necessary savings for their financial well-being."
But in a sign that workers are struggling financially, the Fidelity
study showed a slight increase in the percentage of workers who took
so-called hardship withdrawals, from 1.6 percent in 2007 to 1.8 percent
in 2008. Unlike 401(k) loans, hardship withdrawals require proof of
a severe financial need and come with a hefty tax bill.
David said the people who took hardship withdrawals most likely did
not have the option to take a loan against their plans. Historically,
those who take hardship withdrawals have taken out loans first and many
employers restrict the number of loans allowed.
"Once you've taken the loan, the next likely step is the withdrawal,
which is a terrible thing to do because of the tax implications and
the penalties," David said.
The average hardship withdrawal amount decreased slightly in 2008
to $6,000, but David attributed that to the fact that workers had less
money to pull out of their accounts.
The report comes at a time when the 401(k)
concept is under intense scrutiny from lawmakers, academics and economists.
The stock market's collapse has revealed the vulnerability of America's
retirement system. Increasingly, employers have abandoned traditional
pensions, forcing workers into 401(k)s which tend to have more exposure
to market forces. Many lawmakers also pushed 401(k)s, approving rules
in recent years that, for instance, make it easier for employers to
automatically enroll their employees in such plans.
David said 401(k)s are still a good retirement savings vehicle but
should not be the only one that an employee relies on.
"They were designed to be one of several savings vehicles," he said.
"To look at 401(k)s as the only form of retirement savings is not appropriate."
"To look at 401(k)s as the only form of retirement savings is not
appropriate."
When the 3-5% we put into our 401K is all we can afford, and when
our home also decline 25% in value, what alternatives do the common
worker have? With unemployment zooming and most people either out of
work of not sure they will have a job tomorrow, what do these experts
suggest.
With assets decreasing by 30% a year, income decreasing by up to
90% and expenses increasing in double digits, just what should people
do?
A. Wait for the banks to help us with the billions in tax dollars
they have received?
B. Wait for our law makers to find a miracle cure?
C. Burry our head in the sand?
D. Blow our brains out before our insurance lapses?
If you have a 401(k) retirement plan at work, you
don’t need us to tell you that you’ve taken a hit in the past year.
The really bad news is that the damage to your retirement security is
likely worse than what the numbers say on your statement.
Many Americans didn’t have enough savings coming into the downturn.
And employers are increasingly cutting back or suspending their 401(k)
match. FedEx, Eastman Kodak, Motorola, General Motors and Ford, among
others, have announced such moves.
There’s also no guarantee that today’s
battered 401(k)’s will rebound powerfully. People close to retirement
don’t have time for a do-over. Even for those still far from retirement,
there’s no telling how stocks will perform in the future.
They could post impressive gains, especially in the near term, from
their current low levels. But they could also struggle.
The last 25 years was a time of low inflation
rates and low interest rates, which boosted stock prices. Going forward,
inflation and interest rates have nowhere to go but up, which would
be bad for stocks.
It wasn’t supposed to be this way. Over the last several decades,
businesses and government used matching contributions and tax breaks
to encourage the proliferation of 401(k)’s. They lauded them as a way
to harness the market to create wealth and increasingly viewed them
as replacements for traditional corporate pensions.
In 1983, 62 percent of workers with retirement coverage had a traditional
pension only, while a mere 12 percent had 401(k)’s. Today, approximately
20 percent have a traditional pension and about two-thirds have only
401(k)’s.
The shift to 401(k)’s also shifted investing risks and responsibilities
from employers to employees, but as long as participants generally made
money and recovered losses quickly, the risks seemed reasonable. Now
many Americans are inevitably having second thoughts.
So far, the cumulative wipe-out of household
retirement savings totals about $2 trillion, and no one believes that
the downturn is anywhere near over. As a result, participants in 401(k)’s
are in greater danger than ever of coming up short in retirement.
That grim reality calls for an expanded approach by policy makers
to retirement issues. Traditionally — and correctly — an important focus
has been on lower-income Americans who lack the means to save and tend
to work for employers who do not offer retirement plans.
During the campaign, President Obama supported a better savers’ tax
credit to encourage savings among lower-income Americans. He also supported
universal I.R.A.’s, which would make a 401(k)-like account available
to all workers. Those good ideas should be pursued. There are also good
ideas for improving 401(k)’s that deserve attention, such as helping
people manage their retirement withdrawals so that the money lasts a
lifetime.
The wipeout in 401(k)’s has made it clear
that it is not enough to get more people to save more. There needs to
be a better way to reasonably ensure that a lifetime of savings can’t
be undone by forces beyond one’s control. The Center
for Retirement Research at Boston College, a leader in retirement policy,
is advocating a new savings account — in addition to Social Security
and 401(k)’s — that would enable risks to be shared among workers, retirees
and the government.
After decades of promoting and improving 401(k)’s, in which employees
bear substantial risk, that’s a new and difficult reality for policy
makers to grapple with. The sooner Mr. Obama puts his team on the issue
— his budget director, Peter Orszag, is one of the nation’s top retirement
experts — the better.
"What you might call the 401(k) effect has had two political consequences
and, in the medium term, will probably have two even more powerful social
ones. The first impact is a shift in the public’s appetite for radical government
action. The same constituents who besieged their members of Congress, calling
on them to oppose a “Wall Street bail-out”, are now demanding to know why
the government has not acted more decisively. The second result has been
a
big shift in the polls in favour of Barack Obama, who seemed to be faltering
a month ago but is now predicted to be heading for a landslide victory."
Last week’s dizzying rush of events and economic and market data
threw up one number which can serve as your Rosetta Stone for understanding
what impact the global financial crisis will have on American society:
$2,000bn (€1,500bn, £1,200bn). That is the amount Americans have lost
from defined-contribution 401(k) pensions over the past 15 months. Peter
Orszag, director of the Congressional Budget Office, cited the figure
in public testimony last Tuesday, so today the vanished retirement savings
will be even greater.
The hit to the 401(k)s – nearly triple the amount Hank Paulson asked
for to rescue Wall Street and more than double the cost of the war in
Iraq – most directly connects what had been a crisis of financial institutions
and esoteric financial instruments with the lives, and old-age security,
of millions of middle-class Americans.
The credit crunch has been gnawing away at the world’s financial
sector for more than a year, but as recently as a fortnight ago – the
date the House Republicans defied their own party and
voted against Hank Paulson’s bail-out plan – it still did not have
much traction with Main Street America. That started to change even
as members of Congress were casting their no ballots – because the US
equity markets plunged in response. In the two subsequent weeks they
have plummeted further, with the Dow
closing on Friday at 8451.19, bringing the week’s decline to 18.2
per cent, its sharpest drop ever.
The Dow matters to the Joe Six-Packs of America because this is a
society of shareholder capitalism. Until this month’s sell-off, more
than 60 per cent of Americans owned shares, up from just over 10 per
cent in 1980. The result is a culture in which business television reporters
are celebrities with photo spreads in Vanity Fair, Warren Buffett is
a national hero, and the group Republican strategists call “the investor
class” forms a majority of the population.
In boom markets, that is a good thing. But it means that a market
sell-off is felt beyond Wall Street. What you might call the 401(k)
effect has had two political consequences and, in the medium term, will
probably have two even more powerful social ones.
The first impact is a shift in the public’s appetite for radical
government action. The same constituents who besieged their members
of Congress, calling on them to oppose a “Wall Street bail-out”, are
now demanding to know why the government has not acted more decisively.
The second result has been a
big shift in the polls in favour of Barack Obama, who seemed to
be faltering a month ago but is now predicted to be heading for a landslide
victory. Months of a slowing economy, falling house values and petrol
prices spiking above $4 a gallon were not enough decisively to shift
the political debate to “the economy, stupid”, the field on which the
Democrats yearned to play. But the plunge in the Dow – computed with
terrifying exactness in the 401(k) statements millions of Americans
receive every month – has, and barring a war or a domestic scandal it
will likely propel Senator Obama to the White House.
The third, social consequence is not yet being felt, but it soon
will be. The culture that gave us the term “retail therapy” seems about
to rediscover the virtues of thrift. The assets that Americans measured
to calculate their net worth – their homes and stock portfolios – have
fallen sharply in value. And the personal credit they used to keep up
with the Joneses in a society where so many people seemed to be getting
so rich has dried up. One sign of the Zeitgeist: Gawker, the popular,
waspish media blog (published by a friend and former FT colleague) this
week offered recession-busting survival tips for hip New Yorkers, including
buying lunch from street carts and cooking at home.
The fourth consequence of the 401(k) effect hangs in the balance,
and its resolution could affect not just the US but the rest of the
world. Shareholder capitalism was a vital part of how America connected
its most important political tenets – capitalism and democracy which,
since the fall of the Berlin Wall, it has been exporting around the
world with success. Now that the markets have turned on America’s Main
Street capitalists, the question is whether their faith will be shaken.
Watching TV stock-pickers enthusiastically suggesting we now have a
buying opportunity, it seems the answer, for now, is not yet.
Retirement Savers Lost $2 Trillion October 8 | Yahoo (U.S.News & World
Report)
Stock market turmoil has wiped out roughly
$2 trillion of Americans' retirement savings over the past 15 months,
according to the Congressional Budget Office.
The value of pension funds and retirement accounts dropped by roughly
$1 trillion, or almost 10 percent, in the year ending June 30, the
CBO told the House Education and Labor Committee Tuesday, citing
Federal Reserve data. Since then, asset prices have dropped even further.
The CBO says that retirement assets may have declined by as much as
$2 trillion over the past 15 months.
"To the extent households view balances in defined-contribution plans
as part of their overall portfolio of wealth, a decline in those balances
could lead people to reduce or delay purchases of goods and services,"
says Peter Orszag, director of the CBO. "It could also lead some workers
to delay their retirement." The CBO says this multitrillion-dollar loss
in retirement wealth could further slow the ailing economy.
Individual 401(k) participants' average losses ranged from 7.2 percent
to 11.2 percent in the first nine months of 2008, according to an Employee
Benefit Research Institute
analysis
of 2.2 million participants. Over two thirds of the assets in 401(k)-style
defined-contribution plans are invested in equities, either directly
or through mutual funds. During the first nine months of 2008, stocks
were down, with the S&P 500 index losing more than 19 percent. Fixed-income
investments fared better, with the Lehman Aggregate index gaining 0.63
percent and three-month treasury bills gaining 1.54 percent.
The recent market turmoil may be disproportionately affecting older
Americans. Older employees generally have less of their money in stocks
and stock funds than do younger workers, which shields them somewhat
against catastrophic losses. But older workers' average account balances
are markedly higher, so they have more to lose in a significant downturn
and less time to recoup losses before retirement. "In the last few weeks,
we've been confronted with older workers' and retirees' lives being
turned upside down; their panic tops off an already existing state of
chronic anxiety about retirement futures," says Teresa Ghilarducci,
a professor of economic policy analysis at the New School for Social
Research.
Two potential solutions to retirement losses offered by the CBO are
working longer to offset financial declines and sensibly allocating
your assets to avoid bearing the risks associated with tumultuous
markets as much as possible. For example, most workers should invest
in diversified index funds rather than individual stocks.
Here's another potential strategy to
insulate yourself against stock market risks.
Investors advised by ``Black Swan'' author
Nassim Taleb have gained 50 percent or more this year as his strategies
for navigating big swings in share prices paid off amid the worst stock
market in seven decades.
Universa Investments LP, the Santa Monica, California-based firm
where Taleb is an adviser, has about $1 billion in accounts managed
to hedge clients against big moves in financial markets. Returns for
the year through Oct. 10 ranged as high as 110 percent, according to
investor documents. The
Standard & Poor's 500 Index lost 39 percent in the same period.
``I am very sad to be vindicated,'' Taleb said today in an interview
in London. ``I don't care about the money. We're proud we protected
our investors.''
Taleb's book argues that history is littered with high- impact rare
events known in quantitative finance as ``fat tails.'' As the founder
of New York-based Empirica LLC, a hedge- fund firm he ran for six years
before closing it in 2004, Taleb built a strategy based on options trading
to bullet-proof investors from market blowups while profiting from big
rallies.
Mark Spitznagel, Taleb's former trading partner, opened Universa
last year using some of the same strategies they'd run since 1999. Pallop
Angsupun manages the Black Swan Protection Protocol for clients and
is overseen by Taleb and Spitznagel, Universa's chief investment officer.
``The Black Swan Protection Protocol is designed to break even 90
to 95 percent of the time,'' Spitznagel said. ``We happen to be in that
other 5 to 10 percent environment.''
Options Strategy
The S&P 500 dropped 18 percent last week, its worst week since 1933,
on concern that the credit crunch would cripple the financial system
and trigger a global recession.
``We got a lot of giggles when we said we're targeting 20 percent
moves,'' Spitznagel said. He and Taleb declined to confirm the investment
returns listed in the documents, which were reviewed by Bloomberg News.
Taleb's strategy is based on buying out-of-the-money options -- puts
and calls whose strike price is either lower or higher than the market
price of the underlying security. A put option gives the buyer the right,
though not the obligation, to sell a specific quantity of a particular
security by a set date. A call option gives the right to buy a security.
The Black Swan Protection Protocol bought puts and calls on a portfolio
of stocks and
S&P 500 Index futures, along with some European shares. The Black
Swan Protocol doesn't rely on commodities, currencies or insurance on
bonds known as credit default swaps, Taleb said.
``We refused to touch credit default swaps,'' Taleb said. ``It would
be like buying insurance on the Titanic from someone on the Titanic.''
White Swan
The Black Swan strategies are designed to limit losses to a few percentage
points. Some investors did better than others depending on when they
decided to lock in profits, Taleb said. The returns have enabled Universa
to line up more money from investors in the next month, Taleb said.
As a trader turned philosopher, Taleb has railed against Wall Street
risk managers who attempt to predict market movements. Even so, Taleb
said he saw the banking crisis coming.
``The financial ecology is swelling into gigantic, incestuous, bureaucratic
banks -- when one fails, they all fall,'' Taleb wrote in ``The Black
Swan: The Impact of the Highly Improbable,'' which was published in
2007. ``The government-sponsored institution Fannie Mae, when I look
at its risks, seems to be sitting on a barrel of dynamite, vulnerable
to the slightest hiccup.''
Taleb said the current crisis is a ``White Swan'', not a Black Swan,
because it was something bound to happen.
``I was expecting the crisis, I was worried about it,'' Taleb said.
``I put my neck and money on the line seeking protection from it.''
Taleb is angry that Wall Street is continuing to use traditional
tools such as value at risk, which banks use to decide how much to wager
in the markets.
Older Americans with their nest egg in the stock market right now
may be watching secure retirement dreams
crumble before their eyes. Retirees and baby boomers near retirement
age may have lost a hefty chuck of their savings at an age when many
have little time or ability to recover.
I recently spoke with Bill Losey, a financial planner and author
of Retire in a Weekend! The Baby Boomer's Guide to Making Work Optional,
about a method he advocates that, in theory, would allow baby boomers
to weather temporary market slumps. Losey calls his approach the "safe-money
benchmark strategy," which calls for the liquidation of assets when
they exceed a predetermined benchmark the investor chooses.
For example, an investor with $400,000 invested in index funds or
ETFs might sell high whenever those investments hit a $425,000 benchmark.
The $25,000 in profits is stored in
ultrasafe investments like certificates of deposit, bonds, treasury
bills, or even cash so that investors can never lose those profits unless
they choose to spend them. Ideally, a retirement saver accrues three
to five years' worth of living expenses in this "safe money area" in
the years leading up to retirement by always selling high during upswings
and taking the spoils out of the market. Once retired, you can use this
liquid cushion to weather periods of flat growth or negative returns.
"If a normal market correction lasts two or three or four years, you
will never have to withdraw from a declining portfolio balance," Losey
says.
If you've employed any of these strategies, please tell us about
it below.
The weak economy is forcing older workers to rethink their retirement.
After watching their nest eggs crack under the weight of falling
stock and home prices, some workers who were about to quit the daily
grind have put those plans on hold. And some retirees have even returned
to work.
"They've crunched the numbers and concluded they can't head to the
lake after a 20 percent loss in their net worth," said Monique Morrissey,
an economist at the Economic Policy Institute. "Now is no time to pick
leisure over labor."
A recent survey by AARP found that one in five workers ages 55 to
64 intends to delay retirement because of the economic downturn. Most
blame stock market losses, while others cite declining home values.
And only 18 percent of workers and 29 percent of retirees now feel
very confident about having enough money for a comfortable retirement
– the smallest percentages in at least a decade, according to the Employee
Benefit Research Institute.
Neal Ator retired in September and began collecting Social Security
in December.
But the 65-year-old McKinney resident has since taken a part-time
job as a loan officer to supplement his retirement income.
Drawing on his experience as a credit counselor, he sells reverse
mortgages out of his home. He hopes the paycheck will offset the losses
from his investments and pay for some travel with his wife.
"Many of my neighbors have also come out of retirement," Mr. Ator
said. "Besides the satisfaction we get from our jobs, we're all trying
to make sure our nest eggs last as long as we do."
The ups and downs of the market will play an even bigger role in
retirement decisions as workers depend less on traditional fixed-benefit
pensions and more on 401(k)s and individual retirement accounts, experts
say.
"This is just the beginning of a long-term trend. The changing nature
of retirement income will make boomers more and more vulnerable to market
downturns," said Richard Johnson, an economist with the Urban Institute.
Employers' decisions to scale back or drop retiree health benefits,
coupled with rising health care costs, have also compelled workers to
remain on the job at least until they qualify for Medicare at 65, he
said.
'Stress test'
Scott Daily of Carrollton figured he had had enough of the corporate
world last year after going through his fourth downsizing. He was looking
forward to kicking back, riding his motorcycle and tinkering with old
cars.
"I talked to my financial planner, who thought I could afford to
do those things, even though I'm only 60," he said. "I'm debt-free –
I don't even have a mortgage. And I've been able to save for my retirement."
Then the market took a nosedive, slashing 30 percent from Mr. Daily's
portfolio and sending him in search of a job again.
"I'm not hurting, but I'm wondering whether the economy will deteriorate
further," he said.
Over his career, Mr. Daily managed dozens of construction projects
across the country, traveling more than 3 million miles. He's now trying
to find an employer who values that hands-on experience.
Gary Brownfield, a certified financial planner with GB Financial
Services in Plano, said he often gives his older clients a "financial
stress test."
"We look at what would happen to their
nest egg if the market collapsed the day after they retired," he said.
"Then we see whether they'd have enough time to recover and enough money
to live on throughout retirement."
The exercise sometimes convinces his clients that they need to continue
working and add muscle to their portfolio, Mr. Brownfield said.
Many people make the mistake of overestimating what they can afford
to withdraw from their nest egg and underestimating inflation's effect,
said Viktor Szucs, a certified financial planner at Quest Capital Management
in Dallas.
"Anyone who withdraws too much in a bear market, especially early
in retirement, will outlive his money," Mr. Szucs said. "A good rule
is to take out no more than 4 percent a year. That should keep a portfolio
going for many years."
The past decade of tame inflation also lulled older adults into thinking
that they didn't have to worry about their dwindling purchasing power,
he said, but today's high gas and food prices have jolted them back
to reality.
Extra income
Peter Laux, who's 65 and lives in Plano, works as a management consultant
four days a week because he believes he can't afford to take much from
his shrunken nest egg, which has lost 20 percent in a year.
"If the market were better, I wouldn't work at all," he said. "But
my cardiologist tells me I may live to be 95, and my mutual funds certainly
aren't giving me the kind of returns I'll need to last that long."
Mr. Laux, who took an early retirement package from Texas Instruments
Inc., intends to draw Social Security when he reaches 66. But his consulting
income lets him enjoy a more comfortable lifestyle.
"Because I don't see myself sitting at home and eating cat food,
I will keep chasing consulting jobs," he said.
Depressed housing prices have also shaken older workers' confidence
in retirement, Mr. Szucs said, since some boomers had figured they'd
sell their homes, downsize and use the profits in retirement.
"Even those who don't plan to move after retirement are still psychologically
affected by falling home values," he said. "They look at their net worth
on paper and feel poorer, so they continue working."
But the topsy-turvy housing market may also allow a few people to
realize their retirement dreams sooner than they had expected, Mr. Szucs
said.
"Dallas has fared better than most housing markets, so clients of
mine who had wanted to move to California or Florida but been priced
out of those once-booming markets can now afford a place on the beach,"
he said.
My impression is that 401K donors who are mistakenly called 401K investors
would be better off using 100 - your age formula with index fund like S&P500,
Dow or total market fund and bonds (high yield bonds like Vanguard probably
can be used instead of S&P 500 as it for the last 10 years has returns less
then junk).
Some of the diversification problems stemmed from concentrated holdings
of company stock. Experts urge savers to hold no more than 10 percent
to 15 percent of their accounts in company stock, pointing out that
they could sustain significant losses if the company runs into trouble
or goes bankrupt.
The Financial Engines study found that among
savers eligible to receive company stock, more than one-third had
more than 20 percent of their holdings in the company's shares.
Some older workers had more than half their holdings in company
stock, and workers with salaries under $25,000 also held a disproportionate
amount of company stock, the study found.
On the level of savings, the study found that just 7 percent
of 401(k) participants were saving the maximum allowed.
Much of that is common sense. (Think Enron: the time when your company
stock will be least value to you also will be the time you may need
to borrow against your retirement account.)
Some of it, likely, is
the way the plans are offered. (Again, think Enron.) Public companies
tend to offer their stock as part of a "retirement plan," and many "investors"
are told to invest in "what you know."
However, the absurd claim in the lede of the AP piece ("Despite extensive
efforts to educate workers about saving for retirement") is belied by
two realities. One is noted by Lux:
Look, Maw, those damned Kids don’t know how to manage their (401)k
Funds. When are they going to learn that they have to spend 20 hrs.
per Week evaluating good potential Investments. Listen to them complain
that they don’t have the time–between raising children and working
a 50-hour Workweek. (italics removed)
the other comes from anyone who knows a bit of history and remembers
that pensions have been historically underfunded (or raided) by management.
If trained money managers couldn't do a good job in the Glory Days of
Defined Benefit (and, make no mistake, a literal reading of economic
theory would lead anyone to believe those were the glory days), then
expecting people who do not specialize in managing money to
allocate "appropriately" should be, on the face of it, absurd.
Finally,
some of the problem likely is due to constraint optimization issues.
(Short version: You can only save what you don't have to spend.) Let
us rewrite this paragraph:
Nearly two-thirds of those earning less than $25,000 a year don't
contribute enough to get the full company match, the study found.
But 24 percent of those earning $50,000 to $75,000 a year and 12
percent of those earning more than $100,000 a year didn't get the
full match, either.
as
Only slgihtly more than one-third of those earning less than $25,000
a year have enough disposable income to get the full company match,
the study found. Meanwhile, 76 percent of those earning $50,000
to $75,000 a year and 88 percent of those earning more than $100,000
a year were able to qualify for the full match.
You don't invest in the market until you have money you can afford
to lose.
And a lot more people making $50,000-plus-a-year have money they can
afford to lose than those making less than $25,000 p.a. Which is what
the data shows.
Don't take this too seriously. it is the coberly investment plan:
There is a reason they pay all that interest. money now is more useful
than money later. Spend it while you are young on things that will make
you happy (a big tv or a big car will NOT make you happy).
when you get to be about 45 or 50, and
the kids are grown and the house is paid for, start saving like mad.
you are making peak earnings, you are too old for ski trips, and you
have learned how to be happy while spending almost nothing.
In five or ten years you can save about as much as you were going to
get putting away that hundred dollars a month at 3% or less over inflation.
worked for me.
coberly | 05.12.08 - 5:16 pm |
===
Whenever someone complains that the typical investor doesn't work
hard enough on optimizing their investment plan, I point at that there
is an entire class of people who do nothing else but manage investment
plans. They subscribe to every known data source for investment plans.
They have real time feeds to all sorts of financial data. They have
research staffs and budgets for hiring specialized consultants. They
have all that, and they still consider it good performance if they can
track the market indices. No, Joe Employee cannot do better than the
typical fund manager, so if he is lucky, he'll track the market indices.
There used to be a reason for buying your own company's stock under
an ESOP plan. In the 1980s, at least, the deal was that you could buy
stock every six months, but you got a price 15% off the lower price
at either the start or end of the period. In other words, you were guaranteed
at 15% one time return, even if the company was heading for the sewer.
Otherwise, I tended to avoid my own company's stock, except when I had
no choice. I was lucky in this. My company was sold, and the pseudo-shares
I had been buying turned into real money.
The discontinuance of the defined pension plans, as potentially bad
as they may have been, the rise of the 401K and IRA as alternatives
has been a boon to the investment community, especially the mutual fund
industry. I don't see that we individual workers have done any better
under this revision. Why would we expect to do better if even the social
security component were revised in the same manner?
If memory serves me correctly, IRAs were initially created for the
benefit of those who did not have access to a defined pension plan.
The 401K had a similar beginnig, but intended for employees of businesses
too small to provide an adequate defined pension plan. As soon as both
systems were in place the defined pention went bye-bye and the investment
managers found themselves closing in on Nirvana.
Jack | 05.13.08 - 11:02 am |
#
Retirement red flags Study finds workers make 401(k) mistakes that may
dash retirement plans
With few exception (warning about overexposure to the compnay stock,
failure to get full matching by employeer, etc) this is a regular yellow
press baloney...
SAN FRANCISCO (MarketWatch) -- Is more than half of your 401(k)
invested in your own company's stock? In an ideal world, retirement
savers would scoff at that question. But the world of retirement savings
is far from ideal, as revealed by the results of a new study released
Monday of almost 1 million workers' 401(k) portfolios at 82 large firms.
One-fourth of 401(k) participants closest to retirement -- those
60-years-old or older -- invest more than half of their workplace retirement
plan in their company's stock, according to the study by Financial Engines,
a Palo Alto-based registered investment advisory firm that provides
advice and account management services to retirement-plan participants
at large firms.
Some of those older workers take even bigger risks: 15% of 60-year-old
or older workers invest more than 80% of their portfolio in their company's
stock. About one-third of the 82 companies in the study offer unrestricted
stock as a 401(k) plan option.
Lower-salaried workers also tend to rely on company stock, with more
than half -- or 54% -- of those earning $25,000 or less holding more
than 20% in company stock.
In comparison, about 31% of those earning $25,000 to $75,000 hold
more than 20% in company stock, and 27% of those earning $75,000 or
more do so.
"One of the reasons people have a lot of company stock is when you're
looking at 10 [investment] options, none of which you recognize, but
you work for the company, familiarity makes it feel safer," said Jeff
Maggioncalda, chief executive of Financial Engines, in a telephone interview.
He added that studies have shown investors, when asked whether their
company's stock or the S&P 500 is more risky, consistently point to
the S&P 500.
Maggioncalda said the study's findings point to the importance of
automatic 401(k) plans, in which savers are automatically enrolled in
specified investments and their contribution rates automatically rise
each year. Right now, most employers adopting automatic enrollment plans
generally include only new hires rather than existing savers.
The report, Maggioncalda said, shows that "people have issues they
need help with. Employers should not just apply the automatic 401(k)
for the lucky people who are just starting out as new hires. They should
have automatic enrollment options for existing participants who have
problems right now ... and who have less time to fix those problems."
Investing in a single company can lead
to dire consequences for retirement savers, according to Financial Engines.
Taking a sample $30,000 invested for 40 years, a saver with 80% or more
in one company's stock would end up with 66% less money, on average,
than a saver who invested 20% or less in company stock, according to
Financial Engines' analyses of workers' accounts.
Losing the match
Another red flag: Many workers are failing to claim free money offered
by their employers, with 33% of plan participants
failing to save enough to get the full matching contribution from their
company. Of the 82 companies studied, 62 offer a match,
and the average match is 50 cents per dollar
contributed, up to 6% of salary.
And younger and lower-income workers are likelier to have low savings
rates: The portion of savers failing to get the full match jumps to
48% for savers under age 30 compared with 35% of savers in their 30s,
31% of those in their 40s, 26% of those in their 50s and 28% for savers
60-and-older.
Looking at workers by salary level, 63% of those earning less than
$25,000 a year fail to save enough to get their company's full match
versus 24% of those earning between $50,000 and $75,000 and 12% of those
with salaries of $100,000 or more per year.
"It's really tough to see folks making less than $25,000 who could
effectively get a 3% to 6% raise" if they slightly increased their savings
rate, Maggioncalda said.
According to a Financial Engines analysis, if a worker saving 1.9%
of salary with a median account balance of $5,872 continues contributing
at that same rate (and thus receiving a partial company match), that
saver will have $46,779 after 20 years. But if the same worker increases
the contribution to 6% of salary (thus receiving the full employer match),
the expected account balance would be 158% higher, at $120,905 after
20 years.
Older workers tend to save a higher percentage of their salary than
younger workers: Savers under age 30 save an average of 5.2% of their
salary, according to the study, compared with an average of:
6.3% among those in their 30s,
7% among those in their 40s,
8.5% among those in their 50s, and
9.1% among those in their 60s or older.
Risky business
While some workers are holding a dangerous level
of company stock, others are overly concentrated in a single asset class,
or are choosing overly conservative allocations, among other potential
investing mistakes, according to Financial Engines' analysis, which
assessed risk level and efficiency for each individual portfolio based
on the saver's time horizon and other criteria.
And, while 53% of those with incomes below $25,000 were found to
be making investing mistakes, they weren't alone. Workers in higher
income brackets made similar mistakes, according to the study, including:
37% of those earning $25,000 to $50,000,
34% of those earning $50,000 to $75,000,
31% of those earning $75,000 to $100,000, and
33% of those earning $100,000 or more.
Of course, in some cases, an investor's penchant for a more risky,
or less risky, portfolio might not fit exactly into any one definition
of best practices. For instance, a young investor could opt to stick
to very safe investments.
"It could be the case that ... you're a really conservative 25-year-old,"
Maggioncalda said. That's O.K., he said, "as long as you know you're
taking a lot less risk, which means you'll have much lower expected
growth, which means you'll have to save a lot more money than someone
who has more equity exposure."
The good news: 23% of those earning $25,000 or less had appropriately
diversified portfolios, as did 31% of those earning $25,000 to $50,000,
33% of those earning $50,000 to $75,000, 36% of those earning $75,000
to $100,000, and 37% of those earning $100,000 or more.
Andrea Coombes is an assistant personal finance editor for MarketWatch,
based in San Francisco.
There's some great investing advice out there, and of course, there's
some pretty bad advice as well. If you've ever heard "It doesn't
matter how high the price is -- buy all the Enron you can," that probably
falls into the latter category.
While you can spend all day listing smart and useful investment advice,
I got to thinking about great advice that is limited to four words.
Let's check the results.
"Buy what you know" This is probably the second-most-famous four-word piece of investing
advice. It comes from, or is at least most popularly attributed to,
Peter Lynch's One Up on Wall Street. In a timeless article
from several years ago, Jeff Fischer
writes at great length about this phrase:
[I]t is most often read to mean buy the brands that you know,
buy the companies that make products that you like, and buy the
company names that you always hear in daily life.
When large-cap stocks are soaring, this strategy, simple as it
is, appears brilliant. "If I just buy Coca-Cola (NYSE:
KO), General Electric, and Hershey, I could double
my money every three years!" Of course, when large caps go into
long periods of rest or retraction, the strategy requires patience
and offers less-than-blistering returns, especially if you "bought
what you knew" as it was hitting a seven-year peak.
Buy what you know is one-dimensional advice for three reasons.
First, what you know may not be worth investing in. Second,
the practice of buying what you know is rarely interpreted to mean
buy the business model, the cash flow statement, and the balance
sheet that you know backwards and forwards. It too often is seen
as "buy your favorite brand." Period. If you happen to know and
love Kmart, but you didn't learn about its financials, you [were]
in a sorry situation because you were an uninformed investor. Third,
I've never heard the term "buy what you know" coupled with anything
regarding valuation. It seems to be "buy what you know -- at any
price."
Thank you, Jeff. "Buy what you know" may help new investors get comfortable
with the process, but it simply won't help you pick particularly good
stocks if you don't get into the valuation side of the equation. Plenty
of people bought Krispy Kreme because they "knew it," and that was a
disaster. Alternatively, in the late '90s, plenty bought Microsoft because
they "knew it," but, because of the valuation back then, they haven't
been well rewarded despite the accomplishments of the company in the
interim. Plenty of other people have bought Starbucks because they knew
it, and that's worked out fantastically. Simply put, acting on "buy
what you know" doesn't lead you anywhere in particular.
"Buy low, sell high" I'm pretty sure this is the most famous four-word piece of investing
advice ever, and as guidance, the phrase is unarguable ... yet largely
useless. By definition, if you succeed in buying low and selling high,
you've made a profit. Any purchase is made with the expectation -- or
at least hope -- that in absolute dollar terms, you're going to be selling
at a higher price than what you've bought for. But since the advice
itself gives no guidance as to what is "low" and what is "high," it
can't be used without a whole lot of addendums. Buy stocks with low
P/Es, or at 52-week lows, or during bear markets, or any number of other
interpretations of "buying low." Selling high might or might not be
useful advice. After all, as Philip Fisher has famously written and
as adopted by Warren Buffett, the best time to sell a stock, if it's
properly researched, may be almost never.
We can all tell plenty of stories about someone selling a stock at
a quick profit that seemed high but turned out to be several hundred
or thousand percent below what they could have made by holding onto
the stock. Tom Gardner frequently mentions Daktronics (Nasdaq:
DAKT), Websense (Nasdaq:
WBSN), Dell, and Whole Foods when confessing his own
bad calls. Not to pick on Tom -- his results speak for themselves. But
these were mistakes that came out of the "buy low, sell high" mold.
"Buy an index fund" This is the most actionable, most mathematically supported, short-form
investment advice ever. If you look up The Motley Fool in the encyclopedia
-- or at least on Wikipedia -- you'll find that we are "famous for [our]
view that, for the majority of people who have little time to keep track
of stocks, the best investment strategy can be summed up in four words:
'Buy an index fund.' "
And that remains true. If you've got little time to keep track of
stocks, this really is the best investment advice around. It's not perfect
-- after all, you might be asking, "Which index fund?" And then you'd
want to specify certain characteristics, such as:
No load.
Low annual cost.
Low turnover.
Broad index.
That means a fund like Vanguard Total Stock Market Index (VTSMX),
or the Vanguard Total Stock Market ETF (AMEX:
VTI), which coincidentally may hold a lot of what you know, including
GE, Microsoft, Coca-Cola, Hewlett-Packard (NYSE:
HPQ), Verizon (NYSE:
VZ), and Procter & Gamble (NYSE:
PG).
When cornered at cocktail parties for investment advice, this is
the one piece I usually provide. After all, barely 25% of mutual funds
beat the relevant market index over time. I don't think that you can
really improve on this advice if you're stuck using four words or fewer.
But you can spend more than four words on investment advice,
and as with the other four-word mantras above, doing so usually yields
even better advice. Like the classic index fund, a managed fund can
have no load, low costs, low turnover, and strong diversification. It
can, on rare occasions, have managers capable of properly allocating
capital and valuing businesses, thereby adding value beyond the overall
increases of the market. When you combine all of these factors, you
get a fund that improves on its index -- and helps you make money.
Such funds are out there. They take more than four words' worth of
work to find, but
Motley Fool Rule Your Retirement has uncovered a number of
them. Along with a selection of exchange-traded funds that it recommends,
as well as index funds beyond the S&P 500, our retirement newsletter
focuses on inexpensive, diversified ways to save and invest for a healthy
and happy retirement.
For much more on planning for retirement, including tools, investment
recommendations, and a suite of discussion boards where you can ask
questions to your heart's content, try Rule Your Retirement
for the
next 30 days, free of charge.
This article was originally published on Jan. 13, 2006. It has
been updated.
Bill Barker
does not own shares in any of the companies mentioned in this article.
Whole Foods, Starbucks, and Dell are Motley Fool Stock Advisor
recommendations. Microsoft, Coca-Cola, and Dell are Inside Value
selections. The Motley Fool has a
disclosure policy.
BOSTON (MarketWatch) -- What's the best way to motivate Americans
to save, invest and prepare for retirement? Some behavioral finance
experts suggest using the carrot. Others suggest using the stick. And
still others suggest using a combination of carrot and stick.
As for me, I suggest the use of statistics. Consider just a sampling
of the numbers that have been released this year:
IRAs and 401(k)s
There's $4.23 trillion in individual retirements accounts, but that
figure hides the fact that very few Americans contribute to an IRA and
even when they do the amount is small.
On average, just 10% of eligible Americans contributed to an IRA
for the years 2000 to 2002, according to the latest issue of EBRI Notes.
And in 2004, the median contribution to a traditional IRA was just $2,300,
according to the Investment Company Institute. The maximum you could
contribute to an IRA in 2004, by the way, was $3,000 or $3,500 for those
50 and older.
Now you might say that's not so bleak given that working Americans
are presumably saving for retirement using an employer-sponsored plan,
such as a 401(k), 403(b), 457 or Thrift Savings Plan. But again, the
numbers are somewhat depressing.
There are nearly 100 million Americans age 21 to 64 working full-time,
full-year. But of that number, just 60% or 58.4 million work for an
employer that sponsors a retirement plan, and only 52.7%, or 50.8 million
participate in a retirement plan.
That means roughly half of all working Americans don't participate
in a retirement plan or don't have an employer-sponsored plan in which
to participate. It also means that a huge number of adult Americans
-- by my estimate 150 million of a potential 200 million -- aren't saving
for retirement in any meaningful way, if at all.
Retirement risks
According to the Society of Actuaries' 2007 Risks and Process Retirement
Survey, roughly half to 60% of retirees worry about three things: the
cost of health care, the effect of inflation
on their nest eggs and not being able to maintain a reasonable
standard of living for the rest of their life.
Those worries are justified given the lack of savings in America.
But what's really bothersome is the degree to which those who aren't
worried should be.
Consider, for instance, health-care costs. Fidelity Investments estimated
earlier this year that a 65-year-old couple retiring today would
need $215,000 set aside just to pay for medical expenses over a 20-year
span. And if that wasn't depressing enough, other estimates are even
higher.
Paul Fronstin of the Employee Benefit Research Institute, for instance,
said a 65-year-old couple retiring today would need, assuming average
life expectancy of 82 for men and 85 for women, more than $300,000 set
aside to pay for health-care costs (premiums and out-of-pocket expenses)
in retirement, and more than $550,000 if the couple lives to age 92.
What's even more depressing is that neither the EBRI nor Fidelity
estimates factor in the cost of nursing homes, long-term care or assisted-living
facilities, or home health aides. And those costs are staggering.
According to the MetLife Mature Market Institute, it costs $69,000
per year for a semiprivate nursing-home room, $35,628 per year for a
unit in an assisted-living facility, $19 an hour for a home health aide
and $61 per day for an adult day care center. Where's that money going
to come from?
Retirement expenses
Retirees and would-be retirees are also right to fret about maintaining
their standard of living. Consider, for instance, these numbers: The
median household income (half above, half below) in America is $48,451
and the average is $65,527, according to the U.S. Census Bureau. But
in retirement, income falls dramatically.
The average total income for those 65 and older in America is $25,610,
and the median was a meager $16,770, according to EBRI Notes. That means
retirees are living on roughly one-third of their preretirement income.
And that's a far cry from the 70% to 80% income replacement experts
suggest Americans need to maintain their preretirement standard of living.
Besides not having the income to maintain a similar standard of living,
retirees will face expenses that are certain to rise faster than the
average rate of inflation.
Consider, for instance, the results of the 2002 Consumer Expenditure
Survey. On average, retirees spent 32.6% on housing, 14% on food, and
13% on health care. But that's the average. What's interesting is the
degree to which money spent on health care in retirement changes over
time.
For instance, those 55 to 64 spend 6.8% on health care, those 65
to 74 spend 11.2% and those 75 and older spend 15.1%. That percentage
rises in part because the cost of health care is rising twice as fast
as the core rate of inflation (less energy and food), 5% vs. 2.3%, according
to the U.S. Bureau of Labor Statistics. But it also rises because older
retirees tend to spend more on health care than younger retirees.
Source of retirement income
So where do retirees get their income once in retirement? Again,
the numbers are depressing (and deceiving). On average, retirees get
39.8% from Social Security, 23.7% from earnings, 19.4% from pensions
and annuities, 15.4% from assets (IRAs and the like) and 1.9% from other
sources, according to EBRI Notes.
But the composition of the income changes dramatically based on income.
Retirees in the bottom fifth of income, those with less than $8,261
in 2006, got 87.6% of their income from Social Security while those
in the top fifth of income, those with greater than $34,570, got 36.4%
from earnings, 22.6% from pensions, 20.5% from assets, and just 18.5%
from Social Security.
The moral of story
If you are among the 150 million who are not saving for retirement,
now would be a good time to do so. If you are among the 50 million who
are saving for retirement, now would be a good time to save more.
If you are among those who aren't worried about health-care costs,
inflation or maintaining a standard of living in retirement, now would
be a good time to start worrying.
If you are among those who worry about retirement risks, now would
be a good time to do something about it: Set aside money for health
care, for instance.
And if you are among those who don't know what your sources and composition
of retirement income will be, now would be a good time to figure that
out. After all, waiting to see how things might work out isn't the world's
best plan.
Robert Powell has been a journalist covering personal finance
issues for more than 20 years, writing and editing for publications
such as The Wall Street Journal, the Financial Times, and Mutual Fund
Market News.
CNBC anchor Mark Haines stated on air today at 11:00 am: “The two
people I don’t trust are realtors and car salesmen. Not that they are
dishonest. They just have a vested interest in keeping spirits up.”
Doesn’t that take the cake?
With respect to Mr. Haines and the subject of “keeping spirits up”,
readers know my views.
CNN calls themselves “The most trusted name in news” and CNBC is
all about “The greatest story never told”. It’s all a crock that nobody
believes, so why they play this mindless game is beyond me.
But -- and this is important -- it’s only been in recent years that
Wall Street has permitted their best people to speak their minds --
as long as they cover themselves with disclaimers. We need to encourage
that.
Wall Street is full of brilliant minds, and these professional players
don’t all agree with their colleagues, or with Talking Heads. We need
to hear their differences of opinion, directly.
From the media, many of whom are on the sidelines cheerleading advertisers
and promoters and their friends, we need to tune out. If they were simply
journalists, we should listen.
From readers comments:
If you view CNBC as 50% entertainment with some factual information
as background, it isn't so bad.
Anyone who blindly invests based on what they hear or read, without
doing some of their own analysis, is doing themselves a disservice --
they should get someone else to make their investment decisions. But
your main thesis here is right on. Analysts provide value by providing
insight into why they think a stock should be valued at some level,
and we as investors are free to weight or reject those varied opinions.
A difference of opinion could result from a variety of different assumptions,
and our assessment of those assumptions is what makes markets move.
====
Yes, Wall Street is "full of brilliant minds". You can witness this
by the "brilliant" performance of the in-house mutual funds that the
brokerages cram down the accounts of their hapless customers. While
this is a travesty, even worse is the current move afoot by the SEC
and Congress to prevent the retail investor or pension plans from putting
any money into funds that can short the market or use leverage.
The S&P 500 only recently recovered back to even after six years
and a 40%+ drawdown. Of course, that represents a excellent investment
choice according to the regulators and the index fund distributors.
Just buy and hold into the sunset.
Q: I am in a quandary regarding my 401-K portfolio allocation.
I am 56 years old and understand that in my age category I should have
a 60%-40% mix between stocks and bonds in my portfolio.
For the past couple of years, I have been mostly invested in equities
but recently shifted to the recommended 60-40 split --- except that
right now the 40% is currently in a Money Market fund.
This is because investing in bond funds
has seemed to be more speculative than equities in these times.
My company 401-K plan provides me with 5 choices and a none of them
includes owning bonds directly. Our bond fund return cannot keep pace
with the Money Market return. The best choice has been the Equity Index
Fund which is an S&P 500 Index Fund.
What do you recommend for people in my situation?
---B.D., Houston, TX
A. Your judgment has been excellent. Bond fund figures for
the last three years have been dismal and cash has been a better choice.
You might consider some research by Peter Bernstein. Disappointed
with bonds, he found that a 75/25 stocks/cash allocation produced the
same volatility as the traditional 60/40 stocks/bonds allocation. In
other words, if you hold cash instead of bonds, you can afford to hold
more stocks because the cash is more stable than bonds.
Another option would be to look among your fixed income choices and
try to find a fund that was what some analysts call "near cash"--- a
very short term fund with an average maturity of 1-3 years
Regular stock promoting idiotism form mainstream press... I bet in Feb
2009 he need to eat this article shredded into borsch
February 17, 2008 | The New York Times
IT has been a time to worry even the savviest investors. The credit
markets have been in a crisis, the domestic stock market has been shaky
and overseas markets haven’t been much better.
David F. Swensen manages investments for the $22.5 billion endowment
at Yale.
What should an individual investor do?
Don’t try anything fancy. Stick to a simple diversified portfolio,
keep your costs down and rebalance periodically to keep your asset allocations
in line with your long-term goals. That is the advice of David F. Swensen,
who has run the Yale endowment since 1988, relying on a complex strategy
that includes investments in hedge funds and other esoteric vehicles.
The endowment earned 28 percent in its last fiscal year, which ended
June 30, beating all other endowments. It finished the year with $22.5
billion.
For most people, he recommends a very basic approach: use index
funds, exchange-traded funds and other low-cost instruments, and stick
to your long-term asset allocation — even when the markets are in tumult.
Don’t be distracted by market forecasts, he said. “You have to diversify
against the collective ignorance,” he said. “I think nobody is in a
position to react to these big macro-issues. Where is the dollar going
to be or what is G.D.P. growth going to be in China? For every smart
person on one side of the question, there is another smart person on
the other side.”
For most individual investors, he said, copying the strategies of
institutions like Yale is virtually impossible: big investors have access
to fund managers and arcane strategies that are beyond the reach of
most people.
“The only people who should get involved are sophisticated individuals
who have significant resources and a highly qualified investment staff,”
Mr. Swensen said.
“Most people do not have the resources and time to pick market-beating
managers” of hedge funds, private equity funds or funds of funds, he
said. And he said that the techniques used by hedge funds often result
in higher taxes than those of index funds.
So he advocates another approach, which he outlined in the book “Unconventional
Success: A Fundamental Approach to Personal Investment” (Free Press,
2005). He proposes a portfolio of (what a genius, this portfolio
los more then 30% in 2008 --NNB Jan 26, 2009):
30% domestic stocks,
15% foreign stocks,
5% emerging-market stocks
20% in real estate
15% each in Treasury bonds and Treasury inflation-protected
securities, or TIPS.
The real estate investment can be made through real estate index
funds. Though the real estate market has declined and your portfolio
is below its target allocation to it, he said, don’t try to time the
market. Go ahead and rebalance because no one really knows where the
market’s bottom is.
Diversification will buffer a portfolio from declines in specific
asset classes. For example, he said: “If the dollar declines dramatically,
you have foreign and emerging-market equities.
And a declining dollar may well be associated with inflation, but a
diversified portfolio would include TIPS,” to provide a hedge. “That
means if any of these scenarios play out, an investor has sizable chunks
of his portfolio that protect against them,” Mr. Swensen said.
When possible, he said, rebalancing should be done in a tax-sheltered
account, like an I.R.A. or a 401(k), to avoid tax liabilities. “When
you are putting fresh money to work,” he said, “you put it in an asset
class where you are underweight and take money out of a class that is
overweight.”
He says it is fruitless for individual investors to pick stocks.
“There is no way that an individual can go out there and compete
with all these highly qualified and compensated professionals,” Mr.
Swensen said.
... ... ...
Mr. Swensen says investors should forget market timing entirely.
Once an individual sets up a program, it should be rebalanced quarterly
or semiannually, he said, “but it should be disciplined.”
When the markets decline, try not to pay attention, he said. “Let
yourself off the hook,” he said. “If you pursue the sensible long-term
policy, look at it over a 5- to 10-year
period. Don’t look at five months.”
Sometimes, the questions we don't ask are more important than the
ones we do.
Had someone asked, for example, "Can he hit?" the Red Sox might never
have traded pitcher Babe Ruth to the Yankees. Had someone asked, "Do
we really need a New Coke?" we wouldn't still be making New Coke jokes.
One question every investor needs to ask is, "How much money can
I lose?" It's a particularly urgent question in uncertain economic times
— now, for example. So for the second column in our series on dealing
with stormy financial markets, we're going to talk about how to make
your portfolio as recession-proof as possible.
Let's start with the proposition that the more narrowly focused your
portfolio, the larger the potential gains or losses. Suppose, for example,
you had invested in the Hey, Boy & Howdy fund, which owned five stocks.
If one of its stocks had been Google, then you would have made a great
deal of money. But if one of those stocks had been Enron, then you'd
be sitting on some big losses.
Highly concentrated funds, particularly those that focus on one sector,
enjoy the biggest potential for outsize losses and gains. If you're
worried about a downturn, you should look for funds with many holdings.
You'll give up the chance for a 100% gain in one year, but you probably
won't lose 70%, either.
One easy choice would be Vanguard Total Stock Market Index, which
holds 3,685 stocks and tracks the MSCI US Broad Market Index. (Vanguard's
rival, Fidelity, offers the Fidelity Spartan Total Market fund, which
has 3,411 holdings and tracks the Dow Jones Wilshire 5000 index.)
These funds will protect you somewhat if one stock, or even one whole
sector, takes a bruising. Keep in mind, though, that they're still stock
funds and will follow the stock market faithfully — even if it walks
off a cliff. If you want further protection, you have to invest in something
that might not move in lockstep with the broad stock market.
You can use two statistical measures to determine how closely one
type of fund tracks another. The first is a fund's statistical correlation
with another fund or a broad index. A 100% correlation is a perfect
match; a 0% correlation means the two funds' movements are unrelated.
A negative correlation means the two move in opposite directions.
Consider, for example, the Lipper large-cap core fund index, which
measures the performance of the largest funds in that category. The
index has a 98.9% correlation with funds that track the Standard & Poor's
500-stock index. If you own an S&P 500 fund and a large-company core
fund, you're not getting much diversification from owning the two funds.
Another measure, called r-squared, shows how much one fund's movements
can be traced to the movements of a benchmark, such as the S&P 500.
The closer the r-squared is to 100, the more the returns from the fund
are attributable to the returns from the benchmark. The Lipper equity-income
fund index, for example, has an r-squared of 95.4% with Lipper's index
of S&P 500 index funds. Again, pairing the two types of funds in your
portfolio won't give you a great deal of added benefit.
You can find both these statistical measurements at
www.morningstar.com , and many
funds' websites provide the information, as well.
What types of funds don't correlate with the S&P 500?
International funds have only a 75% correlation
with S&P 500 index funds. Still, you should remember
that when the U.S. stock market melts down, foreign markets melt right
alongside us. Among sector funds, the lowest correlations with the S&P
500 have been among gold funds, natural resources funds and Japan funds.
But you get better diversification if you mix in funds that invest
in different asset classes, such as money market securities or bonds.
Over the past three years, funds that invest
in Inflation Protected Securities, or TIPS, have had a negative correlation
with S&P 500 index funds. So have government securities
funds. Municipal bond funds also have a very low or negative correlation
with S&P 500 index funds.
Some experts also consider real estate funds to be a separate asset
class. In the past three years, real estate funds have had a 53% correlation
with S&P 500 funds.
If we were to construct a Cowardly Portfolio,
then, we might consider a 20% allocation each to a mix of U.S. stocks,
international stocks, real estate, bonds and money market funds.
In broad terms, this gives us 60% in stocks, 20% in bonds and 20% in
money market securities, or cash.
For ease of calculation, we used Vanguard funds for a low-cost model
portfolio. You can create your own cowardly portfolio with funds from
different managers, if you like.
The portfolio performs brilliantly in down markets and reasonably
well in up markets. Had you invested, for example, in the Vanguard Total
Stock fund on Dec. 31, 1999 — the eve of the 2000-02 bear market — you'd
have gained about 21% through the end of November. By contrast, the
Cowardly Portfolio would have gained 86%, thanks to gains in its other
holdings, particularly real estate. The past 12 months, however, the
Cowardly portfolio has trailed the Vanguard Total Stock portfolio.
You can adjust the degree of cowardice in the portfolio by adjusting
the proportions of your total portfolio that you hold in the different
funds. You can also improve your returns
by rebalancing periodically. The best method: Rebalance the entire portfolio
if one holding rises to 30% of your holdings, or falls to 10%.
If you have a long-term outlook (20 years or more) then you probably
shouldn't build a portfolio based on short-term gloom. In the long term,
stocks will fare best. But if the question you're most worried about
is, "How much will I lose?" then consider a Cowardly Portfolio.
Water Undegrave discredits himself calling seismic
shift "market freak-out". Debt based expansion might run out of steam.
The recommendation "But generally someone your age should have roughly two-thirds
of your retirement portfolio in a diversified blend of stocks and the rest
in bonds." is not suitable for the storm coming. I doubt that 66%
of stocks can be considered a defensive strategy in the current environment
but it is better then 100% for sure :-). Also the
assumption that S&P500 outperforms bonds during any 10 years period is not
always true and it will definitely be false for the last ten years if S&P500
falls to 1300 level in 2008. Of course much depends on you
access to specific stock funds but generally 100-your age dictates opposite
percentage (44 stacks and 56 bonds). Pimco probably got higher return
this year then S&P500. All-in-all with cost averaging and starting from
zero S&P500 is equal to the bond fund that returns on average 6.5% a year
if we are talking about the last 10 years.
Instead of panicking and dumping stock funds in a downturn, be
cool and rethink your strategy, says Money Magazine's Walter Updegrave.
Question: I'm 56 and have my most of my nest egg in stock
funds. But with the stock market crashing so much lately,
I've become concerned and am considering switching out of stocks.
Do you think this is a good idea? - Sharon Bollmann
Answer: I certainly understand your apprehension about the
stock market's behavior this year.
After reaching an all-time high in May, the Standard & Poor's 500
stock index - which is a better barometer for stocks overall than the
more often watched Dow Jones Industrial Average - has undertaken a series
of white-knuckle ups and downs that's made investing in stocks a bit
like riding one of those loop-de-loop roller coasters.
And with a seemingly unending litany of bad news on the economic
front - declining housing prices, ongoing subprime woes, a slowing economy
- you can't help but wonder whether we're in for another stomach-churning
dive from which it may take many months to recover.
This kind of situation is unsettling for all investors, but even
more so for people like yourself who are nearing the end of their careers.
After all, the last thing you want is to see the money you've worked
so hard for, saved so diligently and invested so carefully get whacked
with a big loss just when you're in the home stretch to retirement.
But this isn't the time to give in to
fear. Rather, it's a time to re-assess your investing strategy and consider
what you need to do to remain on track toward a secure retirement.
If you're like most people in their mid 50s, you probably have a
good 10 or more years before you can realistically think about retiring.
During that time, you've got to pull off a bit of a balancing act.
On the one hand, you don't want to do anything to unduly jeopardize
the savings you've accumulated in 401(k)s and other retirement accounts.
But you still need to make that money grow.
It's not as if you'll only be investing until age 65.
After calling it a career, you'll probably spend another 20 or more
years in retirement. Which means you still
need to bulk up the value of your nest egg so it can generate enough
income to maintain your purchasing power until you're well into your
'80s or even longer.
So even though your gut may be telling
you otherwise, you don't want to abandon stocks. Nor
do you want to embark on what may seem like a plausible strategy of
getting out now with the idea of jumping back in at a more opportune
time in the future.
As I pointed out in a recent column,
that sort of market timing is very difficult to do and can easily backfire.
A better strategy is to decide on a mix of stocks and bonds that's likely
to get you the long-term growth you need, but that also offers enough
protection so that your nest egg isn't totally scrambled should stocks
take even more of a hit.
The blend of stocks and bonds that's right for you will depend on
a number of factors, including the size of your nest egg, the value
of other resources you have to draw on (Social Security, a pension,
home equity, cash value in life insurance policies, etc.) and how much
risk you're comfortable taking.
But generally someone your age should have roughly two-thirds of
your retirement portfolio in a diversified blend of stocks and the rest
in bonds.
It's also important that you continue to contribute to 401(k) and
other retirement accounts in the last stages of your career. That may
not seem like a very sensible thing to do when the stock prices are
falling and the economic outlook appears iffy.
But remember, the shares you buy while
the stock market is down will likely be the ones that will have generated
the biggest gains a decade or more down the road. And
the money you invest during market setbacks could very well provide
the spending cash you'll need in your later retirement years.
One final note. While I've tailored my answer to people like you
who are nearing the end of their career, the fact is that a tumultuous
market like this one presents a challenge no matter where you are in
your retirement planning.
So for those of you out there who have more than 10 years before
you'll call it a career, you can get a suggested retirement portfolio
blend by clicking here, while anyone who's already retired can get a
recommend mix by clicking here.
But whatever stage of retirement you're in, remember: no matter what
the market is doing, you're always better off setting a reasonable strategy
and following it rather than letting your gut or your emotions lead
the way.
$6000 is true for 2008 and 2009, not true for 2007 ($5000 for 2007)
November 29, 2007 | Kiplinger
Build tax-free retirement income. Contribute to a Roth IRA while
you're working. If you're 50 or older next year, you and your spouse
can each contribute up to $6,000 to Roth accounts--$5,000 in basic contributions
plus a $1,000 catch-up-as long as you meet income requirements (in 2008,
your income can't exceed $169,000 if you're married filing jointly or
$116,000 if you're single). [link to Roth stories]
The toughest questions. The best calculators. The coolest strategies.
And a lot more.
Starting in January, the first of an estimated 78 million baby boomers
turn 62 years old and become eligible for Social Security.
Time to reach for the aspirin.
Now in its eighth decade, Social Security is arguably more important
-- and certainly more complicated -- than ever before. Boomers, for
the most part, are on their own when it comes to planning for later
life; pensions and related safety nets are disappearing from the workplace.
Thus, Social Security checks -- the closest thing to a sure bet in most
retirement budgets -- are expected to play an ever-larger role in older
Americans' financial security.
The process of getting that check, however, is sure to cause headaches
for boomers and bureaucrats alike. The Social Security Administration's
1,300 offices nationwide already see 850,000 visitors each week and
field about 68 million telephone calls a year. Would-be retirees, meanwhile,
are about to discover that many factors -- taxes, a spouse's earnings
history, life spans -- can muddy decisions about how and when to file
for benefits.
You can, of course, keep things simple and take the plunge on your
62nd birthday. (About half of workers do.) Even if that's your plan,
you owe it to yourself -- and your spouse -- to learn about Social Security
and how to get the most out of the system.
"Don't let Social Security just 'happen,' " says Joseph Matthews,
a lawyer in San Francisco and author of a guide to the program. "There
really are a number of variables that people should consider before
they start."
The basics are available from the Social Security Administration.
(More about that in a moment.) But to supplement your education, consider
the following -- some of the most interesting, obscure, misunderstood
and surprising parts of the 72-year-old program:
The most frequently asked question at the Social Security
Administration
"How much can I earn and still receive Social Security benefits?"
Based on a survey of visits to the agency's Web site, more people --
315,847 in the first six months of this year -- wanted the answer to
that question than any other.
The question refers to the agency's "earnings test" and the apparent
penalty for collecting a salary and Social Security at the same time.
It works this way: If you are under your "full retirement age" (the
age at which you qualify for full benefits) when you first receive Social
Security payments, and if you have earned income, $1 in benefits will
be deducted for each $2 you earn above the annual limit. In 2008, the
limit is $13,560.
In the year you reach your full retirement age, the "penalty" shrinks:
$1 in benefits is deducted for each $3 you earn above a higher limit,
$36,120 in 2008. Then, starting with the month you reach your full retirement
age, the deductions end.
What most people don't realize, says Andrew Biggs, deputy commissioner
for Social Security, is that once they reach full retirement age, the
agency recalculates their future benefits to compensate for any benefits
lost due to the earnings test. For most people, Mr. Biggs adds, "the
earnings test isn't a 'tax' so much as a delay in benefits, and so they
shouldn't stop working or limit their earnings in order to avoid it."
The most frequently asked question about Social Security
in financial advisers' offices
"When should I file for benefits?" Invariably, that's the question
planners hear first.
When it comes to the answer, the conventional wisdom is changing.
Where many advisers once recommended grabbing benefits at age 62 (at
which point your monthly check is reduced permanently by as much as
25%), experts today say extended life spans and the demise of traditional
pensions argue for waiting until your full retirement age, or later,
to collect a paycheck. (You get your largest possible benefit at 70.)
Even "foolproof" strategies are no longer looked upon as foolproof.
"Let's say your doctor tells you that you have six months to live,"
says Bruce Schobel, a New York actuary who worked in the Social Security
Administration in the 1980s. "So, it's obvious: You take benefits at
62, right?" Maybe not. Because of Social Security rules involving spousal
benefits, Mr. Schobel says, "taking a reduced benefit at 62 could serve
as a cap on the surviving spouse's payout, reducing that person's future
benefits by tens of thousands of dollars."
"So even an apparently simple decision becomes complicated," he says.
Calculators, of course, can help. (We discuss some of the better
ones below.) But first, take a few minutes to read a new report: "Rethinking
Social Security Claiming in a 401(k) World," written by James Mahaney
and Peter Carlson, retirement specialists at Prudential Financial Inc.
It's the best discussion we've seen about filing for benefits and possible
strategies for doing so. (Note to the give-me-my-money-at-62 crowd:
The authors conclude that changes in Social Security in recent years
"make the value of delaying the receipt of...benefits greater than in
the past.")
The report, published in August, can be found at the Pension Research
Council, part of the Wharton School at the University of Pennsylvania.
(Go to pensionresearchcouncil.org
and click on "Working Papers" and 2007. Registration is free.)
Coolest strategies you've never heard of for claiming benefits
One way many couples can maximize Social Security benefits over their
lifetimes is for wives to claim benefits at age 62, and for husbands
to delay filing until almost 70, says Alicia Munnell, director of the
Center for Retirement Research at Boston College. (That's based on a
number of factors, including income levels, life spans and survivor
benefits.) You can find Dr. Munnell's research in the June issue of
the Journal of Financial Planning. (See
fpanet.org/journal and click
on "Past Issues and Articles.")
Of course, 70 is a long time to wait for Social Security. So, here's
a way -- courtesy of Steve Potter, a retired public-affairs specialist
at Social Security -- to avoid the wait and still get a sizable benefit
at age 70.
The scenario: George, at his full retirement age of 66, expects
a benefit of $2,000 a month. His wife, Martha, at her full retirement
age of 66, expects a benefit of $1,000 a month.
The strategy: Martha files for a reduced benefit on her own at age
63, or $800 a month. George, at age 66, files for just a spousal
benefit, based on Martha's earnings. He would get $500 a month as Martha's
spouse. (Yes, Social Security allows George to get half of what Martha
was projected to receive at her full retirement age.) Then, at
age 70, George applies for benefits based on his earnings history.
With the "delayed retirement credit" (the additional dollars one receives
for waiting until age 70 to claim Social Security), George's benefit
would be 32% higher, or $2,640 a month.
Social Security would stop George's spousal benefit of $500 a month
because he's entitled to the $2,640, based on his own earnings, at age
70. Again, for this to work, George must wait until his full retirement
age or later to file for a spousal benefit.
The nice part about this strategy is that George -- if he's trying
to maximize his and Martha's combined benefits -- doesn't have to wait
three or four years beyond his full retirement age for a paycheck; he
can start collecting benefits at 66 based on Martha's earnings history
-- and jump to a considerably bigger benefit at age 70. As far as the
"break-even" point goes -- the age at which the accumulated value of
benefits from this strategy will start to exceed the accumulated value
from both spouses filing for full benefits at age 66 -- it's 79. Beyond
that age, the 63-66 strategy yields a larger total return. (This example
assumes George and Martha are the same age.)
Note: Some Social Security representatives we spoke with weren't
aware of this strategy. If you try this at your local Social Security
office -- and if the staff balks -- ask them to confirm the strategy
with Social Security headquarters in Baltimore, which confirmed it for
us.
>
Best calculators and sources of information
Start with the Social Security Administration and its Web site,
ssa.gov.
The calculators alone are worth the visit. Three benefits calculators
-- "Quick," "Online" and "Detailed" -- estimate payouts using different
retirement dates and levels of future earnings. (Click on "Calculate
your benefits" on the home page.)
In addition, an "Earnings Limit" calculator illustrates how a salary
-- if you file for benefits before full retirement age and are still
working -- might affect your monthly check from Uncle Sam. A "Retirement
Age" calculator shows how retiring early reduces your monthly payout
(as a wage earner or spouse). And a "Break-Even" calculator shows the
age at which the accumulated value of higher benefits -- for a person
who claims Social Security, say, at age 66 -- will start to exceed the
accumulated value of lower benefits for a person who opts for Social
Security, say, at age 62.
The site also provides extensive lists of frequently asked questions
in 24 categories; offers access to dozens of forms and publications;
and, perhaps most important, allows you to perform a number of tasks
online -- including filing for benefits (and, thus, avoiding a trip
to the Social Security office). In all, a very valuable tool.
Another useful resource is analyzenow.com,
a Web site devoted to retirement issues. Started by Henry K. "Bud" Hebeler,
a retired aerospace executive and author of two books about retirement
planning, analyzenow features a number of helpful articles about Social
Security and two calculators that can help users determine the best
age to file for benefits.
Two other online resources: The National Committee to Protect Social
Security and Medicare, a Washington advocacy group, has a spot on its
Web site called "Ask Mary Jane" (www.ncpssm.org/maryjane).
There, you can email a question to Mary Jane Yarrington, a congressional
caseworker who joined the group in 1986 as a senior policy analyst.
(Before you write, check the archives for earlier questions and answers.)
Second, Stanley A. Tomkiel III, a New York lawyer, is the author
of the "Social Security Benefits Handbook" -- the contents of which
are available free at
socialsecuritybenefitshandbook.com.
Finally, if you prefer print, Mr. Matthews, the San Francisco lawyer,
is co-author of "Social Security, Medicare and Government Pensions,"
one of the best general guides to the program.
Biggest myth -- and most misused words
The biggest myth is that Social Security will go "broke" or "bankrupt"
in coming decades.
The Social Security Administration, in its annual report to Congress
this year, identified three important dates regarding the health of
the program. First, starting in 2017, the agency will begin paying out
more in benefits than it collects in revenue. Second, in 2027, Social
Security will have to tap the principal in its "trust fund" (its savings
account, if you will) to meet its monthly obligations. (The trust fund
itself is a flash point in debates about the health of the program.
Some observers, including President Bush, say the fund, which lends
excess revenue to the federal government and receives special-issue
bonds in exchange, is simply a box full of IOUs. But it's a safe bet
that when Social Security needs to draw on the trust fund, future Congresses
and presidents will make sure the Treasury doesn't default on those
bonds.)
Finally, in 2041, the trust fund will be exhausted, at which point
the agency will be able to pay only about 75% of promised benefits.
It's certainly not a pretty picture. But at no point will Social
Security collapse. Uncle Sam, it's safe to assume, will continue to
collect taxes in 2041 and beyond. Part of that revenue will go to Social
Security, which will continue to write checks. Again, starting in 2041
(as things stand now) beneficiaries will wind up with payouts worth
25% less than current rules call for. And that's grim.
But broke? Bankrupt? No.
Best source of information on how to fix Social Security
Earlier this year, the Center for Retirement Research at Boston College
published "The Social Security Fix-It Book." The cover of the 52-page
booklet describes it as "everything the earnest but over-burdened citizen
needs to know. Cheerfully narrated and handsomely presented."
That quirky beginning belies what follows: the single best guide
we've seen that explains why Social Security is in the mess it's in
-- and the leading proposals for restoring it to health. You can download
a copy free at crr.bc.edu. Keep it
handy when presidential candidates hold forth on their plans to fix
Social Security.
Most arcane, but important, debating points
Speaking of presidential politics, the following issues could well
figure in the fine print of any "solutions" involving Social Security.
Depending on a candidate's stance on these issues, his or her particular
solution could end up sounding very painful -- or just painful. Try
dropping these nuggets into the conversation at your next dinner party:
Time Horizons: Some policy makers argue that we should look
ahead 75 years when estimating the shortfall in Social Security's finances
-- in which case, about $4.7 trillion is needed to close the gap. Others
argue for adopting an "infinite horizon" -- in which case about $13.6
trillion is needed. (A trillion here, a trillion there...)
Changing Work Force: Some evidence suggests that older workers
are remaining in, or rejoining, the work force in greater numbers. If
so, and if the trend continues, it could ease (somewhat) the coming
strains on Social Security. But there's no telling what baby boomers
actually will do in retirement.
Buying Power: Annual cost-of-living adjustments in Social
Security are based on the CPI-W, the consumer price index for urban
wage earners and clerical workers. But groups including the Senior Citizens
League argue that adjustments should be tied to CPI-E, an experimental
index for the elderly started in the 1980s. This index tracks expenditures
among individuals age 62 and older and better reflects (theoretically)
this group's higher spending on health care and other goods and services.
Biggest misunderstanding
The biggest misunderstanding is that your particular tax dollars
are being set aside for you at Social Security.
Social Security is not, and never has been, a savings account. "
'Your' money is not in 'your' account," says Dennis Oliver, a retired
Social Security Administration manager who now works as a Social Security
consultant in Cookeville, Tenn. Rather, Social Security is largely a
pay-as-you-go system, in which your tax dollars are used to pay current
benefits. (Since the mid-1980s, Social Security has been running annual
surpluses that have gone into the trust fund.)
Consider Ida May Fuller, who received the very first monthly Social
Security check in January 1940. She was 65 at the time. Ms. Fuller worked
for three years under Social Security before retiring, and the taxes
on her salary totaled $22.54. By the time she died in 1975 at age 100,
she had collected $22,888.92 in Social Security benefits.
Biggest surprises
In 1983, Congress raised the age at which people qualify for full
Social Security benefits. Once pegged to age 65, the threshold is increasing
gradually until it hits 67 for workers born in or after 1960.
The problem: According to a survey earlier this year by the Employee
Benefit Research Institute, 30% of all workers think -- incorrectly
-- that they will be eligible for unreduced benefits at age 65. Worse,
21% think they will be eligible for unreduced benefits before
age 65.
Separately, for all the discussion about claiming benefits at age
62 or at full retirement age, the decision isn't an either-or proposition.
You can take benefits at any point -- any day, month or year -- after
62. The longer you wait, of course, the smaller the reduction in your
benefits.
If your full retirement age is 66, and if you file for benefits at
62, your monthly check will be reduced about 25% from your full benefit;
file at 63, the reduction is about 20%; file at 64, the reduction is
about 13.3%; file at 65, and the reduction is about 6.7%.
Best day of the year to visit a Social Security office
The Friday after Thanksgiving. Yes, the agency's local offices are
open on that day -- and are usually very quiet.
--Mr. Ruffenach is a reporter and editor for The Wall Street Journal
in Atlanta and the editor of Encore.
Clients often come to me with this same question, and I can't answer
it without knowing how much they are spending. Some clients making $100,000
per year are only spending $50,000, while others are earning $110,000
and getting further in debt.
So you should really ask, What percent of my current annual expenditures
should I expect to spend in retirement?
The best place to start is determining how much you are spending
in pre-retirement. If you're not doing advanced tracking with a software
program, then at least have a look at your checking account.
Your current annual expenditures amount to all your income (take-home
pay, dividends, etc...) less what you put into savings.
Then you should think about what adjustments you'll make in retirement.
Here are just a few life changes that might dramatically reduce expenditures:
Housing: Did you just pay off the mortgage or are you going
to downsize the house? The savings could really add up here.
Education Expenses: Are you paying college for the kids and
is this an expense that's about to go away?
Auto expenses: Kiss that long commute goodbye, not to mention
the bundle you'll save in fuel and maintenance.
Clothes: Maybe you have no more expensive suits to buy and clean
frequently.
Unfortunately, retirement can bring about changes that
increase our expenditures as well. All of that new found time away from
the office also brings additional opportunities to spend money.
Travel: I've found many retirees traveling across the country
and the world. In some cases, their pre-retirement expenditures can
actually double.
Entertainment: Now we've got more time to golf or whatever
we enjoy. If what we enjoy costs money, we need to add it to our budget.
Healthcare: Maybe you're lucky and have an employer that pays
healthcare insurance. For the rest of us, we need to take into account
insurance premiums, Medicare supplemental plans, out of pocket costs
and the like. And these costs are going up much faster than general
inflation. Make sure you factor this in to the retirement budget.
There are also some good tools out there to use in this process,
such as the AOL Money and Finance Retirement Estimator. They can give
you a better idea of what your retirement expenses might be.
After I go over this with clients, I typically see that they are
spending just as much after retirement as before. That's just fine as
long as you've built up the portfolio to support it.
There are times I'll show a client that their portfolio is not adequate
to support their desired retirement expenditures. The response I often
get is that they won't continue to spend at this level as they get older.
This assumption can be risky since we often find other things to spend
money on later in life.
My advice is to figure out what you think you will spend in retirement
based on your specific needs and desires. Once you have this amount,
add 10 percent to it, because we always seem to have these unexpected
expenses that come up.
I take a very conservative stance in this area with my clients. I
tell them I'd much rather have them come to me in 10 years and say they
wish they had spent more, than have them tell me they are out of money
and ask what they do now.
Ask Money Magazine's undercover financial planner a question. Send
e-mails to: themole@moneymail.com.
It reminds me of the index funds. You're buying 500 companies in
the S&P 500 and whether there's an Enron in there or whatever, you're
holding it until you're forced to sell or S&P has finally decided to
eliminate it from the index.
...More turbulence, in other words, is a distinct possibility. And,
collectively, investors are heading into this uncertain period with
highly aggressive portfolios.
Employees in 401(k) plans recently held
nearly 70 percent of their accounts in stocks, marking their
biggest bet on equities since July 2001, according to Hewitt Associates.
And, many of those portfolios have gravitated toward some of the riskiest
typ
![[Going, Going...]](http://s.wsj.net/public/resources/images/ED-AD435_bogle10022005160412.gif)
