Gen Y - Retire Rich!

Post #145 - What if Your Parents Get Whacky?

2010-07-26T18:01:42-07:00

Part 7: Stuff you need to know, now that you know everything about investing (cont.)

Your parents are now old enough to get silly. And there’s not much you can do about it. Your dad may meet you at a restaurant one day wearing lime green slacks, matching color shoes, and a checkered blazer. Grit your teeth and try to enjoy the meal. Let him get flamboyant with his wardrobe if he wants. But refuse to stand next to him if he’s wearing shorts, sandals and dark socks.

Similarly, if your mother gets a tattoo and starts a garage band with the girls in her book club, just deal with it. No sense trying to talk to her out of it. She’s been waiting for twenty something years for you to grow up and leave the house so she could get back to her grunge roots.

These are the whacky years for your parents. Between age 45 and 70 (roughly), your mother will hit menopause, your father will have his midlife crisis, they will see their children move out of the house, their careers will be on the downswing, their sex life will lose steam (I know, TOO MUCH INFORMATION) and when they look in the mirror they will see a wrinkled person looking back at them.

Most of the things they do will be pretty harmless. Dad might buy a corvette so he can regain his youth. Not a big deal as long as he doesn’t take a second mortgage to pay for the car. Make sure he’s not driving the car down Main Street every night trolling for women. Mom won’t like that.

Mom might decide to see the plastic surgeon for a few minor procedures. If botox makes her feel better about herself, I wouldn’t worry too much. However, if she decides she wants to look like a Barbie Doll, you need to talk turkey with her. Do not, I repeat, do not let her start confiding with you about her sex life. Let her tell a shrink. If she can’t afford a shrink, tell her to go to happy hour at the local watering hole. Bartenders love to listen to these stories, and there are a lot more lady bartenders than there used to be.

What if your sixty something Dad thinks he’s smarter than the stock market, and decides to be a day trader? You can certainly tell him that he’s playing Russian roulette with his financial health, but you can’t force him to stop.

How about if your parents decide to retire at age 62, even though they have limited savings? You can tell them they need to work another eight years before they retire. You can show them how much higher their social security payments will be if they start collecting at 70 instead of 62. But they don’t have to listen to you. They might think they are going to die before they hit 70, so why bother waiting for a higher social security check that they will never collect.

There are lots of other reckless financial moves they could make, such as:

Cash in the IRA and buy a monster truck or a boat.
Start playing on-line poker for real money, because they are bored at home.
Get a girlfriend/boyfriend.
Lend your sister their life savings to help her buy a Radio Repair franchise. Never mind that nobody except hermits listens to radios anymore.

There is almost nothing you can do to prevent your parents from making dumb financial moves, other than tell them how you feel. Maybe you can do a little internet research to find statistics/articles to back up your arguments. But if they still go ahead with their plans, you can’t stop them. So pray that your parents stay fairly sane with their financial affairs until they are 70 or so. After that, they are usually a lot less frisky.

Post #144 - George Steinbrenner’s Estate

2010-07-19T16:21:21-07:00

Part 7: Stuff you need to know, now that you know everything about investing (cont.)

George died recently. Love him or hate him, everyone can agree on one thing. He was rich. Lucky he died in 2010. Congress forgot to do anything about the estate tax this year.

I won’t bore you with the history or the politics surrounding the estate tax. But the bottom line is that it ran out this year and Congress forgot to do something about that. So George’s sons don’t owe any estate tax to the federal government (states apply their own taxes). The good old US of A lost about $500 million on this one death. On the one hand I’m reading about how we forced Goldman Sachs to pay a settlement of $500 million, of which a lot of that goes to foreign banks. Congress sees this as a big win. Seems like a loss to me. Goldman pays some corporations $500 million, USA loses $500 million on one guy because Congress forgot about the state tax.

What exactly is Congress doing? They spent a lot of time on healthcare reform. They also yelled at BP a lot. These types of actions help Congressmen get re-elected. They even yelled at oil companies who are not named BP to make sure we all know they’re on the job.

What other really important national issues is Congress working on? Chuck Schumer, a NY senator who never saw a sound bite he didn’t like, has written a nasty letter to Steve Jobs about something or other concerning iPhone 4 customers. I’m sure all the other Senators and Congressmen are spending their time on equally important national issues.

Here’s a short column about the estate tax situation. Estate Tax 2010

What’s really happening? I think (and this is a big stretch) that the Democrats, who hate large estates, are purposely ducking the issue this year. If they do nothing, the tax will come back with a vengeance in 2011. The exemption threshold in 2011 is $1,000,000 compared to a threshold of $3.5 million in 2009. The federal tax rate is 55% in 2011 rather than 45% in 2009. This is a winning scenario for the Democrats.

On the other hand, I think the Republicans are happy not to do anything this year. They probably have a plan to force the Democrats in 2011 to increase the estate tax exemption amount and the estate tax rate to something close to the 2009 levels. It’s all politics, my friends.

I guess we’ll have to wait until 2011 to see what develops. In the meantime, George’s sons are probably extremely happy that they don’t have to sell Derek Jeter and A-Rod to pay the taxes on their father’s estate.

What do I think? I’m glad you asked.

I think that if someone struggles all his or her life to amass a fortune, he should be able to protect some of it for the kids. How much? I don’t know. It shouldn’t be so much that all his descendants for twenty generations can live rich, indolent lives.

On the other hand, if someone amasses a fortune during his lifetime, you don’t want to confiscate all of it when he dies. Because then nobody will be willing to do the hard work necessary to earn a fortune. Take my word for it. We need people who are willing to sweat and strain in an effort to get rich. (Exception: Hedge Fund Managers. We don’t need any of them. They don’t add any value to society.) People who strive to get rich are good for the economy, the country, and the world. So you have to find a balance when you decide on an inheritance tax. Take enough from the dead person’s estate so all the descendants for 300 years can’t live like kings. But don’t take too much, or nobody will bother trying to get rich.

I’m looking forward to watching the estate tax debate in 2011. In the meantime, if you have parents with a lot of bucks, encourage them to die before January 1.

Post #143 - Politicians in New York, New Jersey and California

2010-07-12T08:00:00-07:00

Part 7: Stuff you need to know, now that you know everything about investing (cont.)

I love watching and listening to these guys. Their states are flat broke and you have to just about break their arms to get them to cut programs. You see, their first allegiance is to themselves. They want to be re-elected. And they realize they won’t get re-elected by taking money or services away from portions of their constituency, even if that’s the right thing to do.

Here’s an article about how New York State is trying to solve its budget crisis: New York State Tax Ideas. Do you see and creativity here? Do you see anyone going back to their constituents and telling them “Hey, we can’t afford all this stuff”! No. You see a lot of sneaky taxes on consumption and a push to get people to gamble more. By increasing revenue this way, they can brag that they didn’t raise the income tax.

Like New York, New Jersey is also broke. The governor is trying to cut a number of services/government positions/benefits. He ran on the platform that he would cut expenses instead of raising taxes and he knows he won’t get re-elected unless he delivers on this. It’s tough going. He is being fought tooth and nail be everyone else (it seems). Since the governor is a Republican, all the Democrats are against his ideas. Their solution to New Jersey’s budget problem is an additional tax on “millionaires”. They would prefer to make rich people pay more rather than ask state workers to contribute toward the cost of their health benefits, or cut the number of state employees. Note that ex-Governor McGreevey imposed a millionaires tax already (back in 2004). Since that time, rich people have been moving out, which means not only did NJ lose the additional tax McGreevey promised, it also lost the taxes those rich people had been paying previously. Read this article. New Jersey Loses Wealth. I’m sure the Democrats all read this article too, and they know that a millionaires tax will eventually be counter-productive. But since they are only concerned with getting re-elected, they have no problem promoting this idea, since it is appealing to the majority of voters.

Thankfully, there are still a few intelligent people in New Jersey. The millionaires tax idea has been defeated (for now).

By the way, I have nothing against Democrats. I know that if a Democratic governor proposed spending cuts, the Republican Party would oppose the cuts and propose some other stupid tax as an alternative. Probably not a millionaires tax, since Republicans and rich people seem to think alike, but it would be something just as misguided.

The only really novel idea for raising revenue I’ve seen so far is in Asbury Park, NJ. To entice more people to their beach, where they charge for parking, chairs, umbrellas, access to the sand, and using the bathrooms, the town officials are talking about making the beach topless. I for one would go there three times a week if they do that, unless the place gets filled up with a lot of old wrinkled German ladies. They could double the beach fees and I would still go. Oh wait. My wife just told me I won’t be going to the Asbury Park Beaches. But lots of other men would go.

By the way, could you all write in to NJ Governor Christie and tell him it’s a waste of money to fund a NJ television station. I watch it sometimes to get local news, but we certainly don’t need it. Unless “The Situation” is the news anchor. Then it might get interesting. Lots of fights and cursing. No, that won’t work, he’s from Staten Island. The NJ TV station wouldn’t hire him.

In California, the legislators did offer a few options to the voters that would raise revenue or reduce spending. But these ideas were voted down. Hey California. I know you are disgusted with the mess in the Sacramento Statehouse. But you need to wake up. You are broke……and I hope the federal government does not bail you out.

I figure that eventually, all three of these states will legalize pot for everyone down to the age of seven, because it’s a potentially big source of tax revenue. They’ll also tax cigarettes to the point where you need a home equity loan to buy one pack. Soda, energy drinks, Red Bull, beer, wine, liquor, Big Macs, and Whoppers will have hefty taxes. Don’t tax condoms, guys, or we’ll see a big surge in unplanned pregnancies.

The states should also put a hefty tax on those glasses old people use after they have their cataracts removed. Hey… it’s another way of increasing income and you can blame the doctors. And double the tax on any dinners that are served in restaurants before 5PM. Let’s get the seniors paying their fair share.

How about putting a 100% tax on those stupid little toys people buy for their pets. Come on, how many chew things does little fluffy need anyway? What about girl scout cookies? Put a 100% tax on Thin Mints. After all, the cookie sale profits go to the administrators, and not to the kids. So tax those cookies hard!

You are probably wondering about the purpose of this post. I just wanted to give you a few concrete examples about how politicians find it really hard to be fiscally responsible. It supports my suggestion in the last post that your taxes will be higher when you are in your sixties. I’m talking about higher income taxes, capital gains taxes, property taxes, sales taxes, taxes for standing on the sidewalk, and anything else you can think of.

Hopefully our elected officials will become fiscally responsible and I’ll be proven wrong.

Post #142 - Part 7 – Stuff You Need to Know, Now That You Know Everything About Investing

2010-07-05T08:00:00-07:00

I’m done telling you about investing. Why? Because I’ve told you all you really need to know. Plus, in Part 6, I reviewed the important points in case you forgot anything. Now go to the bookstore and buy William Bernstein’s book “The Investor’s Manifesto: Preparing for Prosperity, Armageddon and Everything In Between”. Here’s a link to the first few pages…The Investor's Manifesto.

Also buy Dan Solin’s “The Smartest Investment Book You’ll Ever Read”.

You don’t need anything else in your investing arsenal. Keep these books close and re-read them from time to time.

Part 7 will focus on other things you need to know to insure that your financial future is secure.

The first big question you need answered is “Will future tax rates be higher or lower than they are today?”

It’s impossible to answer that one without knowing the answers to these other questions:

Will Medicare/Medicaid costs ever be contained?
Will significant changes be made to Social Security to ensure that it survives without taking two thirds of your weekly paycheck?
Will we be able to reduce the national debt?
Will national healthcare costs spiral out of control?
Will politicians at the state and federal levels cut spending significantly? Do they have the guts to tell government workers and unions that they have to make significant concessions? Do they have the guts to cut programs we can’t afford?
Will corporate tax breaks be reduced or eliminated?
Will we stop bailing out industries that have no regard for the rules?
Will our agencies assigned to safeguard US interests actually start doing some safeguarding? I’m talking about the people who oversee mining, oil drilling, banking, factory emissions, hedge fund managers, stock brokers, power companies (and their power plants) and any other part of our industrial complex that could really harm the country if somebody with the public’s interest at heart was not watching.
Will we become an isolationist country, or will we continue to be the world’s policeman?

See how hard it is to predict future tax rates? You just can’t do it. My personal guess is that the top tax rates will be higher when you guys are in your sixties. That’s because I don’t think politicians will ever change, which means they won’t cut costs and they will spend money we don’t have in their frenzied efforts to ensure that they are re-elected. So, if you want lower taxes, be poor. Poor people don’t pay taxes.

Post #141 - Don’t Scrimp On Your 401K to Save For your kids’ college?

2010-06-28T08:00:00-07:00

Part 6: Let’s emphasize the important stuff (cont.)

Your main concern should always be saving money and investing your savings for your retirement, not college tuition. Be selfish. Provide for yourself!

They tell you the same stuff in an airplane. If the plane suddenly loses cabin pressure, the little breathing thingies will drop down from some hidden compartment.

Put the breathing thingie around your own head first. Forget the little rug rat next to you.
Make sure you are getting oxygen.
Then worry about the little ankle biter.
- If he’s been a pain the whole trip, take a vote from the other passengers before you put the breathing thingie over his mouth. OK, I only heard one airline say that.

I’m giving you the same advice. Take care of yourself first. Worry about the kiddies second!

So here is the rule:

Do not put money away for your kids’ education unless you can save and invest at least 20% of your gross salary for yourself.

You may think it’s terrible to be so selfish. It’s not. It’s very practical.

Your kids can get great educations at state colleges.
Your kids can go to community college for two years and then switch to private, expensive colleges. It will save tons of dough, and they still get the degree from the fancy college.
Your kids’ eventual success or failure in life will not be determined by which college they attend. So spending your retirement money on a fancy college is foolish. Read this link: Ivy League Versus Regular College
No matter how much you do for your kids, they will never appreciate most of it.
When you’re 70 ½ and need financial assistance, your kids won’t help much. They’ll say “Why didn’t you save more when you were younger?”

Here’s another link you should read. College versus Retirement

I already hear some of you saying “My parents sent me to a good school. I should do the same for my kids.” That’s a dumb way of thinking.

If you think your parents were so smart, remember that:

They thought VD came from toilet seats.
They put raw meat on black eyes to help heal them.
They thought you could fix a leg cramp by punching the muscle.
They thought that eating raw sugar gave you worms.
They told you if you touch it, you’ll go blind. (This is a guy thing.)

Wait a minute. Those are my parents I’m talking about. Your parents would be my age. The post hippy, slightly too young for the Age of Aquarius generation. They are cool. But if they paid a lot of money to send you to a private school, ask them if they have enough money set aside to retire comfortably. Be prepared to run, because they may try to attack you.

Post #140 - Don’t buy equities with borrowed money

2010-06-21T08:00:00-07:00

Part 6: Let’s emphasize the important stuff (cont.)

If I hear that you are even thinking of doing this, I’ll find you and beat you with a tree limb.

There are people out there who took home equity loans and invested the loan money in a hot stock market back in 2004. That’s crazy. When the market sunk in 2008 their stocks lost value, and their house lost value as well. Double whammy. They may have to sell the stocks at a loss just to pay back the loan.

If you have $50,000 in the bank and decide to sink the money into a few equity index funds, that’s fine. If you then take out a car loan to finance the purchase of a fancy ride, that’s dumb. The better choice is to use your money to buy the car (hopefully a second hand utilitarian car that’s not so expensive). Nobody can guarantee that you will earn a return from the stock market that is higher than the rate of an auto loan. That’s why you pay for the car with cash.

Don’t buy stocks on margin. Buying on margin means taking a loan from the brokerage house and using the money to play the market. Usually, the margin loan interest rate is pretty hefty. Even if God himself comes down from heaven and gives you a great tip, don’t buy equities on margin. It is way too risky. If the market goes down (like in 2008), the brokerage house calls in the loan. You have to sell all your stock plus a few relatives to pay it off. Those stock brokers play rough when you owe them money.

Post #139 - People Never Learn

2010-06-07T08:00:00-07:00

Part 6: Let’s emphasize the important stuff (cont.)

Always remember that people never learn from history. This will help you in your quest not to die poor.

People are not going to stop consuming just because the financial world almost melted down in 2008-2009. In a year or so, they will forget about what happened and resume spending above their means. Only a small percentage of the population has what it takes to live simply. This is good news for you. If everyone else acts like a fool, you can do pretty well by doing things right. It would be a lot harder for you to make money with your investments if the rest of the world were as smart as Warren Buffett.

There will always be booms and busts. In the next forty years we will see a few more bubbles. And those bubbles will burst. Why?

Because bankers are throwing so much money at Congress that meaningful reform will not happen.
Because investment professionals will always be there, selling you products that you don’t understand and which may have hidden downsides.
Because investors get carried away. They get caught up in a rising market and push it way past where it should be. Then they panic and it comes crashing down, much lower than where it should have landed.

The best thing to do is ride the wave. Save, invest, rebalance, and stick with your plan. Do that through up periods and down periods. Rebalancing acts as a brake. It slows you down from moving toward the edge of a stock bubble. You won’t avoid damage when the bubble bursts, but your damage will be less severe. And when the market sinks to its low point, rebalancing will help you get back in before other people have the guts.

How many people bought stocks when the Dow was down at 7000 last February? Not too many. Those same people were falling all over themselves to buy at 11,000 in April. Then everything hit the fan again the people who bought at 11,000 are crying.

Of course, not everyone rebalanced in March 2009, and March 2010, which would have been really good times to do so. I rebalanced in January of both years, which wasn’t an optimal time. But I still did better than those who don’t practice rebalancing (which is most everyone else). And that’s the point.

People will continue to hate each other. Each year, there will be some war or other being fought somewhere. Maybe multiple conflicts. But that the trend has been away from global wars toward local fights. This is a sign that the world is getting better. Good news for investors.

Post #138 - Early Retirement is not for everyone

2010-06-01T08:00:00-07:00

Part 6: Let’s emphasize the important stuff (cont.)

I know you are still young, but I bet you’re already planning to retire in 15 years. Here is a semi-wet blanket I want to throw over that idea. I’ll skip all the psychological issues about early retirement. Just let me make one important point. Some people should never retire. They would go insane. Don’t ever retire if:

You love telling people what to do and when to do it.
You live for Power Lunches.
Your Blackberry/I-phone is grafted to your hand.
You can’t go on vacation for more than 5 days without feeling lost and rudderless.
You have no hobbies or enjoyments outside of work.
You have no friends to hang out with at home.
Your spouse doesn’t want you following him or her around all day looking for sex.
You would feel like a loser if you didn’t have a secretary and a corner office.

But if you do retire early, there are two keys to enjoying your golden years.

Continue to LIVE SIMPLY
Don’t let the market tank during the first few years of your retirement.

Unfortunately, you don’t have any control over point number 2. All you can do is keep your fingers crossed. Anyone who retired in early 2008 is probably looking for new employment right now, because all their calculations about how long they could live on their savings have been thrown out the window.

When you think you have enough money to retire early, or if you suddenly get a big inheritance, don’t up and quit your job. Work for another ten years. During those years you can:

Continue to build your nest egg.
Develop a few hobbies.
Improve your connections to your extended family and friends.
Make new friends outside of work.
Think about what you want your retirement life to be like. Maybe you want to continue working part time at something else. Maybe you want to volunteer. You may need to develop new skills to accomplish these things. During the ten years of extra work, you can learn these skills.

Then, when you finally do retire (ten years later than you wanted to), you’ll have a larger nest egg, a support network (friends and family) in place and a good perspective on your new life.

Of course, if you die in that ten year periods, your last words might be “Curse that blogger and his ridiculous suggestions.”

Post #137 - Embrace the Boredom of Index Investing

2010-05-24T08:00:00-07:00

Part 6: Let’s emphasize the important stuff (cont.)

When I start telling people about my investment strategy, they generally fall asleep. So if you are planning to have sex with your significant other, refrain from any discussions about passive index investing a full eight hours beforehand. Alternatively, if your life partner starts licking your earlobes and you are just not in the mood, tell him a story about asset allocations and you’ll be able to finish your book without interruption.

Also, don’t talk about low cost index funds when you are a passenger in a car. The driver will keel over with boredom in less than 20 miles and the next thing you know you’ll be in a Medevac chopper heading to the nearest trauma unit.

It’s important for you to understand that my way of investing is boring. It doesn’t take a lot of time, effort or brains to invest via my recommendations. It does require dedication, a strong stomach (for those times when the market gets crazy) and mental toughness to stay the course and not be swayed by the lies of the financial spin doctors.

If you absolutely need more excitement in your portfolio, use 5% of the portfolio as Mad Money. The worst that will happen is that you will blow 5%. The best that will happen is you will have exciting stories to tell. When you are at the golf club you can tell your buddies of your daily skirmishes with the spot oil market. While you are sipping the latest “Pinot Hudson River” at your wine group meeting, you can let it slip that you’ve been trading gold futures. Pretend there is a lot of money at stake rather than just 5%. The stories will be just as good. Of course, nobody will believe you because they know you drive a 20 year old VW bug. That’s the price you pay for saving 20% of your annual salary. It’s tough to get people to think you are a big shot.

Once you blow the 5%, do not try it again. This is a one-time thing. It’s like when you are at Vegas and your spouse gives you fifty bucks to blow on blackjack (which probably will last for two hands). Once the money is gone, the well has run dry. You can’t go back to your spouse and ask for more. It’s the same with your mad money. Blow it once and then give up with your crazy investment ideas.

You can add excitement into your life ways other than investing. You could be a lion tamer at the circus instead of a mechanical engineer. Or you could learn to fly a plane upside down. That sounds real exciting. Wait, you think that’s too dangerous? Well, guess what, exciting investments are just as dangerous. Stay away from them.

Post #136 - Renting Versus Buying a Home

2010-05-17T08:00:00-07:00

Part 6: Let’s emphasize the important stuff (cont.)

I talked about this in July 2008 (posts 35, 36 and 37). Go back and re-read the posts before we go further. I’ll wait until you are finished.

OK, are you finished reading those old posts? Great. Now let’s go to our new bible, “The Investor’s Manifesto”, written by William Bernstein. He approaches the issue from a straight dollars and cents angle. I could go through the math, but it’s boring. However, he boils it all down to a nice rule of thumb which all of us can use.

If you are thinking of buying a house, find out what the monthly rent would be for a similar house in that area. Don’t trust the realtor’s answer, double-check. Multiply the monthly rental number by 150. The resulting number is a reasonable price to pay for the house. If the house price is too high, then rent one of the other places for a few years until the market gets back to normal. If the market doesn’t cool down in your area for ten years keep renting. Once the market gets to a point where the rule of thumb says the price of your prospective house is reasonable, go ahead and buy.

Example: You look at a condo that is selling for $675,000. A few other condos in the same building, with similar floor plans, rent for $4,000 per month. Multiply the rental price by 150 and the result is $600,000. This means a realistic price you should pay for the condo is 600,000 or below. Try to negotiate the $675,000 price downwards. If they don’t budge, rent a condo instead of buying that one.

If Dr. Bernstein was looking for a house during the years 2000 through 2007, he wouldn’t have bought anything. His rule of thumb would have told him that it was better to rent during that time period. But in 2008-2009, after the market had crashed, he would have swooped in and gotten a really nice house for half the price it would have cost just a few years earlier.

I recommend that you use Dr. Bernstein’s rule of thumb for future rent versus buy calculations. It’s much easier and based on a lot more sophisticated math then my analysis in posts 35, 36, and 37. Tell all your friends about it too. Better yet. Tell all of them to buy his book. It’s all they need to do a good job of saving and investing.

So why did I make you re-read those three posts and then tell you to disregard them? I just wanted you to appreciate the beauty of my prose.