Posts Tagged ‘Financial Planning’

The Thinker

Why to drive on the wrong side of the road, or the power of rebalancing

Whew! It’s been a long week, which makes it hard to find time to blog. When I slow down the frequency of my posts, traffic to my site sinks as well. Well, sorry, I’ve been busy. It’s not that I have run out of ideas. I generally blog about whatever is on my mind on a particular day. It does help though to know your market.

This blog attempts to be part education, part inspiration and part entertainment. The education part of it is because I probably spend too much time reading disparate stuff and when I find some wheat in the chaff I feel an obligation to get it out. Inspiration happens less frequently as most of my really good ideas and insights came out years ago. (Fortunately, a lot of those posts still receive regular hits.) The entertainment part is to give visitors a reason to come back. Sex sells, even on my obscure blog, as evidenced by a disproportionate number of hits on my posts on stuff like Craigslist Casual Encounters. Apparently I am vain enough to care about these hits, hence I am more than happy to do a monthly post on Craigslist casual encounter weirdness, or harpoon a recently uncovered philandering politician. I just can’t write about it everyday.

Today money, not sex, is on my mind, mainly because my financial adviser and I have been buying and selling mutual funds. So this post can be classified as education. I keep learning stuff from him and I thought I’d share what I’ve learned about the power of rebalancing.

When I speak of rebalancing, I mean shuffling funds you own around. In the case of my wife and I, these are mostly retirement funds. You may have an IRA or a 401-K and you may have the power to move funds around from one kind to another, say from stocks to bonds. This may not apply to many of you because you don’t have any funds. But you may someday, in which case keep reading. And if you do have some funds, you may learn some new stuff.

So let me ask you. Suppose you had a hundred shares of Google, purchased for an average of $500 a share, and are now worth about $1000 a share. You’ve been watching it trend up regularly with few bumps down. Would you sell it?

Most investors would say, “Hell no!” It’s the human tendency to be greedy, of course. After all, it could go to $1500 a share. 200% return sounds a lot better than 100% return.

Rebalancing a portfolio though is all about selling funds that are making money and putting it into funds that are not. Is that crazy or what? It is crazy, but crazy like a fox, and it is the secret to acquiring wealth for us ordinary mortals not fortunate enough to be Warren Buffet. Of course, most ordinary people aren’t buying stocks. We are buying mostly mutual funds, which are combinations of stocks, bonds and securities, and it is being done somewhat abstractly, probably through our 401-K or IRA plans. We buy mutual funds to minimize risk. Yet the principle remains the same. If you have money invested in a hot mutual fund returning 30% a year, it sounds crazy to take profit from it and invest it in some underperforming fund category, say a CD fund. Why would any sane person do this?

It’s because the only thing that is certain in the world of finance is that nothing stays static. In reality, investing is like playing a game of whack a mole. One fund class/mole gets hit and another one will pop up to replace it. It’s as given a phenomenon as the seasons except when it will happen is unknown. It’s well known that over time that certain kinds of funds pay better than others. Stock funds, for example, generally return more money than bonds over thirty years, although their value may swing up and down a lot. Investors chase profit and they chase wealth retention. Moreover, there is a lot of a herd mentality, at least among professional investors. Many take their cues from channels like CNBC. For the most part these investors aren’t looking ten or thirty years out. They are looking tomorrow, next week or next month. They want to grab some profit now. Investors like you and me though are more likely to want to gain wealth in the long term. We can’t time the market. In truth, financial gurus can’t time the market either. They like to think they can. Anyhow, since we can’t time the market all we can really do to acquire wealth is to intelligently ride the dynamics of the market.

And since the only constant in investing is change, we have to ride change to acquire wealth. So if we have a fund that invests heavily in sexy tech stocks like Google, Microsoft and Apple that has had a good and steady return then we need to sell it when it is profitable. We probably don’t want to sell all of it. There are two parts to this wealth business: gathering more wealth and hanging on to the wealth we have. So typically we own a lot of various fund classes, accepting more risky investments when we are younger and less of these investments as we age. So we can and probably should hold on to that sexy mutual fund, just bleed off some of its profits and put it into something that is not so profitable. We obviously don’t want to invest the money in a class of funds known to be a loser, such as a junk bond fund, but one that is currently undervalued and should become profitable once market conditions change fundamentally. Recessions are not events that might happen, they will happen. When they will happen really cannot be predicted, but when they happen a whole lot of panicked investors will quickly sell their new unsexy assets and buy U.S. Treasury securities and various bonds. We saw this during the Great Recession.

Reinvesting is all about buying low and selling high. If you don’t sell those sexy funds when they are high and buy something undervalued with it, you won’t lock in your profit. And if you don’t lock in your profit, you defeat the whole purpose of investing. The purpose of investing for the average person is not to get rich quickly, it’s to be rich in the future and retain your wealth in the future so you can spend it the way you like.

So that’s what my financial adviser and I have been doing: carefully looking at the value of our portfolio, seeing where we made money and to the extent its value exceeds the percentage we want to be vested in it, putting the profits into well managed funds that haven’t done as well instead. Because when market fundamentals change, as they will, we will have bought those funds when they were undervalued and will be prepared to sell them at a profit, probably for those stock funds that will then be undervalued.

In principle this is quite simple, with the hard parts being picking well-managed, low-fee funds in each asset class. The other part requires patience and discipline: ignoring day-to-day fluctuations and rebalancing regularly.

So it turns out that being a financial wizard is not that hard. You just have to have patience and be a methodical, slow and steady type of investor. You also have to adopt a counterintuitive financial strategy. It’s like driving on the wrong side of the road. Except by not following the crowd, you will actually be on the right side of the road.


The Thinker

Ducks in a row

The government may be shutting down on Tuesday, but this near retiree is still not too panicked. Shutdowns don’t last forever, although this latest group of Tea Party Republicans doesn’t seem very amenable to reason, so it could last weeks or longer. I’m not too panicked because not only is retirement on the horizon, my retirement now has a date, sort of: May 2015.

That’s what I told my management chain recently. “Eighty percent certainty.” Watching our dysfunctional Congress at work makes me want to speed that up to an immediate retirement, technically possible but not entirely advisable. The message from Republicans in Congress to us toiling in the federal civil service is kind of hard not to hear: we hate you. There are the constant threats of shutdowns; and this one looks like it is actually going to happen. To make sure you get the message that you are loathed, Republicans don’t seem inclined to compensate us for shutdowns they caused.

Then there are all the other signs, like the lack of anything like a cost of living raise these last four years. For four years inflation has eroded the value of my salary without even a penny in cost of living increases. And of course, there were furloughs. My agency was fortunate enough to escape them this year, but not without much anxiety. “Retire if you can and don’t mind us if we kick you in the pants on your way out the door. We don’t give a shit about all your hard work during your career. Just get the hell out. If we make your life miserable enough, maybe you will just quit and do the taxpayers a favor.”

Message received. But retirement, if you can even afford to retire, is not something to do on impulse. You have to have some confidence that you can actually afford to retire. There are so many factors to consider. In our case, there’s the remaining debt on our house, which ideally should not be carried into retirement. There is also the pension amount. The longer you wait, the higher the pension. Since my pension is based on my highest annual salaries, the lack of a cost of living raise for four years has effectively cut my pension. Thanks, Republicans!

Then there is the larger question of what the heck I am going to do in retirement. The research shows not doing anything cuts your mortality significantly. It also increases your risk of Alzheimer’s. Apparently, the brain is something like a muscle. If you don’t challenge it by giving it obstacles, it tends to atrophy. Anyhow, there are lots of puzzle pieces to consider. There is also our daughter, now age 24, who presumably should move out and be able to support herself independently before we retire. But I must say that being retired is looking quite appealing, if for no other reason that I don’t have to feel like a piñata anymore. Instead of Congress giving me the finger, I can give them one back.

My boss’s retirement in June had the effect of making me more than a little jealous. At least she is out of the mess. I am still in it. My glide slope to retirement though seems a little sad. My employer, the U.S. Geological Survey, is such a terrific employer. It’s doing everything it can possibly do to maintain morale and let employees know their work matters. But it can’t keep us from being furloughed except for the handful whose work is deemed “excepted” from furlough. That depends on a Congress that actually cares about the laws on the books and values its mission, rather than the anarchistic boobs we have instead.

So May 2015 is about right. My service computation date cranks into another year, which increases the pension to a marginally more satisfying amount. And I still have twenty months to keep putting income into retirement accounts. I do care enough about my job and the people who work for and with me to make my transition out as reasonably painless as possible for those who will pick up my slack. I’d like to have most of my projects complete and to do whatever mentoring I can to those who might assume my position. Twenty more months should allow all this to happen.

I am hopeful that Democrats will regain the House in the 2014 elections and that sanity will return to Congress then. It would be nice to retire with a government that again values rather than scorns its employees. It will be an uphill fight with House districts so crazily gerrymandered, but it is potentially doable. A shutdown that lasts for more than a week might be the animus that tells voters it’s time to escort these bulls out of our national china shop.

I can thank Republicans for one thing: giving me the animus to call John, our financial adviser, and run through the scenario where I would retire earlier and, if necessary, take the rest of my life off. What would our retirement parachute look like? We ran through all sorts of scenarios based on pension estimates, investment income, savings and probable expenses. I asked him to project all sorts of unlikely scenarios, including a cut in my pension and mediocre stock market returns on our portfolio over the thirty or so more years I hope to be alive. It all looks doable if I stay on the plan. It is made better by relocating to a less expensive area of the country, which is part of our animus at looking at retirement areas. Our financial adviser, like most, likes to use Monte Carlo simulations to make portfolio projections. It is sort of like throwing random die on a table over thirty years, and using those numbers to project investment returns. Even in the most unlikely scenarios, we should do fine. We can maintain our standard of living without needing to earn a dime after retirement.

Retirement, if you can do it, can be more of a door opening than one shutting behind you. I will be glad to put the federal rat race behind me. I don’t know what my future will look like beyond inevitable aging and death. But I do know I am up to the challenge.

Twenty months to go.

The Thinker


Financial planning is supposed to make your life easier, but it is definitely a hassle. It becomes more of a hassle when you old financial planner has faded away and you feel the need to find a new one. Our new planner has his own ideas about what it means to have your financial life properly planned. It means financial assessments, many client meetings and writing three and four figure checks to our financial planner. Finally you end up in a new place, with your financial life not necessarily simpler, but at least orderly and following a sound financial strategy. And hopefully, you have less anxiety about whether you will be eating dog food in retirement. To lessen the anxiety, your planner generally provides a nice binder with pretty charts, words and numbers in it. In my case, the charts even came colored.

One thing that’s new with this financial planner is that we have most of our investments centralized in a brokerage. I chose Scottrade though I am sure there are other good and cheap brokers out there. Like lots of things related to getting your financial house in order, it’s a huge up front hassle for a long-term benefit. In our case, it meant setting up four separate brokerage accounts (one joint, one traditional IRA for me, and two IRAs for my wife, one traditional, one for rollover IRAs). It meant shuffling papers to the investment firms that gave them permission to let Scottrade buy and sell for us. It meant signing another form so one account could access all the other accounts. And it meant $630 additional to our financial planner, to make sure all the initial trades were done right. Using Scottrade with my planner looking over my shoulders online in a Skype session also gave me some insight into how day traders work. I felt I needed a set of green eyeshades, but mostly I am glad not to be a day trader. Rebalancing funds once a year is fine with me.

It also has meant becoming acquainted with, a free online web site now owned by the Quicken people to help you manage your finances. If you are hoping that will balance your checkbook, unfortunately it won’t do that, at least not yet. This is probably good for Intuit, the company that owns Quicken, because it keeps them selling their core product. However, for doing budgeting, minimizing hassle and giving you insight into your finances, is very impressive.

It took me only about half an hour to get it set up. I had to create an account then tell it about my various checking, savings and money market accounts. I had to give it my credentials for accessing these accounts, as well as for my various investment accounts. But it was super easy to do this. What really impressed me is that it knew about the Thrift Savings Plan, the federal government’s agency for managing federal employee’s 401K accounts. To track these investments in Quicken, I had to input the information from my quarterly statements, available in detail only online. Quicken, or at least Quicken for the Mac which is what I use, cannot access it electronically. though just jumped into it, quickly summarized information by fund type and pulled in the transactions as well. It also let me know how well each fund was performing. Yeah, just like that. Slick! sifts through transactions in all your accounts and does a pretty good job of automatically categorizing your transactions into its budget categories. Then based on your spending it will try to infer a budget for each category and tell you how your spending is going compared to the budget. Of course you can refine your budget manually. Most people though are like me: inherently lazy. caters to us inherently lazy people, and seems to get smarter the longer you use it.

In short, for general tracking your spending, investments and liabilities, it’s a great tool. For getting an overall picture of your financial health and tracking your finances over time, it’s slick as well. Unfortunately, it’s not smart enough to categorize everything correctly. You really should sift through your transactions and put the ten percent or so that are not categorized into the correct categories. But this seems to be necessary only for those who are anal. If big picture is good enough for you, is all you need.

As I noted, it won’t balance your checkbook. So if you need this level of detail, you are going to be using Quicken or one of its competitors. If you don’t bother to balance your checkbook and are only concerned if you might overdraw your account, will do a good job of watching for when you drop below thresholds and sending you notifications when you cross them. You just have to be smart enough not to write checks that are too large.

In short, it’s a site with a lot of potential, bringing financial organization to the lazy. If it can wholly replace the functionality of Quicken, it would keep me from the hassle of entering most of our transactions into Quicken, potentially saving me huge amounts of time. I would like the site to morph into a complete financial solution, so I can pay bills from the site with a few clicks. It already warns me somehow of when bills are due.

It’s about saving my time so I can do more interesting and fun stuff. Software like Quicken helps make managing my finances easier compared to doing it with pen, paper and a calculator, but Quicken is a huge hassle compared with

Hopefully, will figure out a sustainable financial model. I don’t think it comes from their current approach, which is to serve targeted financial ads. I think it comes from selling services that balance your accounts, categorize your spending in greater details, pay your bills with a few clicks and that help you see the big picture. Maybe someday I can trust it to be my impartial financial adviser. If it can be as good as my financial planner, and be impartial, it could probably save me a lot of money on financial planning as well.

The Thinker

Profiting from our financial ignorance

Do you have a degree in finance? I sure don’t. Sadly, if you want to successfully navigate through today’s financial minefield, you arguably need a degree in finance, or its equivalent. Failing this, you probably need someone who understands personal finance in its mind-numbing complexity: a financial adviser, who of course does not come cheap.

The carnage of financial ignorance is all around us. Yet even before there was a housing crisis and a Great Recession, most of us were still happily reveling in our ignorance. We spent beyond our means and pushed up our credit card balances. Our financial plan consisted of spending as much as we earned and often more, and assuming that we would remain gainfully employed indefinitely.

For every action there is an equal but opposite reaction. When your financial life implodes, vultures are ready to swoop in. Debt collectors will hound you day and night on the promise of a percent of the money they collect from you. Investors will buy foreclosed properties and hang onto them long enough to turn a profit on them when the market turns around. Credit card companies will laugh all the way to the bank, which is not hard because they are the bank, and the huge fees and interest rates you pay to live beyond your means simply adds to their shareholders’ profits.

Even tiny steps to address our financial ignorance are vigorously opposed by financial barons. The Consumer Protection Financial Bureau cannot get a permanent director because Senate Republicans won’t confirm one, leaving the president to appoint one through a recess appointment. Attempts to simplify credit card rates and fees into something that might make sense for someone with a high school education draws howls of protest. Clearly, there is big money to be made in financial obfuscation, and it appears that those vested in the current system want to keep it that way.

Financial ignorance is hardly bliss. Financial ignorance can saddle you with a lifetime of poor financial decisions and result in an old age, if you make it that long, mired in poverty. No high school or college that I am aware of requires that you pass a Personal Finance 101 course in order to graduate. Even if you have the knowledge, there is no guarantee that you will use the knowledge. Competently managing your personal finances takes time and worse, persistence.

I wear the green eyeshades in my house. I try to keep the seams of our financial ship caulked, but I know there are always some leaky planks. On a good week I can take care of our financial stuff in a couple of hours. This mostly involves putting last week’s financial transactions into Quicken, watching our budget and paying bills.

If I were doing the job properly, it would probably take six hours or more a week. I would be filing documents and pruning old ones from my files. I would be methodically reading insurance policies and pondering coverage changes. I would be finding the best credit card rates and planning my next vacation. I would be looking at my investments and pondering whether to shuffle my funds around.

Needless to say, little of all this interests me. At best I can only see a few years ahead. Seeing into the future is hard. So I’ve hired a financial adviser. The only problem is my financial adviser actually retired, which means I need to hire another financial adviser, which takes additional time and money. I finally found a local firm that I have some confidence in and we are working on a new financial plan. This guy of course brings a different perspective than my last financial adviser. Right now it means feeding him reams of data about our current financial situation so he can sift through it all. Soon he will give me a plan, which is a good thing, until you look at what is required to actually implement the plan. It’s not hard to imagine since I’ve been down this road before. It will involve shuffling lots of funds around. In spite of the fact that I have a financial planner, specifically hired to make my financial life simpler, it looks like I will be spending even more time managing my finances. If I were independently wealthy, I would hire someone to manage the work my financial planner wants me to do.

This whole process is so frustrating. I figure that if I am frustrated by it, most people are even more frustrated. The really annoying part is that it doesn’t have to be this way. Through law we have constructed a large financial minefield specifically designed to profit from general ignorance. There are sporadic attempts to simplify finances for the 99 percent. Federal employees like me have a 401K system called the Thrift Savings Plan. Over the last few years, the TSP has unveiled a plan that automatically moves and rebalances your funds based on your age and planned retirement date. This means that you have one less thing you have to worry about. Many companies contract with financial services firms that offer similar services.

Of course, there is no guarantee that these financial stewards will put your money in the best investment vehicles, but it is better than nothing. At least someone is doing this for you instead of you remembering to do it once a year on your own, something that most of us simply will not think about. Many employers also offer an automatic “opt in” 401K. This too is a step in the right direction, since many of us will never get around to putting away money for our retirement if we have to take explicit action.

Is this socialism? Is it a big nanny state at work? Who knows? These are really just small and measured steps to make the system work for most people instead of those whose paycheck depends on your financial ignorance. We have the illusion of choice in our financial life when the reality is there are so many choices it’s impossible for the average person to work through them all. By default most of us will choose whatever is easiest or least intrusive. In the process we will probably get saddled with poor investment advice and all sorts of usury fees. Moreover, there is no gatekeeper to warn us before we make some really stupid financial decisions. I cringe when I hear about people who use their banks to get investment advice. What a bad idea: to entrust your financial future to an institution that sees you only as a profit center.

Our new Consumer Financial Protection Bureau is a great idea, providing it can stay true to its mission of protecting consumers. Right now it is having a hard time just conducting any sort of business at all. When Republicans win the White House again, its mission, if it is not abolished, will likely quickly steer away from doing anything that actually benefits consumers. Instead it will probably become yet another organ designed to maximize profits for those already reeling them in, adding more financial obfuscation rather than leveling the playing field.

Which means you are likely to keep getting screwed by all those interests that profit off your ignorance and lack of time and attention. If you do not have at least a basic financial literacy you had best squeeze in the time to get it. Or you probably need to get some help, even if you cannot afford it.

What do you do? I have one possible solution: use the in-house financial advisers available at many credit unions. While I don’t believe banks have your best interests at heart, I think that credit unions do. This is because when you belong to a credit union, you become an owner. The National Credit Union Administration has a tool for finding local credit unions. Some credit unions have special requirements for membership, but it is likely that there are several that you could join and that are reasonably local to you. Call them first to see if they have a personal financial adviser and if so what fees, if any, they charge. Any fees they have are likely to be low. In addition by being a credit union member you are likely to save tons of money on banking fees and credit card interest rates. Just make sure when you move your money into the credit union that you also make an appointment to see their financial adviser too. And yes, sorry, but make time in your schedule to practice financial literacy, because you will need it. A Dummies book may be a good place to start.


The Thinker

Wall Street’s puppet masters

Last month I wrote how the oligarchy stays in charge. At the time, the Occupy Wall Street movement was nascent, so nascent that not even I was blogging about it. Since then it, everything has changed. It used to be that the headlines were full of stories about how we need to cut the deficit and lower taxes. Thanks to OWS, the story is now about the chronic lack of jobs, sinking standards of living that seem unstoppable, and a generation of mostly twenty somethings with no real job prospects on even their most distant horizons. They are joined by other large groups of unemployed people who happen to be over fifty, and thus become something like untouchables. Unemployment is a problem at all levels of the workforce. The OWS movement is finally giving it the focus it deserves, and rightly raises the question: why did we bail out Wall Street when none of it trickled down to the unemployed who needed it most?

The OWS movement has at least made me do more pondering about how the wealthy stay wealthy and how the rest of us take it on the chin. There are the obvious strategies that I mentioned in the previous post: the moneyed and Wall Street buy the influence they want. Then there are less obvious strategies: such as using inheritances to pass unearned income to the next generation, wealth that is arguably put to unproductive uses. Then there are the strategies that most people don’t think about.

For example, there is snuffing out potential competition. The oil companies, in spite of their profits, are running scared of the clean energy industry. Oh sure, they are spending lots of money with newspaper advertisements touting how they are going green by doing solar energy projects and the like. This is ninety percent setting expectations and one percent doing something tangible. It’s a try to set up a meme with the public that, “Well, they really aren’t entirely evil just because they want to rip up Alberta’s tar sands.” Those with the money, at least if they are savvy, will continue to spend significant capital to make sure competitive markets don’t emerge.

It’s not coincidence that the oil industry contributes disproportionately to Republican candidates, for instance. This behavior is not seen as anticompetitive; it is seen as pro-business. It’s easy to win the competition when you can use money to set an uneven playing field from the start. Thus money buys not just political power, but the ability to have your message drown out the competition’s. In many cases, you can buy out these threats with your ready capital, often ostensibly to build market share in an emerging industry, but more typically to quietly kill them so business as usual can continue.

This happens all the time here in American but we rarely notice it. Why are there only three major ratings firms on Wall Street? It is in part because the big three have the capital to squash any competition. The government rarely breaks up companies anymore, even after the Great Recession. In fact, despite the lessons of the Great Recession, the trend is just the opposite. Thus, as one example, Bank of America swallows up Countrywide Mortgage and everyone yawns. Money gives you this sort of power. Unless you have an administration and congress full of trustbusters, abuse simply leads to more abuse.

Perhaps the most insidious way to stay in charge is through financial obfuscation. A good example is derivative stocks. The more complex you make a financial instrument, the harder it is to figure out what is really going on. Only experts can really understand how these instruments work, and then only dimly. In all likelihood the only ones who really understand them are those who create and manage them.

That leaves us poor individual investors pretty much baffled. We know we need to invest money for the future but unless the financial entity is incredibly simple, like simple shares of a blue chip stock or an index fund, we are baffled by how it works or how to fairly value them. Instead we turn to so-called experts to give us advice on what represents good investments, for which usually they have a vested interest that disproportionately lines their pockets. To really understand our financial world, you need a PhD in finance plus you have to keep up on the minutia of markets. If you can do this, you can be bought off. Wall Street will hire you for seven or eight figure incomes to manage a fund. Unless you have missionary zeal, you won’t be an Elizabeth Warren trying to simplify things for the average consumer. And if you are Elizabeth Warren, you will find out that politicians have been bought off specifically to keep you out of a position of power.

Yes, obfuscation is profitable, at least for those already in charge, and it effectively drains wealth from the rest of us. We think that to make money we must do it through specially trained intercessors on Wall Street. What we really need are simplified rules and financial instruments that the average person can understand, which implies that many “innovative” financial instruments should probably be outlawed. As we have seen, many were engineered without real failsafes and have cascading effects when they fail that drain wealth principally from those who never directly invested in these instruments.

No wonder Republicans are dead set against a consumer protection agency. They realize that if such an agency were effective, it might level the playing field. And what that really means is that wealth generated through third parties and financial obfuscation might return to where it rightly belongs: to individual investors.

The Thinker

Who wants to be a millionaire?

Not me, at least I never set out with the goal to be a millionaire. When I entered adulthood around 1978 with less than a thousand dollars in my savings account and $5000 or so in student debt, the idea of me being a millionaire someday seemed preposterous. The only millionaire I knew was a character on TV named Jed Clampett, and he had a mansion in Beverly Hills and a cement pond in the back. I kept my expectations more modest. Perhaps I could afford to go into hock for a townhouse, which my wife and I finally did at age twenty-nine. At the time I felt very much overextended, and I was. The first time I wrote a mortgage payment check, my hand actually shook. I had never written a check for that large an amount before and writing a check that big once a month was scary and sobering.

Today, on Good Friday of all days, I updated our accounts in Quicken and found that we had become millionaires. Quicken told me today that our net worth is $1,000,531.14. Approximately. I looked around. Nope, I wasn’t living in Beverly Hills. Nope, Texas Tea was not responsible for our amazing wealth. Nope, no cement pond in the backyard either, although after heavy rains we do get a transient pond, which occasionally will be inhabited by feathered friends. No BMW in our driveway. No butler to fetch my coat. No maid service either; I still clean our toilets. We do have a lawn service. Maybe in 2011 that is one clue you can use to judge if someone is a millionaire. In my case, it is because I am just lazy.

And I still pinch pennies, although not as hard as I used to. There was a time when I kept track of all my cash expenses in a little notebook because I had to make my GS-5 salary stretch to the next payday. Perhaps as a result toward the mid 1980s I started tracking income and expenses. Around 1990 bought a version of Quicken for an antiquated operating system called MS-DOS. Back then our net worth was about $20,000. Still, I had no expectation of someday being a millionaire. For much of the last twenty years I didn’t see how it could possibly happen. Life was just so darned expensive! There were all these massive payments, for the mortgage, for childcare, and to keep our house from falling apart. I needed loans to live my lifestyle, principally car loans, and later home improvement loans. How on earth did we become millionaires?

It is still something of a mystery so I went investigating. One major factor: stocks have recovered. In fact they recovered so well I suspect they are currently overvalued, so my millionaire status may not last too long. In addition, thanks to the recession and all our deficit spending, the dollar has declined precipitously. Which means that a million dollars today is probably the equivalent of $750,000 or so a few years ago, based on what we can actually buy with it. I doubt our purchasing power has gone up that much since the recession began.

We became millionaires principally by holding steady jobs and steadily advancing in our careers, which at least in my case finally got me to a comfortable salary. We did it by investing in us, specifically our educations (a graduate degree for me in 1999, and a bachelor’s degree for my wife the same year). When our income allowed, we saved as much as we could. It also came from living for a few more decades. If you do your best to consistently follow a sound financial strategy, your net worth tends to grow. Another likely factor: having just one child.

It is also true that we were either lucky or canny. I had no idea that when I moved to the Washington D.C. region in 1978 that it would be financially rewarding, at least compared to other places in the country. The high cost of living appalled me, but I had the good fortune to settle in Fairfax County, Virginia, a prosperous county full of beltway bandits and clean industries, mostly of the software kind. It is a place where good jobs were as fungible as money and never required the hassle and expense of moving. While I often groaned while making my house payments, my property values steadily appreciated over the years. Real estate as an investment rarely returns more than inflation, but our house, purchased for $191,000 in 1993 is worth $460,000 today. I expect it at least held its value. We were also lucky. We generally bought in buyers’ markets, getting good value for our money. We could have easily ended up underwater, like many homeowners today. We weren’t bright enough back then to time our real estate transactions to the market.

Building net worth takes tenacity and well-practiced self-denial. It often meant buying used cars when I lusted after new cars, and when buying new cars, buying practical cars like Toyotas and Hondas instead of Lexus and Mercedes Benz. It meant gritting my teeth and adding a couple of hundred dollars to my mortgage payment every month. It meant living somewhat below my income; our single-family house with a one-car garage is modest living. It meant avoiding shiny new toys like cell phones until they got dirt-cheap. My cell phone is currently a $10 model from Virgin Mobile. I still don’t own a smartphone. Since I am by a computer most of the day anyhow, paying $50-$100 a month for an iPhone or Android device seems a poor value.

I still constantly scan the market for real value. Consumer Reports recently recommended the Ooma Internet phone for those of us with landlines who are already paying for high speed internet. I guess we don’t need a landline but we are used to having one for its clarity and reliability, attributes I don’t associate with a cell phone. I currently spend $25-$35 a month for a landline, which includes modest long distance charges. With my Ooma, after paying $249.99 to buy it, I will spend less than $4 a month, all of it going for taxes. I can do all the local and long distance calling within the United States I want for free, forever. My effective cost for a landline will go from $30 a month to $5 a month. Free from my bundle with the cable company, I will now get to play a bidding war between Verizon and Cox for my high-speed Internet and HD TV service.

While we may be “millionaires”, most of our wealth is not easily touched. Our house remains theoretical wealth until we sell it and/or we own it free and clear. ($75,000 to go!) About half of our wealth is invested in retirement assets that we cannot touch without penalties. Perhaps that is why even though we are millionaires I still tread cautiously financially. The kind of wealth where you can rarely think about how much money you are spending still eludes us, and always will.

The Thinker

Looking out for Number 1

I hope I am wrong, but I am predicting a mean decade ahead, particularly here in the United States. Americans may be voting their bum out of office on November 2nd, hoping for real change or genuine bipartisanship, but at least through 2012 they will not get it. Political paralysis over the next couple of years is easy to predict, with a high probability that a Republican House of Representatives will try a reprieve of its 1995 government shutdown. The results of the 2010 census will encourage governors to draw congressional districts even more tightly to ensure even higher partisanship in Congress.

In addition, there are structural problems with our economy that are going to linger, particularly high unemployment. The “government is spending too much” mantra combined with businesses sitting on huge piles of cash but unwilling to use it to actually hire people simply means a prolonged period of high unemployment. And since Republicans in general will block spending on infrastructure and high tech investments, those jobs that will be created are mostly going to pay less. Add to this mess our massive foreclosure problem, wars in Afghanistan that will linger, massive climate change and the natural disasters that they will cause and it is hard for me to be optimistic about anything.

The Glenn Beck’s of the world would have me running to buy gold at inflated prices as a hedge against all this uncertainty and potential turmoil. The problem with gold is that it is not fungible. In any event, the world now runs on electronic currency. I am not worried about a currency collapse, but it’s clear that government is not going to look out for me, the little guy. And due to the Supreme Court’s incredibly bad Citizens United decision, we can expect even more extreme government by and for the corporation. Unless you are very agile and smart, you are going to be screwed.

Since I like prefer to live in the real world, I have been running “what if” scenarios with my financial future. I happen to be a federal employee who can retire in less than two years. Until recently, I assumed that I would never have to worry about my pension. It is as solid as the United States government and its sterling ability to print money, right? However, using Greece as an example, at some point if in the opinion of its creditors a state is insufficiently well managed, the creditors will show who is really in charge. In Greece, the effect has been a sudden reduction in the wealth of its citizens in general and government pensioners in particular.

While the social security system is fully solvent for at least twenty years, Medicare is not and Congress seems unwilling to do much more to make it more solvent. Larger structural issues remain to be solved but of course, there is nothing close to consensus on how to do this, and the situation will only get worse. It’s easy to see that even for a vested civil servant like myself, my pension may be on someone’s chopping block.

While I don’t see my pension going away altogether, I can see the federal government devolving into something like California. I can see mandatory cuts in pensions as well as many other programs in order to make creditors and Wall Street happy. How do you survive this new reality when the assumptions you made for your life plan change fundamentally?

Answer: not very well, as many unemployed and overleveraged Americans have discovered over the last few years. While I have escaped it through the virtue of steady employment, watching what has happened during the Great Recession to those caught in its vice is instructive. It has had me sending emails to my financial adviser, who all along has warned me that the solvency of some of my retirement benefits was questionable.

To some extent, I may worry too much. My wife and I are fortunate because we have mostly lived within our means. We do not carry a credit card balance. Our homeowner’s equity line of credit is now paid off as well. All our cars are paid off too, although we are dealing with the major expense of shepherding a daughter through college. It’s not today I am worried about. It’s my standard of living ten years or more from now when I am living on a fixed income that causes me concern. It’s when Uncle Sam’s creditors are forcing austerity and all that austerity means they are raiding my pension fund and scaling back my benefits. I think it is unlikely that my pension will disappear altogether. However, I do think it is prudent to assume a worst case of a 25% reduction in my pension, 10% reductions to my social security income and a lot higher premiums for health insurance. I am having my financial adviser run the numbers. What would my retired life look like? How can I mitigate now some of these potential serious financial consequences to my future?

Here’s the gist of what I am learning. You may want to take notes. I need to save as much as I can and pay off debt as fast as I can as well. For me, saving more is actually difficult to do. The federal Thrift Savings Plan is essentially a 401-K and I have maxed out my contributions into it. The one thing I can do is put money into an IRA as well, but that is limited to $5000 a year. I could save more as a financial cushion, but there are no tax benefits for doing so, and I must report interest as income.

The second thing I am learning is that I need to get out of debt. We are doing very well there, but we still have $85,000 for so left on the mortgage. This seems the wisest place for me to park any extra income. I have been chipping away at it the seventeen years we have been in the house, but need to be more aggressive. I am looking at strategies like applying all leftover income to paying off the principle on our mortgage.

So basically, to reduce our impact to any financial shocks, we need to be debt free as soon as possible, and save and invest as much money as possible. There are also other strategies that may seem not particularly patriotic. My financial adviser has had me move most of our funds into international stocks, where economies that are growing and the legislatures have more common sense. While Wall Street remains one of the few bright spots in our economy, investing too much money with Wall Street may be unwise, at least over the course of the next decade or so, because it will be buffeted by shocks to federal and state governments that seem likely to continue and exacerbate.

With luck, at some point, Democrats and Republicans will agree on a common path forward. It’s not hard to see what that future will be because it is likely to be laid out for us by events. Eventually we will all find that our lives will become more austere and we will be paying more in taxes. There is no way to escape this reality indefinitely, and no amount of vitriolic partisan clamoring otherwise can change it.

However, if our mortgage is paid off, we have a new real asset: our house. Washington Post financial columnist Michele Singletary made an excellent point recently: those of us who think having equity in our house means we are homeowners are fooling ourselves. We are homeowers, and our home as a permanent as our ability to keep sending mortgage payments every month. You are only a homeowner when the mortgage is paid off. Only then can you truly count your house as an asset and as part of your net worth.

We do own our investments free and clear. Properly managing that so it grows but does not lose value when we retire, that matters and is something we can control. Unfortunately, there are so many other variables that I cannot control. I can change those variables within my control and lessen my overall financial risks, and I can do that by saving like the Japanese, investing wisely and getting out of debt.

You are welcome to follow these strategies as well, which are sound and should be much more viable than buying gold from Goldline. I suspect many of you are younger, start with many more liabilities and have less in the way of income. In general, we all need to acquire the painful habit of living beneath our means to the extent we can and save or invest the difference. In addition, we need to become educated if we are not and continually keep our education relevant to the job market. The unemployment rate for college graduates even during these tough times is about five percent. It’s those with less education who are bearing the brunt of these times. Education in a decently paying field is the key, as well as mastering the social skills to get and retain these jobs.

It’s clear that no one is willing to look out for you anymore. Our safety net is collapsing. So much about the future is uncertain, but following these principles should greatly increase the odds that you will emerge with most of your standard of living intact.

The Thinker

Real Life 101, Lesson 12: The Basics of Investing

This is the twelfth in an indeterminate series of entries that provides my “real world” lessons to young adults. It is my conviction that these lessons are rarely taught either at home or in the schools. For those who did not get them growing up you can get them from me for free. This is part of my way of giving back to the universe on the occasion of my 50th birthday.

Way back in Lesson 2, I covered the fundamentals of personal finance. I hope you used the intervening two and a half years to make yourself financially solvent. Good news: if you are not carrying a credit card debt, you are doing better than many Americans. Your net worth may hardly be in the positive numbers but at least it is positive. Even if you have student loans, providing it has helped you get a decent paying job, this is good debt.

You may be young but you might also have the feeling that old age is going to visit you someday. When it arrives, you know you would not prefer living in a cardboard box under a freeway. You know that to avoid this fate you need to start investing money now, although you might not have a whole lot to invest except for the spare change inside your sofa. Most likely you kind of resent having to save anything at all, but you know that like taking vitamins its one of these things that prudent people do. Where to start? Buy a share of Wal-Mart stock? Open a money market account? Buy gold on the assumption that its value will stay steady during inflationary times? There are an infinite number of choices and it’s so darn confusing!

I can make it easy for you: start with your employer’s 401-K plan. Why? Start there because if your employer offers a 401-K plan they will often match your contributions up to a certain percent of your salary. In other words, it’s free money. It’s true that except in cases of dire emergencies you cannot take out the money before retirement, but you still get to invest more money than you can contribute. In short, you should contribute as much money as you possibly can into your 401-K or similar plan, particularly if you get matching contributions.

Start contributing today and never, ever stop until you are fully retired. This is the golden rule of investing: start early and contribute regularly. Do not contribute a fixed dollar amount. Contribute a percentage of your income automatically with every paycheck. Your income should naturally rise as you age so at the very least you want your contributions to rise proportionately. It is never to late to start investing but the multiplicative factor for starting early is mind-boggling. Starting early means that you have more time to invest and your money has more time to grow. Give until it hurts. Give until the financial pain is just short of excruciating. As your income goes up, try your best to put a greater percentage of your income into retirement funds as well. There is an additional piece of good news: the IRS pretends your salary is your actual salary less your 401-K contributions. In other words, you end up paying less in taxes because you “earn” less. The net effect is you have a little more money available to put into your 401-K than if the money was taxed up front.

If your employer does not offer a 401-K, or even if they do, you can still open an Individual Retirement Account (IRA). In 2009, you can contribute up to $4000 and write it off your taxes, at least if you place your money into a “traditional” IRA. You can also choose a Roth IRA. The difference with a Roth IRA is your contribution is not subtracted from your income for tax purposes: you pay the tax upfront but can withdraw it later tax-free. With a traditional IRA, you pay the taxes on the income much later when you retire for the privilege of paying fewer taxes now. If you can swing it, because younger people tend to earn a lot less than older workers, the Roth IRA is the better deal. As you age you might want to open a Traditional IRA because then you are likely to be taxed at a higher rate than you will as a retiree.

The general guidance for investing is tried and true and fairly well known. In the very long term, invest in stocks or stock funds as history shows that overall they will provide higher returns. In the medium term, buy bonds. In the short term, stick with savings, checking and money market accounts for their liquidity and safety.

What else should you save for? Many smart young people find plenty of incentive to save for their own digs. They would prefer being tied down by a mortgage instead of renting a U-Haul every few years and moving all their possessions. They also have expectations that if they own property, it will appreciate, and their net worth will grow. (The mortgage interest deduction is also a nice tax break, although you may find the cost of maintaining your home can eat up the tax break.) Obviously, you don’t invest this sort of money into retirement accounts. Where to put it depends on how long you think it will take you to buy some property. Most likely, you don’t want to put it into some sort of stock-oriented mutual fund because there is likely to be too much volatility in the stock by the time you need the money. The safest bets are savings and money market accounts, but they produce almost no interest. A good choice looking several years out would be a well-rated corporate bond fund. Also consider a fund that buys Ginnie Mae bonds. Ginnie Mae bonds actually help homebuyers like you buy houses. There is risk of losing money, but it is very small, along with decent potential of above average market returns.

Okay, you are thinking. Where do I buy these sorts of funds? In addition, which ones are good and which are bad? Unfortunately, there is a lot of smoke and mirrors among investment firms and brokerage houses, which they gleefully help create. Real return is hard to figure out, given that returns are rarely guaranteed and many funds charge fees to buy and sell funds. Many funds come with certain minimums and contribution requirements. Billions are spent to shape your perception that firms like Vanguard and T. Rowe Price are smart places to put your money. You would be right to be skeptical.

If you want, you can be your own broker. You can in theory send a check to places like Ginnie Mae or the U.S. Treasury and they will send you bond certificates back. This is too much hassle for most people. When in doubt I go to the most trusted and unbiased source I know: Consumer Reports. I think any smart consumer should subscribe to the magazine, but you can also spend a little money to get access to their online web site. Periodically they rate various categories of mutual funds. Their ratings are not necessarily sure things, but they are good, unbiased bets.

Ultimately what you need is a personal financial advisor. Most likely, that will have to wait until you have enough income to also afford a financial advisor. Banks and brokerage firms will want to sell you their financial advice. Be wary because most likely they put their bottom line ahead of yours. When I finally had enough money to get a personal financial advisor and I chose someone local who was listed on the National Association of Personal Financial Advisors web site. My personal financial advisor makes recommendations to me. I do the actual paperwork to make them happen. He never gets a cut of my earnings, only a flat fee for sound and unbiased advice.

Until that time comes, it is probably a sound strategy to be your own financial advisor. You can supplement your knowledge not just by reading my advice but also by reading some of the many popular books on investing available at your local bookstore. By following the established investing rules I outlined, you are likely to do nearly as well as the financially sophisticated anyhow. The truth is there is always risk in investment, as well as rewards, and no financial guru is always right, not even Warren Buffett. Some approaches will prove to be luckier than others in the short term, but time seems to even out the playing field. Sticking to traditional rules should serve you well until you have the time and money to get your own personal financial advisor.

The Thinker

Financial Winners and Losers

For most of us the current recession, already the longest lasting recession since the Great Depression, is an unpleasant reality. 345,000 jobs were lost in May, which raised the official national unemployment rate to 9.4%, the highest in over a quarter century. While the trend is improving, this is still very bad. The Labor Department estimates 14.5 million Americans are unemployed. If you include the underemployed and those who gave up looking the unemployment rate is 16.4%. Many of us can look at our investments and find they are worth half of what they were before the recession started. Stock market indices reflect this trend. Meanwhile, real estate prices keep plummeting. Surplus homes abound, as financially distressed people walk away from their mortgages. All these statistics document that the economic pain is pervasive and widespread.

Yet despite all this pain, there are winners out there, many of whom are profiting from our pain and losses. Fahreed Zakaria, a Newsweek columnist, recently documented some of them. China’s Shanghai Index is up 45%. Brazil’s stock market is up 38%. Indonesia’s market is up 32%. Retail sales are 15% higher in China this year than they were a year ago. In India, car sales are up 4.2% compared with a year ago. All these countries are expected to grow this year while most of the rest of the world’s economies will contract. Learning why these countries are bucking trends is interesting. What it amounts to is that they are not overburdened by debt. Consequently, they have plenty of money to spend and invest. For cash rich countries like China, right now the world is a bargain. That is why they are buying foreign energy companies and purchasing mineral rights. The effect is to rapidly extend their influence across the world, simply because they own more of it.

Americans are belatedly discovering that not all forms of wealth are equal. The value of stocks and homes in particular are directly tied to the current state of the economy. When the economy tanks, they lose proportionate value. When the economy tanks severely, your house can have negative worth, flipping from an asset to a liability. Stocks too have little value if you need to sell them in a recession. Many Americans today feel compelled to sell their stocks, usually acquired through a 401-K plan, simply to survive. They do so in part because whatever meager savings they had acquired have been spent trying to hold on to their lifestyle. On the other hand, savings are more tangible as well as reliable. Perhaps that is why Americans are belatedly getting the religion: an old-fashioned savings account is good, not bad. Savings rates, which were at 0% before the recession are now at 5.7%. However, savings accounts do not offer a complete panacea either. The reason we bought stocks and houses in the first place is that inflation often ran ahead of on the marginal interest we might have earned on any savings.

Like the Chinese, Americans who find themselves cash rich in this recession now have an opportunity to shop for bargains. Our nation is now one big red light sale. With a few exceptions like health care, there are bargains everywhere, but particularly in housing, stocks and commodities. The smart Americans who kept their jobs and have sizeable stashes of cash should be scooping these bargains up.

Like most Americans, I do not have huge sums of readily available cash to invest. What amounts I do have I am tempted to invest in good undervalued stocks. Take General Electric. GE is perhaps the best-managed company on the planet, having sat on the Dow Jones Industrial Index since 1906. Its stock price actually slipped below $6 a share briefly in March, largely due to its financial subsidiary. It is currently trading at around $13 a share, but over the last decade, its price has been $30 to $40 a share. Shrewder investors than me may see red flags in owning GE stock, but I suspect it is a bargain. Likely, many other well-established companies out there can be purchased at a substantial discount too, only because the current economy substantially discounts their long-term worth. Their worth is discounted in part because people have to sell stocks to turn into cash to pay immediate expenses.

What lessons can we learn from this miserable experience so we do not repeat it? One may be a lesson I learned in 1988: unemployment sucks. I have remained fully employed since then because I have remained a civil servant. Private industry is certainly important, and in the short term often pays better than the public sector, but it is also inherently chancy. Having a steady paycheck during turbulent times is a great blessing. In my case, it is also a blessing to know there is little likelihood that I will be fired if the economy tanks further. As a civil servant, I will never be a millionaire. On the other hand, I should have steady employment. Moreover, when I retire I will have a pension to draw from, as well as social security and investment income from my 401-K. While I am unlikely to retire to a lavish estate in the Hamptons, neither am I likely to eat dog food in retirement. I am likely to have what now seems to be vanishing: a real retirement that should include occasional trips to exotic locations as well as good medical benefits, which are increasingly important as I age. I was not thinking about these things nearly thirty years ago when I first joined the civil service, but in the current economy, my decision looks smart. If you feel like a piñata from the last couple of years, perhaps it is time to consider some place other than private industry as a career, whether it is government service, a religious institution, a non-governmental agency or a nonprofit. There is no requirement that you have to spend your life in rough career waters.

Speaking of careers, if you have looked behind the unemployment numbers, the value of advanced education should now be clear. While people with bachelor or better degrees were affected by the recession, as usual they did better than those with just high school education. Where were the most jobs lost? Simply drive through the rust belt. Manufacturing took the biggest hit, and manufacturing jobs tend to require fewer skills. Also disproportionately affected were service related jobs that depend on the economy. When people have less money, they travel less, so we have lots of unemployed pilots, flight attendants and baggage handlers. When people have less money, they are not buying houses, which is why many realtors are working part time at best. With less money in circulation, there is less need for bankers, stockbrokers and securities dealers. The lesson: advanced education reduces risk of unemployment as well as usually pays better. Advanced education is needed not just because it pays better but because our world is more complicated. It needs increasingly more people with the advanced skills to manage and understand it.

I hope that some of us are learning to be thrifty. As someone raised from children of the depression, thrift came naturally to me. Apparently, it did not to many of my generation, because so many are overleveraged. The recession should teach us that many of the things we thought were necessities are luxuries. A family does not necessarily need two cars. My family survived on one car until I was out of the house. You don’t have to shop at Harris Teeter when a Shoppers Food Warehouse will do. You don’t need to buy shoes at Neiman Marcus; you can get a decent pair at Payless. If you are smart, you will funnel the difference into savings.

And speaking of savings, if you are rich enough to put in money for retirement but not rich enough to have at least six months of expenses in a savings account, perhaps you should at least be channeling some of that investment money into a savings account instead. In actuality, six months of living expenses is considered on the low side. You would be wiser just match your employer’s contribution into a 401-K (or perhaps put just 3% if they offer no match at all) and funnel the extra into high yield savings accounts. Unless your job is very secure, have the goal to accumulate at least 75% of your yearly expenses into a savings account.

By saving money instead of borrowing it, you make yourself more financially secure and you help turn the United States into a creditor nation again. Until 1978, we were the world’s largest creditor nation. Now we are the world’s largest debtor nation. The United States still has the world’s largest economy. These dynamics can be turned around, if we take time to learn from this recession. If we do it right, the next time a global recession rolls around we will be prospering like China and Indonesia instead.

The Thinker

A grave business

Life is about living, right? So why spend any time at all planning for death? After all, there are few things more certain in life than death and taxes. Once you are dead, unless you are Jesus Christ, you can forget about coming back to life. The best use of my corpse will be pushing up some daisies somewhere.

Alas, my passing is of interest to my financial adviser. For the two years I have had him he has been pushing my wife and I to plan for being dead. These days though, just writing a will is not good enough. You need many documents, all of which are vital for keeping lawyers in Birkenstock and driving their Mercedes Benz. Apparently, in addition to a legally enforceable will, I need Power of Attorney statements, a trust until our daughter is old enough to spend her inheritance wisely and a life support directive. Death is apparently a very complicated thing, at least for those you leave behind.

Just because I am dead, I would not want to burden my loved ones, would I? Hmm, maybe I would. I mean, I do love my loved ones. That comes with the definition. However, from my jaundiced perspective, I have given more love to them in love than I have gotten back in return. Yeah, I know, it’s good to give more than you get. But isn’t the least they can do for me when I am departed to deal with a few inheritance squabbles and tax issues? Knowing my future deceased state, does it require an extra level of love while I am alive beyond which I have already borne out in my fifty-two years of devoted service?

How do I know that this world is real anyhow? It sure feels fleeting. Maybe nonexistence is real and life is surreal. Maybe I am like Neo in The Matrix and when I die, I wake up to find my life was just a wild dream. If life is a dream, why bother with the drudgery like wills and such? Why not just live in the moment and get as much enjoyment as you can from life?

Maybe that’s why I’ve dragged my feet on updating my will. The last one is nearly fifteen years old and was done by a friend, and just so my wife and I could feel comfortable going out of town without our daughter. Because it turns out that planning for your mortality is a complex business. Naturally, this being the United States of America, there is no simple way to make your wishes known. Instead, you need either pricey software or a good attorney or two, and likely both witnesses and a notary too.

Here is my idea of how it should be done: each state and/or county would have a web site. When you want to complete your will, you they would provide you with a way to legally authenticate yourself. You would go onto the web site and be presented with a standard will complete with a number of “most popular” checkboxes and open text fields. For 95% of us, this would work fine. Since I am married, if I die first, I want my wife to get all my stuff. The same is true with her. If we both died at the same time, our daughter would get the bulk of our estate. She’s no longer a minor, but if she were I should be able to fill in that part of the web form where I indicate who would be the custodian of our child, who would oversee the estate, and enter the disposition of important heirlooms. It should take a half an hour maximum, be all done electronically and remain on file in the county clerk’s office. It would be accessible if necessary so properly credentialed officials, like the doctor in the emergency room, could also get the information.

You can write some things in your will that will have no practical effect. For example, do you want your body buried or cremated? Where should your remains go or be placed? Should your body go to medical science? Wills are read weeks or months after the deceased passes, so it is best to tell your family your wishes on what to do with your corpse. Yet, the county could easily collect this information in a central database. Every five or ten years, say whenever you renew your driver’s license, you would be required to recertify your electronic will. All this strikes me as a perfectly logical way the government could become more citizen-centric.

However, because I suspect that my survivors will otherwise engrave, “The bastard didn’t even bother to leave a will” on my gravestone, I have much belatedly decided to work on all these death documents. I quickly discovered why I dragged my feet. They are expensive to get right, particularly if you have lots of money and assets. After all, you do not want your loved ones to deal with complex things like probate taxes. No, you want to create a trust instead and screw Uncle Sam. I called one of the more prominent firms around us and found out that a modest set of these documents cost in the $3000-$5000 range. How many of us has that kind of money to throw around?

There is software you can buy, like WillMaker, but I remain a bit leery that it will not write the proper words or know precisely how to have forms properly notarized, witnessed and filed. So I did the next best thing, and shopped for a discount lawyer. It turns out that if you have to hire a lawyer, this is a good time. Many have been downsized and are scrambling for work, working from offices in their home. I found one via the user comments on Washington Consumers Checkbook. (Warning: you must subscribe to see the user comments, and they are not of much use if you live outside the Washington D.C. metropolitan area.) The lawyer even offered me a recession special: all the right documents done for a little under a grand. This still seemed like a lot of money, but it did not seem outrageous.

It turns out that what matters most is likely not the will itself, but various power of attorney statements and emergency medical directives. Do I want the plug pulled if three doctors agree that I am a goner but I cannot speak for myself? Who should speak for me when I cannot? Who can and should pay the bills or act when I cannot? Like most Americans, these obligations would fall to my spouse, but if she is not available, then who? For now, it seems safer to entrust this decision with a sibling. That may change as we age.

It will probably be money well spent, but in my deceased condition, it will mean nothing to me. We invited Carrie (the attorney) out to our house.  She told us much about the legal business of death and dying that we needed to know but about which we would have preferred to remain ignorant. We have been marking up drafts of documents she has cranked out, plodded through other verbose documents and keep trying to remember why we are doing this in the first place.

The good news is that when she is done we will have a set of PDF documents that we can easily update at any time, to name new executors and the like. We hope to have a final signing in our living room a week from Friday.

Dying is ordinarily a messy and depressing business, as is handling the estate of someone. Wills provide some comfort that the process may be less messy. As I discovered watching my mother decline, it is bound to be both messy and heartbreaking for those who go through it. Given these facts, much can and should be done to make it less onerous and expensive. With major economic crises underway, straightening out the business of death and dying is probably on no one’s radar. I hope someday someone will tackle it because the current process is unnecessarily complex and expensive, making it hard for the many who need these documents to acquire them. In the end, it is of most use to those who profit from it.

While death is inevitable, estate planning need not be the equivalent of rocket science. Instead, we could use the time and the money on worthier endeavors like enjoying the short life we were given.


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