AssetBuilder Inc. - Registered Investment Advisor

Just Go Away!

admin — Fri, 20 Nov 2009 21:00:00 GMT

By Scott Burns

Do you ever get the urge to just… go away?

I certainly do. With the press of deadlines and other work, vacations are really important. For several years my wife and I have taken mini-vacations simply by looking for houses to rent in places we like.

As residents of Texas, our appreciation of Belfast, Maine, soars in July and August. During the dismal weeks of winter, it is places like Sayulita, Mexico, that we think about. At other times— like when I’m trying to figure out how to use our hoard of Southwest Airlines Rapid Rewards tickets— I think about going to some funky part of Florida, like Anna Maria Island, or to a place with a scent of the Pacific in La Jolla, Calif.

Yes, we think about more vacations than we actually take. I bet you do, too.

We do this by visiting two web sites. One is www.homeaway.com. The other is www.vrbo.com. Both offer listings with photographs and written information about vacation homes that are for rent. Some can be rented like hotel rooms, for only a few days. Others are rented by the week or month. On both websites you can find places that range from rustic to rococo. Think palaces.

It turns out this is not a casual undertaking.

It is, in fact, a deeply funded Austin-based Internet startup. Home Away, the umbrella company for a family of websites, is well on its way to becoming the world’s largest collection of vacation opportunities. Although the real estate involved is worth hundreds of millions, not a dime has been spent building the houses, spas, fountains, pools, docks and decks that make this sprawling complex. Instead, the investment is all in the code for the family of websites that allows anyone with a vacation home to list it and rent it to vacationers.

If you think I’m being hyperbolic when I call it the world’s largest collection of vacation opportunities, you’d be wrong. With 425,000 listings, HomeAway rivals the largest hotel chains in the world. The Intercontinental Hotel Group, for instance, recently ranked as the world’s largest, with 619,851 rooms. It is well ahead of Wyndham Worldwide (592,880), Marriott International (545,705), or Hilton (544,361).

If you call a listing a room, HomeAway is larger than seventh ranked Best Western (305,800). But if you figure that each listing typically represents two or more bedrooms, HomeAway would top the list at 850,000-plus rooms, making it No. 1. However you measure, this is enormous for an enterprise that was only an idea six years ago.

Located in a green building full of birdhouses (the iconic image for HomeAway) and across the street from the intergalactic flagship Whole Foods store, HomeAway is a model for the new wave of Internet-based businesses that are helping us get more from less. Remember, they have “found” the equivalent of one of the world’s largest resort chains without cutting down a tree.

In a recent interview, HomeAway CEO Brian Sharples spelled out the economics. People with vacation homes to rent pay an annual listing fee of $300. They also provide their listing information, and the site encourages renters to write reviews.

“The average rental is $1,500 a week, so it takes only one booking to pay for the listing. But the average customer gets $20,000 a year in bookings,” he said.

“HomeAway is a classic Web 2.0 business. It’s all user-generated content. The subscribers are putting up the photos and prose. And the upside opportunity in the business is very big. We think there are 4 million vacation properties in the U.S. and Europe.”

It’s important to note here that the subscriber fee is minimal compared to most of the alternatives, including property management contracts. As a consequence, Mr. Sharples believes that many vacation home owners who might not have considered renting their home may now build some rental income into their plans.

And that’s a good thing.

The National Association of Realtors estimates there are 8.1 million second homes in the United States. Not all are vacation homes, but many were built and purchased during the bubble of soaring real estate prices. A little rental income may allow thousands of worried owners to hold onto their vacation dream by sharing it. A rental income of $20,000 a year, for instance, will support about $300,000 of mortgage debt. That will be good for everyone— even those who stay home and worry about real estate prices.

On the web:

January 25, 2008: Slider-Land

October 22, 2008: Watching California— The National Yard Sale Begins

July 4, 2007: Letter from Maine— Reinvention Trumps Loss

July 10, 2005: What I Learned on my Summer Vacation

There Is No Investment “Cure” for a Bad Feeling

admin — Wed, 18 Nov 2009 21:00:00 GMT

By Scott Burns

Q. My wife and I are 81 and 84. We have $400,000 (all our savings) in two $200,000 CDs that are averaging 3.8 percent interest. One CD matures in May 2010. The other matures in May 2011. We have no debts. And we can live on our income from Social Security and a pension. I feel that something bad is going to happen to the U.S. economy, but I have no idea what it is. We would like to maintain the $400,000 as a safety net only; we have no interest in leaving it to our estate. What do we do with it? We don't mind closing the CDs and taking the penalty. — G.W., by email from Dallas, TX

A. I don’t think there is an investment-based cure for the anxiety you (and millions of others) are feeling. We could be dealing with asset and income deflation for some period of time. If that happens, your 3.8 percent-yield CDs and other, longer-term fixed-income investments will look very smart.

If we have the inflation many people are expecting, on the other hand, those CDs may be maturing into a much higher interest rate environment. We could, for instance, experience a replay of the stagnation and inflation (remember “stagflation”?) of the 1970s. If that happens, nominal corporate earnings will rise along with interest rates but neither will keep up with inflation. So stock prices will be flat to declining and bond prices will fall. It’s not a pretty picture.

The best (but highly imperfect!) protection is broad diversification. Americans own virtually no foreign bonds and very little in foreign equities. We need to change that and diversify as widely as possible.

Given your ages, you might also consider doing a term annuity. Not a life annuity, this would take a sum of money and return it to you in monthly payments of principal and interest for a chosen period of time such as 5 or 10 years.

Q. I am 70 and my wife is 67. We are both retired. My retirement pension is about $120,000 a year. My wife has a pension of about $14,000 a year. Our adjusted gross income is about $150,000 a year. We have about $850,000 in equities, bonds, and cash. About $500,000 of it is in traditional IRAs funded with before-tax funds. The only liability we have is the mortgage on our house.

We are trying to decide if we should consider converting some or all of our IRAs to Roth IRAs. We do not need the income from our investments. It seems like this might be something to consider since you can spread the tax bill over two years, even though the tax bill would be sizable, and we would lose the earning power from that principal. What is your opinion? —D. P., by email from Cedar Hill, TX

A. In “Spend ‘til the End” (Simon & Schuster, 2008), economist Laurence J. Kotlikoff and I use his consumption-smoothing software to explore that issue. We were surprised to find that Roth accounts, in general, provided little or no lifetime advantage for your standard of living. They may, for some, provide some advantage for having a larger or more flexible estate— but that’s different from your lifetime standard of living.

Another way to think about the unrealized tax liability in qualified plans is to think of it as a reserve for medical expenses. In that case, the tax liability may disappear.

How could that happen? Simple. In the event of a major illness or long-term nursing home care, it would be necessary to make large withdrawals from qualified plans. Since the account withdrawals are likely to be offset with major tax deductions for medical expenses, there is a grim chance that qualified plan accumulations may come out at lower tax rates— not the higher tax rates everyone fears.

No one would choose this as a way to reduce their taxes, but it isn’t unreasonable to think of the unrealized tax liability in qualified plans as a “reserve” for long-term nursing care or catastrophic illness. Stay healthy and you’ll pay it out in taxes. Suffer a major illness or long-term care need, and you’ll pay it out in tax-deductible medical expenses.

The Next 100 Years

admin — Fri, 13 Nov 2009 21:00:00 GMT

By Scott Burns

George Friedman holds up a recent Fortune magazine, his face a portrait in incredulity. The cover declares that China is buying everything, much as the Japanese were doing nearly two decades ago. The inside story is titled “It’s China’s World. (We just live in it.)”

“If China is so healthy, why is everyone there not investing in China?” he asks.

“The obvious question is: Why are they doing this? Fortune doesn’t remember that we saw this before. It’s called capital flight.”

Mr. Friedman, the founder and prime mover at Stratfor, goes on to point out some basic facts about the size of the U.S. economy relative to China. While we bemoan the loss of industrial capacity in the United States, for instance, we still manufacture more than China and Japan combined. And the United States still produces 25 percent of the world’s output. And our output is larger than the combined gross domestic products of the next three largest economies, Japan, China and Germany.

We simply don’t know our own strength.

“If we grow at 2.5 percent a year, China would have to grow at 8.2 percent just to keep the absolute gap steady. It will take generations for the Chinese to catch up,” he says.

Nor do we understand the deep poverty of China. He points out that China has a population of 1.3 billion people. But of that number, 600 million have an income under $1,000 a year. Another 440 million have incomes of $1,000 to $2,000 a year. Only 60 million people have incomes of $20,000 a year or more.

“In the U.S. we have ignored the numbers. So we say all industry has left the United States. That’s rubbish,” he declares.

Stratfor, which is short for “Strategic Forecasting,” is a rapidly growing international intelligence-gathering organization in Austin, Texas. Its growth, based on subscription revenue and Internet-distributed content, dramatically underlines the failure of international news reporting by conventional media. Stratfor is growing as news bureaus disappear around the globe.

The Stratfor approach does not involve collecting disingenuous quotes from politicians and finance ministers. Instead, it is tough, geopolitical and rooted in history. More important, it starts from the premise that conflict is a constant. That pragmatism is also the foundation for his most recent book, “The Next 100 Years” (Doubleday, $26).

Here are some of the major, and surprising, messages in the book, which is written with the immediacy of a thriller novel:

Al-Qaida has made its move and lost. While we worry about how the war in Iraq or Afghanistan will end, the blunt reality is that the Middle East continues to be fragmented. Keeping it so has been the major goal of U.S. policy. The real victory isn’t in winning the declared wars; it is in frustrating the radical Islamists’ hope of restoring a united jihadist region.
China is not the threat it is made out to be. It has an Achilles’ heel of bad debt. Both its employment and output depend on external demand. Worse, it has the same kind of demographic issues Japan has. The difference is that Japan is having its population decline now while China will have its population decline later.
Declining birth rates will create something unique in history---a shortage of labor. This will hit first and hardest in the industrialized world. Capital--- as an example he points to the likely decline of land values in a less populated Europe--- will be in surplus. We will be encouraging immigration and competing with other nations. The United States has a better history of doing this than most other nations. It will be virtually impossible for Japan, for instance, to offset the decline of its working population.
The same need for immigration will also sow the seeds for a conflict with Mexico. This will happen late in the century as the growing Mexican population of the borderland states makes it more difficult to define where Mexico ends and the United States begins, official border notwithstanding.

Although it reads with the ease of a Tom Clancy page-turner, peace-and love-seeking idealists are likely to have a tough time with the unrelenting machination at the heart of Friedman’s worldview. For them I suggest two things. First, get over it. Second, a companion reading of William J. Bernstein’s “A Splendid Exchange” covering the tumultuous history of trade over the last 3,000 years will build a solid foundation for understanding why Friedman is likely to be one of the few futurists with accurate vision.

You Can’t Avoid Interest Rate Risk

admin — Wed, 11 Nov 2009 21:00:00 GMT

By Scott Burns

Q. I don't know how to invest in bonds. I am in my late 40s. My portfolio primarily consists of equities (individual stocks and mutual funds), but I also own a rental house and have a growing amount of cash equivalents in CDs and money market funds. I should probably start steering some investments away from equities and into bonds as I get older.

Bond funds have interest rate risk, and when the economy picks up we can expect interest rates to rise, causing a loss of principal. I remember how badly people got burned in bond funds in the 1990s. I don’t want to put money in a "fixed-income" investment that is certain to lose principal when interest rates rise. Does this mean I should consider buying individual bonds? How does one choose which bonds to buy? —G.G., Austin, TX

A. No, you probably shouldn’t consider individual bonds. They have interest rate risk, too. If interest rates rise and you are holding a bond that yields 4 percent, the value of that bond will decline. How much it declines will depend on how far from maturity it is— the longer the maturity, the greater your possible loss if you sell.

While individual bonds have the same interest and credit risk issues that bond funds face, there is a significant difference. If you own an individual bond, it has a maturity date. That’s when you get the original face value of the bond back.

You’ve got two basic choices here. Neither is attractive. You can be safe and invest very short term at the expense of having a pathetic yield. Or you can take risk and get a somewhat less pathetic yield by investing long term. You will, however, face the kind of risk bond investors faced in the ‘70s.

Today, for instance, government money market funds yield virtually nothing. Long-term corporate bond funds yield about 5.8 percent.

Unless you have a large portfolio and investing knowledge, you are better off investing in a bond fund. A rising number of exchange-traded fixed-income index funds is making fixed-income fund investing more attractive by reducing fund costs. The expense ratio for the Vanguard Total Bond Market ETF, for instance, is only 0.14 percent.

Q. I am 57 years old and want to purchase a $150,000 to $200,000 term life insurance policy benefiting my wife. Where should I go to search for affordable policies? Also, how many years should I look to lock in for such a policy? —D.P. by email from Austin, TX

A. If you go to insure.com or selectquote.com, you can get online quotes keyed to your age and medical condition. The quotes will also be for a variety of term periods such as 10 or 15 years. The term of the policy should be determined by the period of time that you expect to need life insurance coverage.

Remember, the main purpose of life insurance for most people is to replace all, or part, of earning power in the event of death. So at 57 you might need to consider college tuition for children, mortgage payoff amounts, and a substitute for Social Security benefits between the time your children leave home and your wife is eligible for benefits.

Your need for life insurance will decline as you get closer to retirement. It’s a pretty good bet that you should have outgrown your need for life insurance by the time you are 67 because you’ll probably be retired.

One possible wrinkle here, which would require talking with a life insurance planner, is that if you are eligible for a corporate pension, you could build cash value in a universal life policy now with the goal of taking a single-life pension benefit. The idea would be to have the life insurance to replace the pension income when you die. You’d do this because the pension benefit for a single life is higher than a joint and survivor pension benefit. This works best for people with plenty of room for saving.

Research has shown that while most people in their 30s and 40s have far too little life insurance, some people in their 50s are overinsured— they have more insurance than needed to protect their families’ standard of living.

Reshelving the Future

admin — Fri, 06 Nov 2009 21:00:00 GMT

By Scott Burns

One of the mixed blessings of moving: Things that had become invisible become visible.

Books, for instance.

Titles that you haven’t thought about for years, maybe even decades, suddenly present themselves. In reshelving my library I found quite a few books about the future.

A few made me laugh out loud, including one of my own. (More about that later.) As the saying goes, predictions are hazardous, particularly concerning the future.

Remember “Dow 36,000”? This 1999 book by James Glassman and Kevin Hassett is a great historical end-piece, the cap for the longest and most hysterical bull market in history. I’m keeping my copy because it has become a valuable collector’s item.

According to Amazon.com, a few new copies are still available. They are offered for a mere $137. The price represents an annual appreciation of 18.5 percent from its publication at $25 10 years ago. Sadly the Dow Jones industrial average didn’t do as well. It peaked at 11,722 in early 2000. It recently closed at 9,847.

Most books about the future aren’t so upbeat.

Basically, we fret a lot about things that never happen. In the 1960s, for instance, futurists pondered automation and mass unemployment. Economists like Robert Theobald wanted to solve the problem by giving everyone a guaranteed income. If they had read “The Harried Leisure Class” (1970) by economist Staffan Burenstam Linder, they would have seen that taking care of a rising tide of toys would easily solve the problem.

In “The Year 2000” (1967), think-tanker Herman Kahn took a sabbatical from thinking about thermonuclear war and offered “surprise-free” projections. But in 400 pages he never mentioned Islam.

Others had more cosmic worries. Paul R. Ehrlich predicted the global population explosion would result in mass starvation by the turn of the millennium. Donella Meadows, who wrote “The Limits to Growth” (1972), used computer modeling to warn us that we were heading toward a resource-exhausted and polluted world.

Today many are worried about low birthrates and population declines in all of Europe, Russia, Japan and China over the next hundred years. Some say birthrates are falling because couples dread the cost of raising children. Others suggest it may be a side effect of television.

Harry Browne, Howard Ruff and others predicted worldwide depression, the fall of America and the destruction of the dollar. Ravi Batra predicted “The Great Depression of 1990” in 1987, and Harry E. Figgie Jr. predicted “Bankruptcy 1995” for the U.S. economy in 1992. Instead, his company, Figgie International Inc., vaporized.

In fact, we’re still hanging in there, even though the arguments for collapse become more persuasive with each new Treasury auction.

The future isn’t always dismal, but the upside gets little attention. No one made a fuss about Gunther Stent and “The Coming of the Golden Age,” published in the same year that charter members of the Aquarian Age met at Woodstock.

My own attempt, “Home, Inc.: The Hidden Wealth and Power of the American Household” (1972), explored an idea that economics ignored— the value of the family and household. The book documented the size and economic value of the household, the basic production unit on the planet. It pointed out that the value of all the work mothers did at home was greater than all the wages paid by all the manufacturing companies in America.

That was good, interesting work— and I should have left it at that. Instead, I went on to predict that both the market and government sectors would decline as we did more and more for ourselves in a rising household economy.

Yeah, right.

Today, I have seen the future. It is best approached with humility: We have more of everything. Does this mean we should dismiss all prediction of the future?

No, because there are two good reasons to indulge. First, it’s good exercise. Imagining the future may help us understand the present. Second, while most views of the future are wildly wrong, a few offer us a good map.

One example is Alvin Toffler’s “Future Shock” (1970). It was absolutely on the mark. He predicted a future of accelerating change, overwhelming choices, ever increasing technology, overstimulation, and organizational ad-hocracy.

That’s what we’ve got— in spades.

Next week: The man with a geo-political map of the future.

Investing in the Earth Market

admin — Wed, 04 Nov 2009 21:00:00 GMT

By Scott Burns

Q. In a recent column you referred to a 33 percent foreign component of the equity portion of a person's investments as being underweight. While I realize that roughly half the world's equity value is outside the U.S., I thought that 25 to 30 percent foreign is about right.

So, two questions:

(1) What percent foreign (for a moderate/moderately aggressive investor) do you recommend?

(2) With the recent outperformance by foreign equities, is this a good time to rebalance in their favor?

—A.F., by email from Spicewood, TX

A. If we were Martians wanting to invest on Earth, we’d treat all areas equally and try to buy an index fund that represented the “Earth market.” That would be evenhanded investing. One proxy for the Earth market is the iShares MSCI ACWI Index fund ETF. It represents an index of about 85 percent of the global equity market. In that index the U.S. stock market recently accounted for 41.7 percent of all value. All the other markets in the world account for the remaining 58.3 percent.

Download the iShares information sheet on the fund and you’ll find some interesting figures. The U.S. stock market is about 4 times as large as the next largest, Japan. Exxon-Mobil, the largest oil company in the world, has a market value about equal to the entire Chinese stock market.

An investor who had 33 percent of his investments outside the United States and 67 percent in the United States would be significantly “underweighted” in international investments and “overweighted” in domestic investments. In fact, most investors are even more underweighted in international investments.

According to the September Hewitt Associates 401(k) Index, a tool that tracks how 401(k) participants are investing their retirement money, the average plan participant had about 8 percent of account assets in international and emerging market equities. That is far less than the nearly 24 percent they had in domestic equities— and that didn’t include the additional 24 percent they had in company stock. So it’s pretty safe to say that most people are significantly “underweighted” in international equities.

The issue here is not whether you are a moderate or aggressive investor. The issue is whether you think the United States economy is more favorable to private investment than the rest of the world. An increasing number of investors think not, even recognizing the poor protection investors receive in many foreign markets. Here’s a short list of the common reasons:

Reduced credibility of U.S. corporate management,
Reduced credibility of U.S. accounting,
Reduced credibility of U.S. regulation,
Reduced credibility of U.S. government fiscal management, and
Fear of a weak domestic economy and a falling dollar.

The argument for international investing can be overstated because major U.S. companies often derive a large portion of their earnings overseas. Coca-Cola, for instance, is a quintessential U.S. company, but it was recently reported that 80 percent of its revenue comes from outside the United States.

Q. I am 73 and have some extra cash in a checking account. My financial advisor is suggesting putting the extra in Templeton Global Bond A. It has a 5-star Morningstar rating. The front-end load is 4.25 percent. Is this a good place to go, or is there something better out there? —G.C. by email

A. It’s hard to question the performance of Templeton Global Bond A shares (ticker: TPINX, expense ratio 0.92 percent). According to Morningstar Principia, it has been in the top 5 percent of competing funds in the last 3, 5, 10, and 15-year periods and ranked at the 13th percentile in the preceding 12 months. The fund is right up there with PIMCO’s Total Return A shares (ticker: PTTAX, expense ratio 0.90 percent).

It also offered a trailing 12-month yield of 7 percent, so you’d recover the 4.25 percent commission and still earn more than you would earn on the average one-year CD (1.7 percent, according to www.bankrate.com) inside a year.

The issue for you is whether this is really “extra cash” in your checking account. If you don’t have a need for it in the near future, it would be good to put it to work. If you have a need for cash in the near future, buying the fund would be foolish because you’d have the certain loss of the commission plus the risk of loss in the event interest rates start to climb.

Web references:

iShares information on MSCI ACWI Index Fund ETF

Hewitt Associates 401(k) Index September 2009 Asset Allocation

The Square of 3 Billion

admin — Fri, 30 Oct 2009 20:00:00 GMT

By Scott Burns

President Barack Obama spoke at MIT’s Kresge Auditorium last week. Imagining him speaking there took me back 50 years.

The auditorium, a huge low dome with just three points of support, is set next to an expanse of athletic fields and student dormitories. Designed by architect Eero Saarinen, the auditorium is a building that begs to be climbed.

Two of its early climbers were Claude Shannon (better known as the father of information theory) and John L. Kelly, a Bell Labs mathematician from Corsicana, Texas, best known for trying to put Shannon’s information theory to work as a gambling or investing tool. Kelly’s work was important for another MIT staffer, Edward O. Thorp. He programmed an IBM mainframe to find ways to “beat the dealer” at blackjack.

If, as economist John Maynard Keynes famously said, “Practical men… are usually the slaves of some defunct economist,” then economists, in any condition, are deeply in debt to ideas from theorists like Shannon or mathematicians like the late Paul Erdos.

Ideas are important. They are the seed corn of our future.

I never climbed Kresge, but I did hear the most exciting lecture of my life in that building.

While the topic may seem obscure, it is entirely relevant to the wave of change all of us are now experiencing. More important, it tells us our future may be a whole lot brighter than most of us dare to think.

How could that possibly be?

Read on.

Rooted in physics and mathematics, the lecture explained the force that has driven our economy and changed our lives over the last 50 years. It also foreshadowed social networking phenomena like Facebook, YouTube, and LinkedIn that we are trying to understand today.

The lecture was not given by someone you might expect--- Claude Shannon or Norbert Wiener (cybernetics) or Marvin Minsky (artificial intelligence) --- all at MIT at the time. No, it was given by biologist Julian Huxley, a visiting lecturer and the brother of novelist Aldous (“Brave New World”) Huxley.

Professor Huxley started with one of the more depressing ideas of physics: entropy. That’s the idea that all things run down, that order is inevitably lost. In one interpretation, it’s an idea that tells us we are likely to be buried in our own garbage.

Another example is the energy issue that President Obama spoke about at MIT. Once we have burned the limited supply of hydrocarbons on the planet, all the energy stored in those neatly ordered long chains of carbon atoms will have been reduced to molecules of a lower and less useful form. Human life, some fear, will get much harder.

But Huxley said that if entropy exists, so does its opposite. It is possible to create order. He called it negative-entropy. It is possible to take things to a higher state. As an example, he worked through a series of equations to show the order implied by the connectivity potential of a telephone network. Building transferable knowledge and connectivity--- negative-entropy--- is what human beings are doing, he told us. And the information potential of a network grows faster than the number of connections. It grows exponentially with the number of combinations.

Listening, I knew I was hearing something very important. I just didn’t know where to put it. Back then, the law of diminishing returns ruled economics because it accurately described human experience.

But over the last 50 years we have built the tools that are making Huxley’s hopeful message deliver. Remember, Arpanet, the first version of the Internet, didn’t exist until 1969.

The notion of a law of increasing returns in the daily world didn’t appear until Robert Metcalfe, the inventor of the Ethernet, suggested that the value of a network was the square of the number of connections. It would make a large network staggeringly valuable.

That was in 1980, well before Gutenberg’s movable type went binary with the creation of hypertext markup language by Tim Berners-Lee in 1990.

Today, as Tom Hayes points out in “Jump Point: How Network Culture Is Revolutionizing Business” (McGraw-Hill, $25), we are only two years away from having 3 billion human beings connected to the Internet.

Square 3 billion. It’s a big, big number.

On the web:

Kresge Auditorium (pictures and info)

John Larry Kelly, Jr..

Tim Berners-Lee and Hypertext Mark Up Language

Julian Huxley

Aldous Huxley

Paul Erdos

Sunday, June 16, 2002: Tech Is Alive and Well at MIT

A New Trend: Improved 401(k) Plans

admin — Wed, 28 Oct 2009 20:00:00 GMT

By Scott Burns

Q. I've recently read that 401(k)s need to be retired because of the many issues that arose during the financial crisis. Some think that the plans aren’t a good savings vehicle and that the risk doesn’t match the benefit in retirement. I'm currently putting in about 18 percent of income. I am considering reducing my contributions to capture the company match, 8 percent. I'm 36 years old. I have my emergency fund, but am still paying off my mortgage. What are your thoughts about this change? —S.J. by email

A. There's a really nice baby in the bathwater you're about to throw out. More important, we're starting to see a shift that will improve 401(k) plans significantly. Recently, for instance, I spoke to a group of employees at Texas Instruments. The first thing I did was congratulate them on having a plan that provided them with low-cost index funds for their investments, a recent change. This means TI employees won't face "manager risk" or the expense of high management fees in typical funds.

I think this is a trend.

In July, Business Week lauded IBM for revising its 401(k) plan to create the 401(k) plan of the future. What did it do? Among other things, its plan now offers a menu of index fund investments. Exxon-Mobil has had an index fund-based plan for many years. Ditto, the federal Thrift Savings Plan. Pretty soon, company managements will have to defend why they have expensive, managed fund-based plans.

Will this, or any other change, protect you from a bear market? No. If you want the returns you can get from equities, your retirement investments will have to contain some. And you’ll have to live with the rough ride they sometimes give.

The important question for you is whether your particular plan offers good, low-cost choices. Or does it offer high-cost choices that will damage your long-term accumulation more certainly than a major bear market. If your plan is expensive, you should limit your contributions to an amount that captures the company match.

Q. Is it better to use a 401(k) loan at 5 percent to pay off credit cards than keep the 29 percent interest rate I have on a credit card? My job is fairly secure, so payback to the 401(k) should not be a problem, and our plan allows us to still contribute if we have an outstanding loan. I will destroy the credit card, but not close the account. The amount is about $18,000. —S. D., by email

A. I’d bet heavy money that there is no fund choice in your 401(k) plan that will return a certain 24 percent— the difference between what you will pay on the 401(k) loan and the interest rate on your credit card debt. So, by all means, borrow from the plan. Pay off the credit card ASAP.

If you treated that $18,000 as a 3-year loan at 5 percent, your monthly payment would be $539. If you tried to pay off the $18,000 while paying at a 29 percent interest rate on your credit card, it would cost you a great deal more. For instance, if you paid it off in the same 36 months, your monthly payment would be $754. That means you would pay an additional $7,734 in interest. If you made the same monthly payment as the 5 percent loan, you would have to make nearly 69 payments before the credit card debt was paid off. That would be about $17,787 for the extra 33 payments.

Either way, the interest saved is money you’ll be able to use for other purposes— such as investing more in your 401(k) plan.

Q. In the past, you have listed reliable web sites for researching CD rates. Are there any current sites, and if so, which are the best? —M.W. by email from Austin, TX

A. Here are some good websites to use for interest rate investing:

For CDs, www.bankrate.com and www.banxquote.com
For U.S. Treasury investments, www.bloomberg.com
For CD-like deferred annuity contracts, www.annuityadvantage.com

The “Texas Premium” and the Foot and Wheel Vote

admin — Fri, 23 Oct 2009 20:00:00 GMT

By Scott Burns

It has been said that people vote with their feet. They pick up and go to where the jobs and opportunities are.

The hard part is that it costs more— a lot more— to move to where the jobs and opportunities are than to move to where jobs and opportunities are limited. My favorite measure for this doesn’t come from the Bureau of Labor Statistics. Nor does it come from any other agency of the federal government.

It comes from U-Haul, the truck and trailer rental company. It has “on the ground” evidence and prices its rentals accordingly. Go to its website, www.uhaul.com, then click on “rates and reservations,” and you can learn very quickly where people are going. You can also learn where they are leaving.

How will you know this?

Simple.

If lots of people are trying to go where you want to go, it will cost a lot more than renting equipment to go to the place everyone is trying to leave. Just as there is a law of supply and demand, there is a law of arrivals and departures. Finding a moving truck will be expensive where departures outnumber arrivals. It will be cheap in places where arrivals outnumber departures.

If nature abhors a vacuum, business is disgusted by unused inventory.

Suppose, for instance, that you are living in Las Vegas. With a recent unemployment rate of 13.4 percent, things are tough there. In fact, it’s a tough time in what is traditionally a rough time of year for Las Vegas. Skeptics should check a travel website like Expedia. When I did, a three-night stay at the 4-star Rio was $60 a night, barely more than a roadside motel. You can stay at the 5-star Bellagio for $199 a night.

Admittedly, this was a Sunday to Wednesday stay, not a weekend, but it gives you an idea of why the unemployment rate is so high— people aren’t traveling, vacationing, or gambling as much these days.

So what does it cost to leave Las Vegas?

Try $1,808 if you want to rent a 26-foot U-Haul truck, fill it with your worldly goods, and drive it to San Antonio. But if you wanted to leave San Antonio (unemployment rate: 7 percent) and move to Las Vegas, it would cost you only $421 for the same equipment.

That’s quite a difference.

The difference is substantial even for cities that aren’t hurting nearly as much. To move from Seattle, with an unemployment rate of 8.8 percent (well below the national average of 9.6 percent), to San Antonio would cost $2,071, but only $858 to move from San Antonio to Seattle.

I found similar price differences for other cities. Want to move from Chicago (9.7 percent unemployment) to Houston (8.4 percent unemployment)? It will cost you $1,970. But it will cost only $449 to make the trip from Houston to Chicago. Los Angeles (11.8 percent unemployment) to Houston was $2,051, while Houston to LA was only $555.

San Francisco (10.7 percent unemployment) to Dallas (8.3 percent unemployment) will cost you $1,988. But the opposite will cost only $689. Boston to Dallas was $2,134, while Dallas to Boston was only $634.

Miami (10.8 percent unemployment) to Austin (7.2 percent unemployment) will cost $1,685. But the reverse will cost only $463. Similarly, Phoenix to Austin will cost $1,563, while Austin to Phoenix will cost only $471.

We might call these differences “the Texas Premium” because regardless of location— East Coast, West Coast or somewhere in between— the migration appears to be to Texas. U-Haul is lowering the price drastically for anyone who is willing to move the equipment back.

To be sure, all the differences aren’t as extreme. If you want to move from hip but hurting Nashville (9.8 percent unemployment) to hip and growing Austin, for instance, it will cost $1,018— but it won’t cost much less to move from Austin to Nashville, $826.

In a time when lots of people are feeling powerless, there is a big message here: There is still a lot we can do for ourselves. We can make decisions. We can, and do, move to places where life looks better.

On the web:

Recent unemployment statistics

U-Haul: After home page, go to “rates and reservations”

Sunday, October 2, 2009: Return to Texas, part 1— A Moving Experience

Sunday, October 9, 2009: Return to Texas, part 2— The Ka-Ching Epiphany

Sunday, April 3, 2009: Lock-n-Load We’re on Foreclosure Safari!

Expedia

The Power of Commitment Management

admin — Wed, 21 Oct 2009 20:00:00 GMT

By Scott Burns

Q. I am a 66-year-old recently retired single male. I receive a $1,600 monthly teacher’s retirement pension, $1,400 a month in Social Security benefits and $210 a month from a life annuity. My living expenses come to about $3,000 a month.

The expenses include $400 a month for spending money and a $600 car lease which will be completed next June. At that time I plan to return the car to the dealership. I would like to pay cash for a cheaper used car and avoid having a car payment.

I also have $10,600 in a money market savings account that earns about 1 percent. I have two annuities, one with $30,000 and one with $5,000. Both have 4 more years before I can withdraw them without paying a surrender fee. I have been told you can take 10 percent a year without paying a surrender fee. I also have a $97,300 IRA rollover account in a money market account earning 1percent interest.

I owe $82,000 on my house at 5.25 percent and have about $45,000 equity in it. My question: What should I do with the savings account, the annuity, and the IRA? Where can I invest them and get more interest, yet be able to access some of the money if there is an emergency? A friend who does a lot of investing says I should put 33 percent in stocks by buying the Vanguard Dividend ETF (ticker: VIG) and 67 percent in bonds by buying Vanguard Total Bond Market ETF (ticker: BND). I have never done any investing before, so I don’t know what to do. ---D.R., by email

A. Your situation is a good example of how powerful careful commitment management can be in retirement. With $3,210 a month in assured monthly income and $3,000 a month in expected expenses, the income from your $143,000 in savings could make a big difference. But earning only 1 percent, or about $1,430 a year (less than $125 a month), it doesn’t provide you with much wiggle room. Even if you could increase the average yield to 4 percent, you would only be adding about $360 a month to your income.

That’s why you’re smart to focus on the $600-a-month car lease. If you buy a good used car and pay cash, you’ll reduce your income need by more than you could reasonably expect to increase your investment income. While you’ll have a need to replace your car from time to time, it may be years away.

There is a similar opportunity in your home mortgage. I don’t know what the monthly payment is, but it’s probably $400 to $500 a month--- another big chunk of required spending that probably offers virtually no tax savings from interest deductions. If you had more financial assets, I would suggest paying it off because eliminating both the car lease payment and the mortgage payment would chop your required income by more than $1,000 a month. Indeed, it still might be useful because it would allow you to save money since your income would then exceed your monthly expenses by over $1,000.

You should use the money market account to deal with the car lease and the cost of buying a used car. Take the maximum 10 percent withdrawal from the annuities unless their yield is reasonable, such as 3 percent interest or more. And invest the IRA rollover.

As an inexperienced investor you should probably buy a balanced fund that invests in stocks and bonds rather than buying two distinct funds and worrying about how much of each you should own. Vanguard Wellesley (ticker: VWINX) is a conservative asset allocation fund with an expense ratio of 0.25 percent, a track record that more than 90 percent of its competitors can’t match, and a current yield of about 4.5 percent according to the Morningstar website. Over the last 20 years it has beaten the average conservative asset allocation fund by 2.37 percent annualized. According to Morningstar, the average fund in this category has an expense ratio of 1.34 percent. That means Wellesley has nearly a 1.1 percentage point advantage at the starting gate.

Comparing Paychecks: Workers and Retirees

admin — Fri, 16 Oct 2009 20:00:00 GMT

By Scott Burns

As far as I can tell, the goal of the AARP--- the American Association of Retired People--- is to enslave all those of working age. Once enslaved, workers will support retirees in the style to which the AARP feels they are entitled.

This would be good for the AARP because its real business is selling products to older people by direct mail, and the more income older people have, the better it is for the AARP.

Too bad about everyone else.

If you think this sounds harsh, you’re right. But if you think I’m just a callow 20-something with no regard for my elders, you’re wrong.

I am an elder.

My wife and I collect Social Security. We’re also on Medicare. As I pointed out earlier this year, it takes a lot of young workers at McDonald’s--- most of whom have no health insurance--- to support those of us who have taxpayer-subsidized health insurance from Uncle Sam. And, trust me, the young people fortunate enough to have health insurance aren’t getting it for $96.40 a month in spite of their dramatically lower need for health care.

What we need here is some sharing of the burden, because we’re all in the same sinking boat. It’s called the USS Federal Budget. It’s a big boat, and all of us are going to have to take an oar and pull.

Instead, retirees send emails. They bemoan the anticipation of no increase in Social Security benefits in January 2010. Worse, they anticipate no increase in benefits in 2011 or 2012. If there is no increase, it will be the first time since benefits were indexed to inflation in 1975.

So here’s a rude question. Do you know anyone who has gotten a wage increase every year for 34 consecutive years?

Wouldn’t it be loverly if everyone had more money to spend? Of course. But if you compare the rise in income of the average retiree with the rise in income experienced by the average worker, the two have had virtually identical experiences since the start of the century (see table below).

Workers and Retirees, Neck and Neck

This table compares the annual increase in retiree benefits with the annual increase in wages for the average worker.

Year	Social Security Benefit Increase	Average Worker Wage Increase
2008	5.8 percent	3.0 percent
2007	2.3	3.9
2006	3.3	4.3
2005	4.1	2.9
2004	2.7	2.1
2003	2.1	2.2
2002	1.4	2.6
2001	2.6	2.7
2000	3.5	3.9
Total	27.8	27.6
Sources: Social Security, Economic Indicators

This rough parity doesn’t reflect some tough realities. No retiree need fear losing his benefits. But most workers have experienced job loss fear since 2000. Worse, many have suffered wage cuts, or worse. Nearly 8 million jobs have been lost since late 2007.

Retirees regularly complain about the rapid rise of Medicare part B insurance premiums. Premiums have more than doubled since 2000. They eat away at the Social Security benefit dollars retirees have left for food, shelter, utilities and other essentials.

That, however, is exactly what workers have experienced. The amount they pay for their health insurance has also more than doubled since 2000. Do you know what that does? It eats away at the dollars they have left to spend for food, shelter, utilities and other essentials.

As I said, we’re all in the same sinking boat.

Rather than consider the possibility of shared sacrifice, AARP wants to lead a chorus of entitled whiners. Members are getting email messages from Barry Jackson, their online advocacy manager. The messages urge them to get Congress to provide $250 in “emergency relief” for seniors because they won’t be getting a cost-of-living increase.

In fact, there is no reason for another handout that would indenture our children and grandchildren still more. The cost of living, as measured by the CPI, is down slightly.

Here are the numbers. In the third quarter of last year the CPI averaged 215.5. This year it will probably average 211. We’ll know the exact number by the time you read this, but the cost of living is down slightly. For the first time since 1975 there is no reason to give a cost-of-living increase.

But the AARP wants higher benefits anyway.

What do they care? Young people and workers aren’t their customers.

On the web:

Sunday, February 20, 2009: A Meditation on McDonald’s

Sunday, August 3, 2008: Want a Good Raise? Retire.

Social Security CPI data

AARP to seek emergency relief for retirees

AARP Bulletin: Senator to seek Social Security increase

‘Vig’ and the Mutual Fund Casino

admin — Wed, 14 Oct 2009 20:00:00 GMT

By Scott Burns

Q. In a recent column you mentioned the importance of expense ratios when evaluating mutual funds. Although I look at the ratios, I also evaluate the funds’ performance. If the performance is higher, I may select a fund with the higher ratio. Don’t you think the net gain has warranted it? I would appreciate your input. —G.Z., by email from Austin, TX

A. It’s all about the odds and the game. Mutual fund expense ratios are similar to the house “vig” in a casino— the money taken by the casino. In a casino game the vig may be small, as in blackjack, or it may be large, as in slots. But the house always collects. The longer you play, the greater the odds that the house will have your money and you won’t.

The difference between a casino game and an investing “game” is that casino games are sum-zero games. No value is created, so every win is offset by a loss. Then the house vig makes it certain that more money will be lost than made by those who play the games. Put your money at risk often and it will be lost due to the drag of the house vig.

Investing games are positive-sum games. Value is created by the payment of interest, dividends, or (sometimes) stock price growth. So people can “leave the table” with more money than they had on arrival.

If they “play” at the expensive funds, however, their chances of asset growth are diminished, just as slots players are likely to lose more money than blackjack players. Why? Simple: The house vig on slots is bigger than the house vig on blackjack.

Wall Street hype notwithstanding, there is no evidence that paying high fees increases your return. There is much evidence that paying high fees reduces your return.

Many readers had difficulty finding the “Fat Fund Report” mentioned in that column. The report, which is free, shows the distribution of mutual fund fees by major fund category. It can be read online or downloaded as a PDF file from this URL: www.assetbuilder.com/fatfund .

Q. I am 55 years old and currently working— but looking to retire at 57. On my most recent statement from Social Security, my benefit at 62 would be about $1,500 a month. How much would that change if I quit working at 57? Lately the amount seems to increase quite a bit each year. Last year it was only $1,300. —G.F., by email

A. Your Social Security benefit is based on your 35 highest years of indexed wages. So each year you work will either add a year to your work record or, if you have worked over 35 years, it may displace a year of lower indexed earnings. As a result, each year of additional work can add nicely to your ultimate retirement benefit. This is particularly true at age 62 to 70 because you are rewarded further for delaying benefits.

Unless you have substantial savings and investments— or are seriously ill and not likely to live long— thinking about retiring very early is not wise. Most people should try to work to full retirement age (66) or longer.

This is not a terrible thing. If Social Security retirement benefits covered retirees for the same proportion of their lives today as they did when Social Security was created, the full retirement age would be something over 72.

The sorry reality is that Social Security benefits are the single largest source of income for the majority of retirees. According to a recent Congressional Research Service study of income and poverty among older Americans, for instance, 46 percent of Americans 65 and older had no income from investments in 2008. The 54 percent who did have investment income had a median investment income of $1,054 compared to their median Social Security benefit of $12,437.

The message is simple: We need to save and invest more, but we also need to pay attention getting the best benefit possible from Social Security.

On the web:

The Fat Fund Report

The Ka-ching Epiphany

admin — Fri, 09 Oct 2009 20:00:00 GMT

By Scott Burns

“So, this must be what an intervention is like.” That’s what I thought as I went around the house with the moving company representative. He was going through our house, room by room, noting this and that piece of furniture.

He saw the bookshelves. He asked what we were taking and what was being left behind or sold. When we told him a couch or a chair was moving, he punched it into his portable estimating machine. The machine was silent, but I knew it was making little cash register ka-ching’s inside.

He was the intervention. Somewhere I heard Shania Twain singing:

“All we ever want is more
A lot more than we had before
So take me to the nearest store”

He wasn’t, like the loving relatives and friends in a conventional intervention, going to tell us we would die if we didn’t stop. No, at the end of the process, he just told us that we were moving nearly 10,000 pounds of “stuff” and we were going to pay for it.

Shania continues singing:

“Can you hear it ring
     It makes you wanna sing
     You'll live like a king
     With lots of money and things
     Ka-ching!”

Five tons! Just for daily living!

We were moving that much “stuff” in spite of the fact that we had been “simplifying” and getting rid of stuff for at least three years. In spite of the fact that the people who bought our Santa Fe home had requested four nearly impossible-to-move antiques be included with the sale. Not to mention that we were going to put the furnishings equivalent to a fully equipped small house in an estate sale.

But even after all that, we were still going to be moving nearly 10,000 pounds from Santa Fe to Austin. So much for our illusions of living a simple lifestyle.

Previous moves haven’t revealed as much. Until now, we have done our own moving because, well, I have a strong back, wonderful friends and a wife who is a close relative of Wonder Woman. I also happen to enjoy driving big noisy rented trucks.

Now, however, the amount of “stuff” was inescapable. And we would pay for moving each pound.

The odd thing is that in the course of packing we realized, again and again, that most of the “stuff” wasn’t necessary. For the better part of a week we packed boxes. In the end we were surrounded by boxes even though the garage was stacked with boxes like the shelves at a Lowe’s or Home Depot.

But we were still functional.

We cooked, ate, slept, washed, changed clothes, talked on the phone, and read. We made margaritas. Life was completely normal, even though most of our 10,000 pounds of stuff was sealed in cardboard boxes.

The stuff, in fact, could remain in those boxes and we might not remember it. With the exception of a few totem objects— a bronze sculpture by my paternal grandfather, a box carved by my father, a plethora of family pictures and a bottle of 1940 vintage Madeira that is sipped on very special occasions— it could all disappear somewhere in west Texas and not be missed.

There is a message here. It’s definitely one of those embarrassing “Do as I say, not as I have been doing” messages— but it is a message nonetheless.

Many of us don’t need a lot of what we have.

We don’t need to replace a lot of what we have as it wears out. We can dematerialize. As I pointed out in a recent column on “Kindle-nomics,” we can substitute a Kindle for books. We can hide an entire music collection on a laptop hard drive. We can get along quite nicely, thank you, with less “stuff.”

This is not a new message. It is far older than Henry David Thoreau and the little box he lived in on Walden Pond. But it is comforting because lots of people don’t have the money to buy “stuff.” And while some Americans simply can’t get along on less, many others may find that adapting to less is easy and beneficial.

It’s just possible that what we see as a loss today will be seen as an opportunity tomorrow.

On the Web

Shania Twain singing “ka-ching” (Red Dress version)

Lyrics to “ka-ching”

Sunday, August 14, 2009: Kindle-nomics

Retirement Is About Matching Income and Spending

admin — Wed, 07 Oct 2009 20:00:00 GMT

By Scott Burns

Q. I'm a 62-year-old copywriter. I lost my job in January. There are so few jobs around that I think I just may be retired, though I'm still looking for a job. I have no pension. But I have about $370,000 in savings, most of it invested in CDs. What is the best way to grow this money so it lasts? My house has a small $50,000 mortgage.

Should I get back into the market? Is it worth it to pay to manage my portfolio since I lack the expertise to manage it? ---L.K., by email

A. One question you need to ask yourself is whether you can live on the income you could get from your savings and Social Security. At 62 you are eligible for early retirement benefits. You can find out what these would be online by using the online calculator or by visiting a local Social Security office. If the combination of these benefits and about $15,000 a year from your savings will be enough to pay your living expenses, you'll be OK.

If your current expenses are a lot higher than your retirement income, you'll need to do a "reset." You’ll need to figure out how you can cut your expenses.

Many people respond to this as a burden. In fact, your spending is one of the few things you can control. The return on your investments is not. So spending is a very good lever. Use it and you will reduce the feeling of helplessness that many people feel.

The best position for most people is to be getting enough income from their investments that they seldom, if ever, need to sell a security to pay their bills. A mutual fund like Vanguard Wellesley Income Admiral shares (ticker: VWIAX) has about 40 percent of its portfolio in equities and 60 percent in fixed-income. Recently, shares of this fund, which requires a minimum investment of $100,000, were yielding about 4.8 percent.

While this is a managed fund, the expense ratio of the Admiral shares is only 0.23 percent. That's in the range of most index funds. It’s also a small fraction of the 1.34 percent average net expense ratio of conservative allocation funds as a group. And if you check the cost of similar funds in the Fat Fund Report on my website, you’ll find that 90 percent of all Conservative Allocation funds cost 0.79 percent or more. So this fund comes at extraordinarily low cost.

In spite of (or because of) all the money being spent managing similar funds, this fund has provided a higher return than 94 percent of its competition over the last 5 years.

Q. My wife and I are in our early 70s and retired. We have a good retirement income, which provides us a comfortable lifestyle. Everything we have is paid for.

We have a little over $60,000 in recently matured CDs and would like advice on investing this amount. If we lost all of the $60,000, it would certainly hurt, but would not result in our financial ruin. In the past we have lost thousands in stocks and now only want to invest "safely."

At present we have the funds in a savings account drawing 1.60 percent interest. We are interested in CDs because we understand them and know they are a safe investment.

We have seen advertisements in the newspaper offering greater than 4 percent on 6-month and 12-month CDs. They state these CDs are through FDIC-insured banks and we will be dealing directly with the banks. Are these safe investments? ---E.D., by email from Austin, TX

A. Don’t believe everything you read in advertisements. Readers have written to tell me that when they answer ads like this, they are told that particular CD is no longer available, but another product with an even higher yield is. The rates being quoted are far above anything you can find online. The rates are vastly higher than the average for CDs of similar maturity.

If it seems too good to be true, it is.

Return to Texas, part 1: A Moving Experience

admin — Fri, 02 Oct 2009 20:00:00 GMT

By Scott Burns

No, it wasn’t as difficult as the journey to Texas that Woodrow Call took with the body of his friend Augustus McCrae in the famous novel and television series “Lonesome Dove.”

For one thing, neither of us was dead.

And an air-conditioned Chevy Suburban, even one loaded with plants, computers, and clothes, is a lot more comfortable than a horse. But Highway 285, which runs south like a lost arrow, is a very lonesome road. It is lonesome in Clines Corners and Vaughn long before it crosses from New Mexico into Texas and ends in Fort Stockton. It takes you through places with fading memories, a hungry present, and little or no future.

When you cross from New Mexico into Texas you know you are in a different place. How? Signs that might have identified an “arroyo” now call the same thing a “draw.” Many have colorful name signs next to the road, like “Six Shooter Draw” along Highway 385 between Fort Stockton and Marathon.

Yes, there are roads less traveled, but you’d have to work to find them. After a night at the wonderful Gage Hotel, for instance, we could have followed the border route provided by Highway 90. We could have gone through Sanderson and Del Rio, as I once did on a motorcycle trip. This particular stretch of blacktop was made famously noir in the movie version of “No Country for Old Men.” Highway 67 from Presidio to Marfa, with views some will remember from the movie “Giant,” is a good alternative. So is Highway 170 from Presidio to Terlingua, with vistas into Mexico across the Rio Grande seen in “The Three Burials of Melquiades Estrada.”

This is the pure, deep Texas. This is Lone Star Texas, the Texas of stories, true and mythical.

The Texas to which my wife and I are returning is another kind of Texas, a new Texas, but it still has the good grit. Our new home in Dripping Springs, about 25 miles outside of Austin, may be the “Gateway to Hill Country”--- to the stunningly beautiful rolling countryside that extends from Austin down to Kerrville, Junction and beyond--- but it’s also in the heart of what I’ve called “Dal-Antonio.”

That’s the developing megopolis of Dallas, Austin and San Antonio. This area is to Texas as “Bos-Wash” is to the Northeast or “Chi-Pitts” is to the Midwest. It may have all kinds of music--- country and western--- but it lives and works urban.

It also accounts for three of the six major metropolitan areas with the fastest growing personal income in the United States. Add Houston, which is first on the list, and Texas is the heartland of growth in America in a year of shock, misery and loss.

Energy contributed, but it isn’t the whole story.

In case you haven’t seen the Bureau of Economic Analysis list of Personal Income for Metropolitan Areas, here’s how major cities compare. While Houston, Austin, San Antonio, and Dallas experienced personal income growth of 6.3 percent, 5.4 percent, 5.4 percent, and 4.6 percent, respectively, in 2008 the average U.S. metropolitan area was growing personal income at only 3.3 percent. (Figures are not inflation-adjusted.)

And while some areas were expected disasters--- Las Vegas and Phoenix (1.3 percent), Miami (1.8 percent) and Los Angeles (2.2 percent) --- others did passably. Boston clocked in at 3.7 percent, Seattle at 3.6 percent and San Diego at 3.8 percent. Chicago and New York came in at 3 percent (see table below).

Compare the income change figures with the home price change figures and you find what you’d expect. Healthy income growth means stable prices. Less income growth means declining prices. While metropolitan Texas home values have been relatively stable, home values elsewhere have plummeted.

Comparing Hits: Personal Income and Home Prices

This table compares changes in personal income in major metropolitan areas around the country with changes in median home sale prices.

Metropolitan Area	Personal Income, 2008 Change in Percent	Median Home Sales Price Change in Percent
Houston	6.3	+2.6
Austin	5.4	-0.1
Dallas	4.6	-0.2
San Antonio	5.4	-3.3
San Diego	3.8	-20.2
Boston	3.7	-8.3
Seattle	3.6	-13.7
U.S. Average	3.3	-15.6
Chicago	3.0	-20.7
San Francisco	2.7	-31.0
Los Angeles	2.2	-25.7
Miami	1.8	-33.1
Las Vegas	1.3	-39.7
Phoenix	1.3	-36.1
Sources: Bureau of Economic Analysis, 2008 data; National Association of Realtors, Q2 data

Whether shrinking gains in personal income caused home prices to decline or declining home prices caused personal income to decline is a long chicken/egg discussion. But while Texas has foreclosures from liar loans and uncertainty due to excess home inventory, one thing is clear. In Texas, homeownership hasn’t devastated homeowner net worth as it has in much of the country.

That makes Texas the state to watch.

Next Sunday: Return to Texas, Part II

On the web:

Borderland column series:

Wikipedia: Lonesome Dove (1989 Television mini-series)

IMDB: No Country for Old Men (2007)

IMDB: Giant (1956)

IMDB: The Three Burials of Melquiades Estrada (2005)

The Gage Hotel

Income, Poverty and Health Insurance Coverage in the United States, 2008

Bureau of Economic Analysis: Personal Income for Metropolitan Areas, 2008

National Association of Realtors: Second Quarter 2009 Median Home Resale Prices

Asset Allocation in the Thrift Savings Plan

admin — Wed, 30 Sep 2009 20:00:00 GMT

By Scott Burns

Q: My son has just accepted a position at a federal agency. He is in the process of establishing his Thrift Savings Plan. As you are probably aware, there are five funds within the Thrift Savings Plan in which to invest: (1) a government securities fund, (2) a fixed-income fund that duplicates Lehman Bros. Bond Index fund, (3) a common stock index fund that duplicates the S&P 500 Index, (4) a small-cap index fund that duplicates the Dow Jones Wilshire 4500 and (5) an international stock index fund that is compiled of stocks of 21 countries.

What distribution among these investment opportunities would you recommend for the current economic environment? -- W.B., by e-mail

A: Recommendations for the current economic environment must also be conditioned by the age of the investor and the employment stability of the investor. A young government employee can generally assume a long period of saving, income stability, and a defined-benefit pension and Social Security in addition to retirement savings. That employee can take a good deal more risk than a person of the same age who works for a private company without a defined-benefit pension plan (most young workers).

In the proud tradition of Couch Potato investing, your son could divide his contributions equally between the Lehman Bond Index fund for fixed-income, the S&P 500 Index fund for large cap domestic stocks, the small cap index fund for small cap domestic stocks and the international stock index for international stocks. This would make his portfolio 75 percent equities, 25 percent fixed-income.

It would also give him a hefty slug of small cap risk since the S&P 500 Index accounts for about 75 percent of all domestic equity value. In his portfolio, large cap would be only half of domestic equities and small cap would, in effect, be overweighted.

The biggest shortcoming of this portfolio is that it is underweighted in international equities since the entire U.S. market is roughly equal in value to the total value of all international and emerging market stocks. It shares this shortcoming with the complete portfolios, known as "L" funds, which are also available through the Thrift Savings Plan -- all contain more than $2 of domestic equities for each $1 of international equities. Your son could correct this by building a slightly more complicated portfolio that was composed of 4 parts international, 3 parts U.S. large cap, 1 part U.S. small cap, and 2 parts Lehman Bond Index. This portfolio would be 80 percent equities, and 20 percent fixed-income with equal weights for U.S. and international equities.

Would either allocation be ideal or prescient? Sorry, no. We don't know the future. But both portfolios would be diversified and allocated at a risk level appropriate to a young man with stable employment and good benefits.

Q: I'm confused as to whether the upcoming "Roth conversion window" in 2010 will be of any value to folks in my situation. I'm 62 and will retire whenever my employer decides they have no further use for me. So I will have a need to start drawing from my retirement accounts in the next several years. I have about a million dollars in a combination of traditional 401(k) and IRA accounts. I have no Roth accounts, as I've never met the income requirements.

Is there any advantage to converting any of my traditional holdings to a Roth? It appears to me that a conversion would exaggerate my marginal tax rate in 2010 and 2011. It would also substantially reduce my principal. If I were to stand pat, my guess is that my tax rate would be less on the traditional distributions over the coming years (even given the threat of increasing taxes). Plus, I would have a larger principal balance to grow tax-free during the early years of the recovery. Am I missing something? -- H.A., Dallas

A: I think you sized up the situation pretty well. Conversion for many people will bump them into a higher tax bracket than they are in now and a higher tax bracket than they will be in when retired. More important, while the drums are beating with fear of much higher tax rates in the future, history suggests that our tax burden is a lot more stable than most people think. Basically, tax collections have averaged about 20 percent of GDP for half a century. Who pays the taxes shifts with political power and fashion, but the basic tax burden is pretty stable.

Unless you can figure out a concrete personal benefit, continued tax deferral is the better course.

A Yardstick for Mutual Fund Expenses

admin — Fri, 25 Sep 2009 20:00:00 GMT

By Scott Burns

Whose money is it, anyway?

In case you have forgotten, all that money in mutual funds belongs to you and me. It may be diminished, but what remains is still our money. Unfortunately, that doesn’t mean we get the most reliable benefit from our money— income.

Like the old divorce joke— “She got the mine and I got the shaft.”—the financial services industry gets paid first, but we take the fall when markets collapse.

Here’s a troubling snapshot. The largest category of mutual funds is what Morningstar calls “domestic large cap blend” funds. The Morningstar database indicates 1,768 of these funds with 3-year track records. Average the group and you’ll find they have average net expense ratios of 1.22 percent… and average SEC measured yields of 0.90 percent.

So, the managers get the income— and then some— and we get the risk. Worse, while our dividend income is declining, fund managers are raising their fees. They do this because their income is based on a percentage of our declining assets.

Yes, there are fund categories where the managers don’t take all the income. But the vast majority of investors are over-paying for under-delivered service.

I have been demonstrating a simple reality for 30 years. High cost funds tend to provide lower returns than low cost funds. Like most things probabilistic, this isn’t guaranteed. It’s just probable.

So I’d like to introduce a new measuring tool. Think of it as the Fat Fund Report. Using it, you’ll be able to learn where your fund ranks in costs. You’ll be able to find out if your fund manager is in the least expensive 10, 25 or 50 percent of managers by category. Ditto the other end of the scale, where funds proudly taking more of your money than 90 percent of other funds. You can view the figures and download the pdf by clicking here.

If you own a large blend fund with a net prospectus expense ratio of 1.18 percent or less, you own a fund with below-median expenses. If your fund expenses are 0.82 percent or less, it ranks among the least expensive 25 percent. And if your fund has a net expense ratio of 0.46 percent or less, it ranks in the slimmest 10 percent.

If your fund ratio is greater than 1.57 percent, it is more expensive than 75 percent of comparable funds. It is in the greedy 10 percent if its expense ratio is 2.03 percent or more. Don’t know the expense ratio for your fund? Visit the Morningstar website, type in the name or ticker for your fund, and find the expense ratio in their fund report.

It should be noted that some distribution channels are more expensive than others. The “B” share version of most funds— where an annual charge replaces an up-front load— will generally be found among the 25 percent most expensive funds. So will shares that build in adviser fees as a 12b-1 charge.

So what funds are doing right by investors? One of the largest is American Funds Investment Company of America A shares. This managed fund has an expense ratio of 0.59 percent. It lost 7.13 percent annualized over the last three years. That’s 1.09 percent a year better than the S&P 500 index. Similar figures obtain for American Funds Fundamental Investors A shares (0.61 percent expense ratio, minus 6.43 percent three year annualized return), Vanguard Life Strategy Growth (0.21 percent expense ratio, minus 6.26 percent three year annualized return), and Fidelity Fund (0.55 percent annual expense ratio, minus 6.5 percent three year annualized return).

What about big expensive disappointments?

Davis New York Venture B shares top the list with a net prospectus expense ratio of 1.66 percent and a 3 year annualized loss of 10.02 percent. Oppenheimer Main Street B shares clocked in with a similarly high 1.66 percent net prospectus expense ratio and a 3 year annualized loss of 9.25 percent. Pioneer B shares (2.12 percent expense ratio, 8.95 percent 3 year annualized loss) and Legg Mason Value C shares (1.73 percent expense ratio, 18.91 percent 3 year annualized loss) are two other large and well-known funds that have done poorly for their investors.

How big is the performance gap between the lowest cost and highest cost large blend funds? Averaging the ten percent most expensive and the ten percent least expensive, the parsimonious funds bettered their spendthrift counterparts by an annualized advantage of 1.05 percent over the last three years.

Bull or bear market, costs matter.

The Facts of Life, Death and Annuity Yields

admin — Wed, 16 Sep 2009 20:00:00 GMT

By Scott Burns

Q. I am a widow of 89. I’ve put $100,000 out of $200,000 held in a money market at 0.34 percent into a lifetime income annuity from a major life insurance company. This annuity pays $1,102 per month for life. At my death, if there is any of that remaining, it goes directly to my beneficiary. This leaves $100,000 of my total assets plus $30,000 in CDs. My Social Security income is $1,230 per month. I have a short time to change the amount or drop it.

I also have a 60-day option to decide whether to put $100,000 into a deferred fixed annuity with the same company. This annuity pays 3.85 percent for the first 3 years. After that the rate can change each year, but it is guaranteed to go no lower than 1.5 percent. Withdrawals of 20 percent can be taken each year, without penalty.

Four major rating agencies gave the insurance company an AAA rating. The company suggests not to put more than 50 percent of assets in annuities and to keep a $20,000 reserve. ---P. H., by email

A. What you are being offered is a single life annuity income “with installment refund paid to beneficiaries.” Basically, you are giving your money to an insurance company. They are promising to pay some of it back to you with the remainder going to your beneficiary. It is very likely that you will receive zero return on your money. In other words, you’re better off leaving it in the 0.34 percent money market account.

Let’s look at the hard facts and probabilities here. According to the Centers for Disease Control Life Tables, an 89-year-old white woman has a life expectancy of 5.5 years. An individual may live longer, or die earlier, but half of all such 89-year-olds will be dead after 5.5 years. So the insurance company is likely to pay you $1,102 a month for 66 months, or a total of $72,732. The remainder of the $100,000, or $27,268, would go to your beneficiary.

Any interest earned on the money during that time would go to the insurance company, and the commission on the sale would go to your thoughtful insurance agent.

Now let’s take this a step further. At $1,102 a month, it will take about 90 months before the insurance company has returned your money. That’s about 7.5 years. So you’ll have to live 2 years beyond expectancy before the insurance company has done anything but send you a monthly installment of your own money.

There is about a 30 percent chance that you will live that long, which means there is only a 30 percent chance that you will live long enough to earn a return on your money. After that, your return would rise month by month. Live 11 years to age 100 and your return would be about 7 percent.

There has been a lot of positive reporting on simple life annuities in the last five years, but the usefulness of this product has declined dramatically as interest rates have dropped. This is particularly true for older people who are thinking about simple life annuities.

The 3.85 percent annuity contract option is a better deal--- except that it doesn’t guarantee the interest rate and probably has a significant penalty for early redemption--- and at 89 you should expect a need for emergency cash. A better option would be a ladder of bank CDs purchased to mature in 1 to 5 years. Recently, I found yields for such CDs ranging from 2 percent (1 year) to 3.5 percent (5 years) on www.bankrate.com.

Younger readers may be interested in how a similar move would look for a retiring couple, so I did the math on that as well.

It’s a lot more attractive.

A 66-year-old man with a 63-year-old spouse who put $100,000 into a 100 percent joint and survivor life annuity could expect an income of $555 a month as long as at least one of them was alive. This means they would get their money back in 15 years, a period that is significantly shorter than their joint life expectancy of nearly 27 years. If one of them survives 20 years, the return on their money will be about 3 percent. The yield rises to 4.5 percent at 25 years and 5.3 percent at 30 years.

The Involuntary (But Happy) Investor Tax Holiday

admin — Fri, 11 Sep 2009 20:00:00 GMT

By Scott Burns

Life is full of perverse surprises.

A candidate for president of the United States runs on the idea that people with more money should pay more taxes. They should, he says, pay higher taxes on capital gains. They should also pay higher taxes on dividends. The new tax revenue would be used to pay for health care improvements and other government programs.

He wins.

But while the candidate was winning, the world was changing. In particular, the stock market was crashing.

Stocks were losing years of gains. An investor who put $100,000 into the Vanguard 500 Index fund in early 1998, for instance, would have collected thousands of dollars in dividends and paid taxes on same, but his investment would only be worth about $100,000. His cost basis (original investment plus reinvested dividends) would be more than $122,000. So he would have an unrealized loss of $22,000 in the middle of 2009 and he’d consider himself fortunate because he had lost so much less than others he knew.

Indeed, in our new upside-down world, there is a new brag for investors: I lost less than you lost.

So let them raise the tax rate on capital gains and dividends. While our friends in Washington will clip an extra nickel out of each dollar of dividend income, the reality is that they won’t get a cent in capital gains tax revenue because most people don’t have any gains to realize and pay taxes on.

We can also use that reality to become virtually tax-free investors for the near future.

How?

We can make mutual fund investments today that will be tax-free for years simply because the fund has large capital losses on its books. As a consequence, the stock market can rise substantially, but many funds are unlikely to realize and distribute a taxable capital gain until they have worked off their losses.

Let me give you an example. According to the Morningstar mutual fund database, the average large blend domestic equity fund had losses equal to 48 percent of its assets at the end of June. This means the average fund could gain nearly 10 percent a year for more than 4 years before it would be likely to distribute a taxable capital gain.

You wouldn’t be immune from capital gains since you could sell shares on your own and realize a capital gain at any time, but at least you would not have much chance of having the fund manager realize a capital gain and distribute it to you.

AIM Charter A shares (ticker: CHTRX), for instance, have unrealized capital losses of 73 percent of assets, according to the Morningstar database, in spite of being rated 4 stars and having performed in the top 10 percent of its peer group in the last 1, 3, and 5 year periods. Similarly, Thornburg Value A shares (ticker: TVAFX) have unrealized capital losses of 56 percent of assets in spite of a 4 star rating and having been a top-decile performer in most time periods out to 10 years.

Are there any fund categories where we can find still larger losses that will raise our chances of having an even longer tax holiday? You bet.

Exploring the Morningstar mutual fund database, I found that mid-cap growth funds, as a group, had unrealized losses equaled to 75 percent of their assets. I also found that the average technology fund had virtually no dividend income and had losses equal to a whopping 156 percent of its assets. It would take a major bull market to produce a tax bill there.

The loss figure was 96 percent for the average finance specialized fund and 97 percent for the average real estate specialized fund. These funds could basically double in value before you would be likely to face a capital gains distribution.

Note that we are not talking about tax deferral. We’re talking about investments that will be largely tax-free for quite a few years.

Combine that with wretchedly low yields on fixed-income investments, and you’ve got a really good reason to favor equities

Stay Married and You can Collect Spousal Benefits

admin — Wed, 09 Sep 2009 20:00:00 GMT

By Scott Burns

Q: I am 62 years old and still working. My husband of 37 years is retired and collecting Social Security. Am I entitled to receive some portion of his benefit? We live separately, but we are not legally separated nor divorced. Will my receiving a portion of his benefit decrease his monthly check? -- K.W., by e-mail

A: Spouses may receive retirement benefits based on their work record. They may also receive benefits based on the work record of their spouse. They can choose whichever provides the greater benefit. If you take a benefit based on your spouse's work record, it is equal to one-half of his benefit less any adjustment for taking the benefit before full retirement age.

Whatever benefit you take, it does not reduce the benefit your spouse may receive. The same rules apply to those who are divorced, provided the marriage lasted for at least 10 years. So whether you are separated or divorced, your eligibility for benefits based on your spouse's work record is the same.

Will your benefit under his record be higher? It all depends on how your career earnings compare to your husband's. Many women find that they will receive a higher benefit based on their spouse's earnings record.

Q: I wrote to you in May, citing your article about reapplying for Social Security at 70. You said you still thought it was a good idea and so did a couple of other people in the field. The only exception was my financial adviser. You had compared the increased Social Security income with an annuity. So I went online to immediateannuities.com (recommended by Kiplinger) and put in $30,000 as the amount I would invest now, age 70, female, single, with nothing for beneficiaries.

The estimated monthly payment was $214.

If I repay that $30,000 to Social Security, my estimated payment (the increase above what I now receive) will be $158.

Am I missing something? I need to take some action on this soon. The payback figure keeps rising, and I think the lady at Social Security would like to close her file one way or the other. -- C.L., Manchester, N.H.

A: There are two possible reasons for this gap.

According to the Social Security Web site (www.ssa.gov/retire2/delayret.htm), the annual rate of increase for delayed benefits for someone born in 1939 or 1940 is 7 percent. For someone born in 1937 or 1938, the rate is 6.5 percent. Both rates of increase are materially lower than the 8 percent rate for those born in 1943 or later. Most discussion of delaying benefits, however, is done in the context of people who are at or approaching retirement, i.e., people born in 1943 or later.

The rate of increase Social Security calculated for you is 6.3 percent. That suggests a possible error in the calculation.

The second reason for the difference is more fundamental. That $158 a month from Social Security will be adjusted for inflation for the rest of your life. The $214-a-month life annuity will be fixed for the rest of your life. So in about eight years, assuming 4 percent inflation, your income from Social Security would equal your income from the life annuity.

For every year after that that you lived, you'd receive more income from Social Security than from the life annuity. The life expectancy of a white female at age 70, according to the CDC Life Tables, is 16.2 years.

To make an apples-to-apples comparison, you would need to purchase an inflation-adjusted life annuity. If you did this, the monthly payment would be less than $214. You can get a quote on an inflation-adjusted annuity at www.vanguard.com. When I went there and entered your data, for instance, the monthly payment on a $30,000 life annuity with inflation adjustments was $159.

While some people may benefit from the SSA form 521 "request for withdrawal of application" procedure, your benefit appears to be marginal, probably because you were born before 1943. Readers can learn more about this method of increasing Social Security benefits by doing a Google search using "SSA 521."

Variable Annuity Watch, 2009

admin — Fri, 04 Sep 2009 20:00:00 GMT

By Scott Burns

I feel a twinge when I start to write this particular column because I'm pretty sure I won't have anything good to say. This year, as with many preceding years, variable annuities are a good deal for insurance companies but a lousy deal for investors.

This isn't personal. It's about the numbers. Just as managed mutual funds have to swim against the tide of their own expenses, variable annuities have to swim against an even faster tide of expenses.

The last year has not been an exception. Indeed, it was worse than most. No one wants to pay for tax deferral and then have no gains to defer.

The idea here is simple. Each year we measure the return of an inexpensive, tax-efficient index fund against every variable annuity sub-account in its category. Then we figure the probability that you would have done better with the simple index fund than with a variable annuity. Tax deferral didn't mean much in this exercise, but if you want to see how little it has meant for earlier periods, just visit my Web site.

Domestic Equities.

As of June 30 there were 6,689 variable annuity sub-accounts categorized as "large blend" by Morningstar with 10-year track records. The group had an average expense ratio of 1.97 percent a year and lost money at an annualized rate of 2.46 percent over the entire 10-year period. The Vanguard 500 Index fund cost a mere 18 basis points, or 0.18 percent. It lost slightly less than the average sub-account, 2.29 percent a year.

Ranked against all 6,689 sub-accounts, the index fund would have placed 2,505. So it beat 63 percent of all its surviving competitors.

The word surviving is important. According to a recent report, only 61 percent of all large blend managed mutual funds survived the last five years. It's a statistical leap, but it isn't unreasonable to guess that the index would have beaten more than 80 percent of its original competitors over the last 10 years.

International Equities.

The 2,071 surviving sub-accounts with 10-year records classified by Morningstar as "large cap blend international" had an average expense ratio of 2.10 percent and a 10-year return of 0.13 percent a year. Vanguard Total International Market fund had an expense ratio of 0.34 percent and an average annualized return of 2.18 percent. The index fund would have ranked 386, beating 81 percent of its surviving competitors.

Moderate Allocation Funds.

The 3,279 surviving moderate allocation sub-accounts had an average expense ratio of 2.07 percent and a 10-year annualized return of 0.44 percent. The Vanguard Balanced Index fund has an expense ratio of 0.25 percent and a 10-year annualized return of 1.86 percent. It would have ranked 693 in the group, outperforming 79 percent of its competitors.

Intermediate General Bond Funds.

The 2,943 surviving bond funds with 10-year records had average expense ratios of 1.74 percent and returned 4 percent annualized over the last 10 years. The Vanguard Total Bond Market index fund has an expense ratio of 0.22 percent and provided an annualized return of 6.39 percent over the period. It would have ranked 55th in the group, beating 98 percent of its competitors.

Given the odds against superior performance, it's clear that simplicity and low cost are a better deal for investors than complexity and high cost.

The insurance industry has countered this statistical reality with an offer for "living benefits." Pay an extra fee that takes the annual expense of the product to about 3 percent a year, and they will guarantee that you can withdraw 5 percent a year from your original investment as long as you live, regardless of what the market does.

Sounds pretty good, right?

Well, think again. The purchase of a $100,000 variable annuity contract with such a guarantee means a 65-year-old man can have an income of $5,000 a year, or $417 a month for life, from his investment. He will get this regardless of what happens to the market. He might even get more if his account can rise over the burden of 3 percent in expenses and $5,000 annual withdrawals.

According to www.immediateannuities.com, the same 65-year-old man can buy a life annuity that will pay $417 a month for life for about $61,000. That means he'd have $39,000 "left over" to invest for more income later.

On the Web

Variable Annuity Watch, 2008:

Variable Annuity Watch, 2007:

Variable Annuity Watch, 2006:

Variable Annuity Watch, 2005:

Variable Annuity Watch, 2004:

Cash Today, or Lifetime Income?

admin — Wed, 02 Sep 2009 20:00:00 GMT

By Scott Burns

Q. I am a 60-year-old police officer looking at retirement in a year or two. Our retirement system offers several options. Basically you can collect a larger monthly retirement check and not take a lump-sum payment. Or you can take a lump-sum payment and settle for a smaller retirement check each month.

I’m married (wife does not work) and earn about $75,000 a year. I own a 4-year-old house (paid for), 2 relatively new cars (paid for), and have no other debts. We have $170,000 in checking, savings and CDs and about $15,000 in an IRA. We have always lived within our means, and I will probably work part time after “retirement.”

I don’t really NEED the cash benefit, but everyone says it is best to take the cash and a lower monthly benefit. I would appreciate your thoughts…… ---G.B., by email from Dallas

A. The answer to your question involves two specific considerations. First, is there a value to taking cash up front over taking a lifetime income? Second, is the amount of cash being offered fair and reasonable, given the income you have to give up?

Cash is most valuable to people who haven’t got any. There are people who get to retirement who haven’t got a dime put away for meeting unexpected expenses. You aren’t that person. You and your wife have more than two years of your pre-tax income in savings and investments. You’ve got emergency resources that you can allow to grow. And the more income you start with, the longer you can allow your savings to grow, whether or not you work.

The amount of cash being offered is reasonable. Your retirement income will decline by $311.61 a month for each $55,560 cash payment you accept if you take the 75 percent survivor income option. That payment, however, amounts to 6.73 percent of the cash amount. By taking the life income instead of the cash payment, you’ll break even in 15 years. That’s about half of your joint life expectancy, assuming both of you are 60 years old. So your “return” on that forgone $55,560 will be about 5.3 percent if one of you lives to your joint expectancy.

Since living expenses decline when a spouse dies, the 75 percent option is a good match to future expenses.

Q. I have a 401(k)/pension plan, and I am happy with my investments. My unhappiness is in the fees department. They charge 2 percent to 2.5 percent on each transaction, and I find it expensive for these times of uncertainty and fluctuation. My investments are in stocks that I have chosen. I manage my portfolio without advice. ---N. T., by email

A. The path you have chosen is not a good way for most people to build their retirement assets. The purchase of individual stocks, regardless of who decides which stocks to buy, has a lot more risk than the purchase of portfolios of stocks or bonds. Most research indicates that you need a portfolio of about 30 stocks before you have reduced the risk of individual stocks to acceptable levels. That's a lot of stocks to buy, own, and follow.

Adding a 2 to 2.5 percent transaction fee simply loads the deck against you. Since a broad domestic market index fund can be purchased for only 0.2 percent a year, you're about 2 percentage points behind each year unless you make very few transactions. While 2 percent doesn't seem like much in any single year, it's major over long periods.

According to the Morningstar mutual funds database, for instance, over the last 15 years large-cap blend funds at the 25th percentile earned 6.9 percent annualized per year. Funds at the 75 percentile--- meaning 75 percent of all funds in their category did better--- returned 5.13 percent a year. The 1.77 percent difference is less than you could be spending on transactions, and it took performance from top quartile to bottom quartile. I don't think that's what you want to do with your retirement money.

The positive alternative: Start investing in low-cost index funds and capturing the return of each selected asset class. If you want to continue on your current path, the best option is an online brokerage account. Active investors pay about $8 a trade. You'd have to make a lot of small purchases and sales to get your transaction costs up to 2 percent.

Examining the Health Care Elephant

admin — Fri, 28 Aug 2009 20:00:00 GMT

By Scott Burns

The health care discussion, if it can be called that, is the closest thing I’ve seen to public hysteria in years. It is a coupling of pure emotion with a remarkable lack of knowledge about medical care in America.

The knowledge deficiency isn’t hard to understand. Health care is a very big elephant. Most of us are like the proverbial blind men. We base passionate opinions on a few experiences with a small part of the elephant, like the amazing cure of Uncle Roy or mom’s unnecessary death.

And, yes, doctors can be found among the blind. Responding to a recent column with a throwaway line suggesting American health care might not be the best in the world--- one doctor wrote to say our health care IS the best in the world. As evidence, he pointed to the people from all over the world who come to get care in America.

People do come from all over, but it’s a two-way street. Americans are flying to Mexico, Europe, and India to get top-quality medical care for a fraction of the price in the U.S. ---“medical tourism” is a fast-growing industry. The doctor, defending rather than thinking, simply failed to use real evidence.

Others avoid actual thinking about the subject by saying everything would be fine if it weren’t for the fraud and abuse from (insert demonized ethnic group or institution here).

If you’re as frustrated as I am about this subject, I’d like to make a suggestion. Read “The Cost Conundrum,” the June 1 New Yorker article that asks how it is that McAllen, Texas, can have Medicare spending that is nearly twice the national average. People don’t flock to McAllen because it is a paragon of high-quality care and good outcomes.

This suggests something very hopeful: More care isn’t always better care. If you read the article, I know you’ll agree with me that it should be required reading for every legislator in Washington, every doctor, every hospital administrator and every insurance executive in America. “The Cost Conundrum” doesn’t require a Ph.D. in statistics or an M.D. degree to read. It has the ease and fluidity of a Malcolm Gladwell article. It may be more compelling than stories by the late John Updike. It’s a good read.

In 2006, the last year for which the Dartmouth Medical Atlas has published data, the national average spending per person on Medicare Parts A and B was $8,304. In McAllen, Texas, the same figure was $14,834--- 79 percent more than the national average.

Spending in Texas tends to be above the national average. It was $10,046 in Houston and Dallas, $9,022 in San Antonio, and $8,744 in Austin. Abilene came in below the national average at $7,594.

Every one of these areas costs more than the $7,092 in Minneapolis, near the much admired Mayo Clinic. At the Mayo Clinic, doctors are salaried. They are not paid on the piecework basis that is the prevailing model for garment workers, windshield installers, and the vast majority of M.D.s in America. The piecework basis of payment, known as “fee for service” in medicine, may be one of the primary drivers of high healthcare costs in America. If your income depends on the number of services you can do and charge for, you’ll do more rather than less. That’s just the way it is.

But more service doesn’t automatically translate into superior health care. A study by the Dartmouth Institute for Health Policy and Clinical practice, for instance, found just the opposite. Comparing higher spending areas to lower spending areas, the Dartmouth researchers found:

That the supply of hospital beds and medical specialists was higher in higher-cost areas.
That doctors in the high-cost areas were less inclined to follow evidence-based care guidelines.
That patient mortality from heart attack, hip fracture, and colorectal cancer was higher in the high-cost areas.
That patients reported worse access to care, greater waiting times, and worse inpatient experiences in the high-cost areas.
That doctors reported poor communication among doctors and inadequate continuity with patients in high-cost areas.
That doctors reported greater difficulty getting specialist referrals in high-cost areas.

This doesn’t mean that less is best. It means that more care isn’t necessarily better care. It also means we have a massive opportunity. Institute “best practices” and we can save this country from a healthcare-driven bankruptcy.

On the web:

The Cost Conundrum

The Dartmouth Institute

Dartmouth Atlas---Healthcare Spending, Quality and Outcomes: More Isn’t Always Better

Dartmouth Atlas---Tracking the Care of Patients with Severe Chronic Illness

August 10, 2003: The $35.5Trillion Medicare Elephant

August 7, 2009: Representation without Taxation

Couch Potato Investing for the TSP

admin — Wed, 26 Aug 2009 20:00:00 GMT

By Scott Burns

Q. I am a 66-year-old divorced federal employee. Currently I have $123,000 in my TSP account. I have been investing 100 percent in the G fund, the one that invests in government securities. I hope to work until I’m 69 or 70 and have saved the maximum allowed during the 9 years I’ve been eligible to invest. I have about $70,000 in IRAs and savings and have about $170,000 in equity in my home.

How should I invest the $123,000 in the various TSP funds--- the Government, Fixed Income, U.S. Common Stock, Small Cap common Stock, International Stock and Lifecycle funds?One article I’ve read suggests diversifying in cash, a mix of corporate and agency backed bonds, international bonds, large-growth stocks, large-value stocks, mid-value stocks, small value stocks, international stocks, gold, commodities and real estate.How should I divide the TSP money? ---K.H., by email

A. Since the Thrift Savings Plan is limited to the 5 investment options you named plus the "L" funds, which are portfolios built with those 5 options, you'll need to keep your portfolio simple. So as attractive as inflation hedges like gold, commodities, and real estate are, you'll have to invest with broader strokes.

One option is what I call the Margarita portfolio, three assets mixed in equal measure, just like the drink. The asset classes, in your case, are the C fund for large-cap domestic stocks, the I fund for international stocks, and the F fund for a broad index of domestic bonds. You can read more about Couch Potato investing on my website. There, the Margarita portfolio uses a Treasury inflation-indexed bond fund for the fixed-income asset.

At 67 percent equities, your portfolio would be a bit more aggressive than most retirement funds, mostly to offset the de facto bond fund you'll have in the relatively small (due to limited years of service) defined benefit pension you’ll have when you retire.

Q. I work for a public employer and have the option to restore retirement credit for times when I withdrew from the system. Basically I will get 2.5 percent of salary for every year of service that I add. This seems like a really good deal. Is it? ---B.D., by email

A. The first thing you need to know is that a 2.5 percent replacement rate of final salary costs a great deal to fund. It is significantly higher than typical private-sector pension formulas, and they cost about 7 percent of payroll.

Generally speaking, buying years of service is a slam dunk compared to alternative paths to the same lifetime income. You can evaluate this for yourself by taking these steps.

First, calculate the increased retirement benefit for buying one year of service, assuming you retired within a year. If you are currently 60 and earning $60,000 a year, a one-year gain in service would mean an additional income benefit of $1,500 a year, or $125 a month.

Second, go to www.immediateannuities.com , fill in the requested age and gender information, and learn how much it will cost to buy a lifetime-only annuity for $125 a month. Then compare this amount with the amount you will have to pay to gain that year of credit. Generally speaking, the private annuity purchase option will cost significantly more.

Third, if your lifetime annuity is adjusted for inflation--- as many state pensions are--- go to the annuity portion of the Vanguard website. Find out how much it will cost to have an inflation-adjusted life annuity in the same amount. Inflation adjustment generally costs about 50 percent more than a fixed annuity, so there is a good chance it would cost up to three times as much to get the same benefit from a private source as from your buy-in offer.

That makes your buy-in opportunity a real slam dunk--- you are buying lifetime benefits at 50 cents to 33 cents on the dollar.

Is there a caveat here? You bet. Public-sector pension funds all around the country were underfunded before the recent market bust. They are more underfunded today. So the real question is whether the public pension funds will be able to make good on all that they have promised. That isn’t a slam dunk.

When will the Economy Float Your Boat?

admin — Fri, 21 Aug 2009 20:00:00 GMT

By Scott Burns

Lake Travis is a great metaphor for the U.S. economy. The man-made lake near Austin, Texas, is simply stunning. Whether you are on the water or above it, applauding a magnificent sunset from the many decks of the Oasis restaurant, it is just plain wonderful.

It is, of course, most wonderful when it has lots of water in it.

Recently, I went to the lake to see a sailboat that is for sale. The water was so low from the long drought that it was no longer possible to walk down the gangplank to get to the floating docks. If the gangplank had still been there, it would have been hanging nearly straight down.

The lake is down an incredible 30 feet from its average level in August. To get to the docks, new stairs had been built in stone. They were precarious, but with a bit of care you could get to the docks and walk from boat slip to boat slip. From there you could contemplate the steep climb back.

The boat I had gone to see is a 34-foot sloop, built by Sabre in Maine. It’s a classic coastal cruiser.

Yes, perhaps that’s a bit large for a lake, particularly one that has less and less water. But I was thinking of trucking it to Corpus Christi and sailing her up the East Coast. I was imagining gliding into a guest mooring at Red Brook Harbor, Mass. on the way to a quiet well-protected place, like Tenants Harbor, Maine.

And then it hit me. Lake Travis could be so low it would be difficult to get a boat out of the lake! The boat could be stranded, waiting for rain.

That is what we’re doing in this economy. We’re waiting for rain. It has been promised by the rainmakers in Washington. A few sprinkles have been noted.

Home resale prices have ticked upward, even if the year-over-year price is still down.
Home resales have increased, even though the unsold inventory remains a burden.
Stock prices are up. They may be down from their October 2007 highs (try 35 percent), but they are nicely up from their March lows (try 48 percent).

Federal Reserve Chairman Ben Bernanke appears to prefer gardening metaphors because he has called the hopeful signs “green shoots.” Whatever one’s metaphor preferences, there is a real difference between a pause while being beaten and actually having a good time.

So the upticks are nice. But we still don’t have any real, lake-filling rain. We need the rain that floats all the boats. We need the big non-stop stuff, the rain that starts and drenches everything. We need the rain that brings back the green.

That rain is called personal income--- wages and salaries--- the money that goes into checking accounts or little manila envelopes every week or two. Until that money starts increasing, we’re still going to be having the National Yard Sale that I wrote about 20 months ago. Without that rain, boats like the Sabre 34 I inspected more than two years ago in Puerto Vallarta (which is still for sale), or like this Sabre 34 on Lake Travis, aren’t likely to find buyers. Or, like houses in Phoenix and Las Vegas, they will sell for a lot less than hoped.

According to the Bureau of Labor Statistics, average weekly earnings in July were $612.87, up slightly from $607.27 a year earlier.

Some analysts would argue that wages have really gone up, since the consumer price index has declined in the last year. In fact, those analysts should leave their cubicles more often. What sane person would bet that an hour of work will buy more gasoline in a few months than it does today? Expansive thinking comes from expanded incomes, not from adjusted incomes.

No, we need basic rain. We need higher wages and higher salaries. We need longer work weeks, not shorter work weeks. That will float the boats.

How will we know when that’s happening? Simple. Watch the BLS average weekly earnings announcement, released around the middle of each month. When it shows a steady progression of rising wage, we’ll know the economic drought is over.

On the web:

Bureau of Labor Statistics Average Weekly Wages Release

Sunday, April 3, 2009: Lock-n-Load--- We’re On Foreclosure Safari!

Sunday, October 22, 2008: Watching California--- the National Yard Sale Begins

Sunday, April 11, 2008: Letter from Mexico--- In Puerto Vallarta, Condos-are-US

Sunday, December 21, 2007: The Coming National Yard Sale

Sunday, July 10, 2007: What I Learned On My Summer Vacation