Here’s why the improved economy means so little

The Thinker by Rodin

The stock market is reaching record highs again, which make us moneyed people woozy. I’m modestly including myself here although I’m not that well moneyed. But I am retired on a nice pension with plenty of assets to draw on should things go south. The Dow Jones Industrial Average passed 27,000 yesterday and closed for the week at 27,322. Not bad for an index that dropped to 6547 on March 6, 2009, a little over ten years ago.

Happy days are here again? It might help to wonder why the market indexes are so high. The most recent surges are almost surely due to the Fed’s strong hinting that it’s going to reduce interest rates soon. Maybe Donald Trump’s bullying is getting to the Fed, but much more likely the Fed has read the tealeaves and suspects a recession is getting started and is trying to prevent one. And it’s enough to calm Wall Street and make them think happy days will keep on coming.

You don’t have to look hard though to find worrying signs: tariffs are slowing trade, commodity prices are dropping, and the percentage of people in the workforce keeps dropping. This is artificially keeping the unemployment statistics low. Consumers are taking on the same levels of record debt they took on before the Great Recession and Republicans have managed to repeal many of the key safeguards put in place to keep it from happening again. Student loans passed the $1T mark, sucking money from these former students’ wallets that they can’t spend on actual goods and services like houses. Perhaps in response, mortgage rates are dropping again, which is actually not a good sign. Banks are trying to entice people to buy houses, so the lower the rates go the harder time they are having finding people who can afford to take out a mortgage.

Still, many of us including me have been expecting calamity and have been wondering why we have been proven wrong. There are a few positive signs. With unemployment low, workers can bargain for higher wages and it’s working, sort of. They are beating the cost of living by .5 to 1% annually. That doesn’t translate into a whole lot of money, but it beats the decades of wage stagnation we’ve been experiencing. This is hardly the end of wage stagnation, but it is at least a hopeful sign.

Donald Trump is wondering why he isn’t getting more traction on the economy. That’s actually his one bright spot, with a slim majority approving of his handling of it, while his overall approval ratings seem mired in the low 40s. 40% of Americans still cannot find $500 to draw from in an emergency. It could be they are all inept at financial management, which is what Republicans would like you to believe.

The real reasons are much simpler. Much of today’s work requires people with fewer valuable skills, which mean they can’t command as much in wages. That’s why they are working two or three jobs to pay the bills. Even this is not enough, which is the real reason they can’t find $500 and are living paycheck to paycheck.

But there’s one other important factor that is often overlooked. Certain things cost a lot more than they used to (housing is a prime example) and there are other things that cost dramatically more than they used to. The most likely reason you will get thrown into poverty is if you need more medical care than you can afford. The Affordable Care Act was a good first step, but it wasn’t nearly affordable enough, despite the subsidies. You still needed enough income to pay for the bronze plans. And since they came with high deductibles, they mostly only bought catastrophic protection. All those deductibles, copayments and coinsurance payments cost a heap of money and all of it needs to be in the form of disposable cash, which for the most part these people don’t have. They still can’t afford to be sick. Of course, a lot of states won’t offer health care under Medicaid to these people, which they probably could afford if it were offered because copays are minimal when they exist at all. Medical price inflation is still insane and there are fewer mechanisms to check it. The magic of the free market has proven largely illusory with health care costs.

It’s no wonder then that surveys show that for most voters it’s not how well the economy is doing that matters, but how well their economy is doing — and it’s not going that great. The good news is that there is work out there for pretty much anyone who wants it. The bad news is that without a lot of high-paying skills, at best you can barely get by on the wages you are earning. Voters have figured out that health insurance really matters, and it’s their number one concern now. Those who had Obamacare realized that at least for a while it cushioned financial shocks. But they also need health care because they can get sick and simply can’t afford to get well. There are people driving hundreds of miles to Canada regularly just to buy insulin at affordable prices.

While it’s true that Donald Trump is widely seen as unlikeable and unpresidential, what voters are really understanding is that government needs to actually govern, and so little of it is happening. A president can be thrown out after four years, which is likely to happen to Trump. But we need a Congress that compromises in the public interest and tackles real problems like immigration reform and the lack of affordable health insurance ten years after Obamacare.

It may be a long wait. The Supreme Court recently decided states were perfectly free to gerrymander based on political party. In short, it’s allowing states to stay in the business of incumbent protection, making it harder and harder for people to actually have a true republican form of government. With our courts now largely in conservative hands, it’s hard to see how this can change.

Which is why Bernie Sanders’ call for a political revolution makes a whole lot of sense. Achieving it without wholesale insurrection though looks incredibly improbable.

Affording retirement and running the numbers

The Thinker by Rodin

I’m a bit anal about money. It probably comes from being a child of someone who lived through the Great Depression. So our retiring last year was a leap of faith. Of course being anal about money, I spent some time with our financial adviser basically to hear him tell me we could actually afford to retire. I retired, but didn’t quite believe it could last, particularly when we started spending thousands of dollars fixing up our house to sell it. The money going out far exceeded our retirement income.

April 29 is our settlement date, but will be important for another reason. On that day for the first time since at least 1981 I will be debt free. That’s because with settlement I won’t own a house anymore and thus won’t have to sweat the mortgage payment. Never mind I never technically owned it. I never got the mortgage balance to zero, although the balance is now under $20,000. With settlement the loan balance will be paid off. We expect a check for about $440,000, which will probably sit in a high yield checking account for a few months. Then it will go to purchase the next house.

We have no car loans and our home equity loan will be paid off at settlement. So we’ll be living totally debt free, assuming we don’t take out a mortgage on the next house. That’s our goal although we will probably draw from other savings to pay cash for our house to avoid a mortgage. Over the years we refinanced our current house twice, so our mortgage payment has lately been under $1200, and that includes escrow for property taxes. $1200 a month is very cheap housing in Northern Virginia, particularly since the next owner of our house is paying $505,000. Even with 20% down he will likely have a monthly mortgage payment in excess of $2500. Mortgage payments will hopefully soon becoming a distant memory for us.

No mortgage payment frees up a lot of cash, which is a good thing for many reasons. One reason is because when you are retired, you live on less money than you used to. To enjoy the same standard of living, you pretty much have to pay off your mortgage. Until recently I wasn’t confident that we could actually do it, and it has made me nervous. Now it’s becoming clear that we can actually retire without sacrificing our standard of living. More money will still go out for a while. Simply moving our stuff will cost us close to $5000. There will be settlement fees with the new house, perhaps a couple of thousand dollars. And there will be one time costs with moving into a new house, which mostly involves window treatments. Toward autumn though these should be in our past as well. With time I hope we can recoup these major one-time expenses.

I do know that when we move to Massachusetts we’ll be spending far less to live. Moving to “Taxachusetts” is supposed to be just the opposite, so much so that Massachusetts is frequently cited as one of the most expensive states to live. In our particular case, most of our income is my pension. Massachusetts won’t tax this income. Running the numbers today I quantified the savings: about $380 a month. These savings essentially continue until we are dead. Assuming we live 30 more years and never move out of Massachusetts, that’s $136,800 we can spend on something else.

With a new house under construction, we’ll be renting for three to four months. We’ll be paying $975 a month to rent a two bedroom, one bath apartment in Easthampton. Rent is not the same thing as a mortgage and since we are renting month to month we have no legal commitment beyond the end of the month. The landlord takes our rent and pays for the apartment’s upkeep as well as its property taxes. As a percentage of our monthly income, $975 will be hardly anything and much less than we pay to live in our current house, when you add in the other expenses like lawn care and water.

Of course it’s not quite that simple. We will eventually move into our house paid for with cash, but houses have expenses too. Our property taxes will be more, $15.80 per thousand dollars of assessed valuation, last time I checked Northampton’s property tax rate. We’ll pay more in property taxes in Massachusetts than we do in Virginia, about $1300 a year more. Property taxes alone should cost us around $620 a month, which is as much as a mortgage payment in many places. Since we’ll be in a condominium, we’ll pay about $350 a month to the condo association, compared to $62 a month we pay now to our homeowners’ association. However, the condo fee includes exterior maintenance, so I won’t have to worry about having the money to replace the siding or the roof. Electricity and water are likely to be more expensive as well, although many houses install solar panels and often get credits from the power company for putting electricity into the grid.

So there’s no way yet to fully quantify our net savings by relocating, retiring and selling our house, but it is likely to be substantial. I don’t expect that we’ll have more money to spend as retirees than when I was working and making more money. That will become clear in time. With a relatively fixed income it will become important to track expenses against a budget and regularly adjust our lifestyles accordingly. Not all costs can be anticipated. But it looks like on April 30 we will not only be debt free but retired both in body and spirit.