I’m betting on a recession

The Thinker by Rodin

In a recent post, I suggested leading a logical life. It’s logically the logical thing to do.

Of course, it’s hard to say what is logical, as there is a lot of murkiness in the world. To deal with the murkiness, sometime toward my late forties I hired a financial adviser who gave me all sorts of logical advice about how to manage our finances. It was good advice. He must practice his own advice because after he retired I found another financial adviser so the good times could keep coming.

His advice costs me a few thousand bucks a year, but I figure it’s worth it. I likely wouldn’t be as successful financially on my own, as the ins and outs of markets leave me bewildered. Markets really don’t make a whole lot of sense. One sensible piece of advice that investors will hear from reputable advisers is not to time the market. Find a sound financial strategy and stick to it. Ride the ups and downs in the market. Always think long term.

It’s been good advice. As I noted in previous posts, our wealth is a result of investing regularly, but it was greatly assisted by the collapse of markets in the Great Recession. By accident instead of design, I ended up buying lots of funds when they were grossly undervalued and watched them steadily appreciate over the last decade.

Buy low, sell high is great advice too, but you never really know when a stock or a fund is a good value. Currently the cost of buying into the market is quite high, by historical measures. I don’t trade in individual stocks. Like most Americans, I trade in funds: mutual funds and ETFs for the most part, along with various commercial and government bonds. It makes sense: any individual stock can have huge fluctuations. I find safety in market baskets of similar funds instead.

Every year when I think stock prices can’t get higher, I seem to be proven wrong. 2018 turned out to be a no-growth year because of a selloff in December 2018, but 2019 was phenomenal, with funds up more than twenty percent. It’s crazy but looking at our investments, since we retired in 2014 we’ve nearly doubled the value of our portfolio mostly by doing nothing but periodic rebalancing.

Given all this, it would seem foolish to start cashing in our chips. And yet today, that’s exactly what I did. I didn’t do it with our entire portfolio, just with the part I control. Our financial adviser oversees our assets in TD Ameritrade, but I oversee the funds in my Thrift Saving Plan (TSP), the federal government’s 401K system for its employees when I was one of them. Until now I’ve been mirroring in that fund the plan our adviser has been recommending in our TD Ameritrade account: 60% stocks, 40% bonds. Today I issued an order to the TSP to rebalance these funds to 40% stocks and 60% bonds.

Crazy? It might be. While no one can time the market, for a long time I’ve been queasy about being so highly invested in stocks. Our financial adviser said not to worry because my pension means that we can assume more risk, and thus reap greater rewards. And he’s been right. I keep waiting for this house of financial cards to collapse, but it doesn’t seem to be doing that.

While not an active investor, I do watch a fair amount of financial news and look at trends. Certain mega-trends that have me worried. What I keep seeing is that we’re doing the same stupid stuff that led to the Great Recession. It really looks like we have a credit bubble underway. If this bubble pops pretty soon, I’m going to look smart. If it doesn’t, I’ll look kind of silly. But consider these statistics:

  • Corporate debt is now higher than it was before the Great Recession: 46.5% of GDP in 2019
  • Credit card debt is at an all time high of $930B, which is $60B more than at its peak before the Great Recession
  • Auto loan delinquencies are at an all time high too, past the Great Recession rate. Some 7 million Americans are 90-days or more behind on their payments
  • Overall household debt is at a new high of $14.15T, as of the end of 2019
  • Student loan debt is at $1.4T at the end of 2019, and no one realistically expects most of these loans will be fully repaid
  • Wage growth has been mediocre. One percent real wage growth per year is certainly better than no wage growth, but it’s hardly a shot in the arm to the economy, which is probably why debt is up so much. The real cost of living is much higher than this mediocre wage growth which means most Americans are treading water financially. To the extent lower wage workers are doing better, it’s largely due to raising the minimum wage in more progressive states and localities.

The Fed is keeping the economy primed by injecting cheap money into the economy, which is encouraging the record high debt statistics. Because Trump’s tax cuts benefited largely only the rich, who can’t spend much of this new wealth, the Fed has to prime the economy instead.

On the plus side, mortgage default rates are half what they were before the Great Recession, which is probably because it’s still harder to get a mortgage than it was before the Great Recession, when pretty much anyone could get one with no money down.

All of this strikes me as showing that our economy is fragile and built on large amounts of unsustainable cheap credit. Certain sectors of our economy are in recession. Many nations are already in recession. Then there is the fallout from trade wars and now a coronavirus to worry about. Given all these risks and the huge credit bubble, my gut tells me that things are overdue to fall, perhaps spectacularly again. And when they do, the Fed will have few tools to use.

In general, stock prices strike me as crazily overvalued, pumped up by cheap credit and stock buybacks financed by cheap credit. All this cheap credit is encouraging unhealthy levels of debt by all sectors.

Obviously, I could be wrong on all of this, but reallocating about $100K in our portfolio from stocks and toward bonds lets us reap these inflated stock prices before most catch on that these assets are wildly overvalued. Also, when stocks return to more reasonable prices, we could buy them cheap again.

We’ll see what happens but I’m betting I made a smart move today.

Live a logical life

The Thinker by Rodin

As you may have noticed, there are a lot of illogical people out there doing a lot of illogical things. It seems large portions of our population are into doing stupid and counterproductive stuff, making things bad if not for just themselves, then for the rest of us too.

It’s easy enough to start with Donald Trump, but you can throw in virtually the whole Republican Party as well as many Democrats. It’s easy to pander to your emotions because emotions are much more powerful than reason. This is being used against us.

For myself, while my decisions are not entirely logical, I strongly believe in trying to act logically instead of emotionally. I look at the world around me, look at my assets and do my best to make logical decisions. If I can’t get others to do the same (it’s not from lack of trying, and in many ways is the theme of this blog), then at least I can do it for myself.

Consequently, when we retired, my wife and I bugged out of town. Our house was paid off but we still bugged out of town. Part of our relocation adventure was simple restlessness; we had lived in the Washington DC area for more than thirty years. But it was also easy to see where things were going to go, as we were living with them even back then.

Life in DC’s burbs was expensive and getting more so. The climate was hot and muggy even thirty years earlier, but was worse now, along with the air quality. So the answer was pretty straightforward: move some place less expensive, more natural, less congested, further north where it’s cooler and somewhere safer in general.

We ended up in western Massachusetts. We endured about two years in a long adventure in retiring, selling a house and relocating, then setting up a newly constructed home. We’re living nowhere near a beach; in fact our new house is on a hill. So rising seas won’t affect us, but even massive flooding it shouldn’t affect us. The water should run downhill, thanks to our new house’s excellent drainage system. Earthquakes are almost unknown around here, along with most natural hazards. We’re starting to see an occasional tornado, but for the most part our lives should be hazard free.

Our big move was basically a once in a lifetime event. We certainly didn’t have this as a viable option during our working years. The good thing about the Washington area though was that despite its high costs and hassles, jobs were easy to find and in general they paid quite well. It was more luck than great planning that we ended up in that region, but once there we were at least smart enough to use the areas resources intelligently. We mostly lived within our means, mostly made sound financial choices and definitely stopped at one child. We ran the numbers and a second child would leave our standard of living significantly impaired.

You don’t have to choose to live life with the blinders on, but it seems to be the default for most of us. Maybe it’s exhaustion from all the other stuff going on in life that makes it hard to focus on longer-range stuff. The thing is though that only you can direct your life, and if you don’t do it intelligently and logically, you life is likely to end pretty messy and full of tremors.

We weren’t perfect. We had no master plan in life and went with common horse sense much of the time. If I couldn’t summon up the energy to create a twenty-year plan, I could summon the energy to redirect any excess money into paying down our mortgage or in getting a home equity loan to cut finance costs for many of life’s major expenses.

I have learned that by paying attention to life and investing time in thinking about your future, you can make your future. There are always unknowns and no guarantees in life, but if most of your actions in life are logical and follow a sound strategy, your odds of ending up where you want to end up someday greatly increase.

It requires time, clear headedness and hopefully some engagement. It also requires curiosity into how others are doing it successfully. Directing your life instead of letting it direct you can be very empowering.

Around 1990, I started tracking our household income and expenses. Simply doing this roused my curiosity in an area that I hadn’t thought much about earlier. I did know I was sick of having bills come due and not having enough cash handy to pay them. Thinking about our income and expenses meant we started planning. It was just a little at first, but as time and interest made possible, it grew into longer-range plans. As I thought about these goals, I had to measure them against what our lives were and think about to achieve them.

It meant some hard choices. For example, there was my decision to go to grad school while maintaining a full time job. For about three years my life was pretty hellish, but fortunately it paid off in promotions and more income. Surmounting this challenge also brought new confidence – I can do this – and led me to find the confidence to take some job risks that paid off.

After September 11, working in downtown D.C. looked simply dangerous. It wasn’t hypothetical, as I was working downtown when that plane hit the Pentagon. Our building was right next to the train tracks. I decided that this fear was telling me to find a job closer to home, without the commute, and I eventually succeeded. Turning my mind to the problem helped me build the future that I wanted. Being three miles from work instead of thirty turned out to be a terrific decision, and the job I landed was also just right for me.

Now I live something of a gilded retirement: financially secure, away from the more obvious threats in life, plus I found a new community that really agreed with me. But it didn’t happen from hoping and wishful thinking. It happened by being logical and by planning and listening to my gut.

I am hoping my country can wake up and do the same. It won’t be easy. It’s much easier to let your right brain run amok.

Reaping the benefits of the Great Recession

The Thinker by Rodin

One of my life’s little mysteries is why I was suddenly able to retire three years ago at age 57. Granted that I wanted to retire and as one of those rare retirees with a comfortable pension I was more able to retire than most. Recently a sister announced her retirement effective January 2nd. She will beat my young retirement age, retiring at age 55. She does not have a pension like me to draw from, but she and her husband are childless. Doubtless that was a factor. Most of my many siblings though are still working, some unhappily, and about half are older than me. Some I know prefer to keep working as the idea of retirement does not agree with them.

All this led me to ponder how we did it and what lessons you may take away from it. Much of what they say is true: start saving for retirement early, the earlier the better. Be relentless about this kind of saving. I did it through payroll deduction increasing the amount to periodically painful levels. At age 50 here in the United States you have the option to contribute additional money tax-free toward your retirement, so called catch-up contributions. I took advantage of that in my last few years of employment. Generally you are in your peak earning years then so it’s not harder to pour more money into your retirement pot.

While I found this all to be true and was reasonably systematic following these principles, I was often a slacker. I was in my 30s before I started saving for retirement, later than recommended. I was in my late 40s before I took a retirement seminar and found the time and money to integrate a financial planner into my life. One factor was that I was reasonably well paid, being in the IT business and in the last ten years in a managerial role. It wasn’t enough to buy a BMW, but it was enough to regularly have money left over and take nice vacations. When you are paid well it’s much easier to put money aside for retirement.

Still I just didn’t understand how we did it, so I was looking in Quicken the other day. I’ve faithfully used it since 1992 to track this stuff; I just don’t often analyze its numbers. Toward the end of 2008 the value of my 401K was about $162K. When I retired six years later its value was $323K. In those six years of course I had been putting a lot more money aside, but not $161K worth. Today, even though I have been withdrawing $1900 a month from the 401K since February 2015, its value is at $446K, so it’s gained $123K over just three years while taking $50K out of it. I should add that my wife also has a pretty good 401K nest egg that we haven’t touched yet. Our income is a combination of my pension and my 401K withdrawals. With some supplemental income of about $10K a year, we are living a comfortable retirement on $100K to $110K a year. It’s made more comfortable because we have zero debt. The house is all paid off, as are our cars.

So what happened to my sister and me that we are able to do this? It turns out that a lot of my sudden wealth was due to the Great Recession. It’s hard to quantify though but my guess is that it is 50% due to riding and profiting from the Great Recession. And I am sure we are not alone. While plenty of baby boomers are struggling financially, many of us are moving into early and comfortable retirements thanks to the Great Recession.

That’s because of a great wealth redistribution that in effect happened during the recession. Think about it. At its low point in February 2009, the Dow Jones Industrial Average (DJIA) was at about 8000. Today it is at around 21,000. The DJIA overstates the growth in the economy but it is an important benchmark. Over about nine years the index grew at an average of 18% per year.

In February 2009 stocks were incredibly cheap by today’s standards, and even by the standards of that time. Stock prices reflected a general sourness that people felt about the economy. No question that it was a scary time. The unemployment rate peaked at over 10%, huge amounts of paper wealth disappeared and those close to the financial edge lost homes, incurred additional debt and in many cases saw their income plummet. Stocks were traded in for cash for whatever the market would bear just to pay expenses. When stocks are traded someone else is buying. One of those people was me, at least indirectly. I was still buying funds via my 401K through regular payroll withdrawals. “Buy low and sell high” is the general advice you are given if you want to be an investor. I hadn’t intended to buy at a low rate, it just worked out that way. For years I bought stocks via mutual funds that turned out to be woefully undervalued.

With help from my financial advisers I was able to capture that wealth too, moving more of it into fixed assets like bonds. What goes up must come down, so there will be another recession in our future. But with a sizable portion of my 401K now in bonds, I can ride out the ups and downs in the stock market.

Curiously it was just the opposite from my late father’s experience. When the Great Recession hit he and many in his retirement community had to finance their retirements with cash. It was challenging because many did not have enough cash and bond funds to fall back on. He sold some of his stocks likely at a discount to keep going and hoped that the Great Recession would finally end.

It’s hardly a secret that the top 1% have vastly increased their wealth over the last few decades. During the last decade, they likely have you to thank. They picked up those sweet discounted assets that you sold and held onto them until the markets recovered. The low taxes on capital gains certainly helped in accumulating this additional wealth. To a lesser extent it raised our financial boat too, artificially so it seems to me. I too profited from your financial mistakes and misfortunes but until I put it together recently I never understood it.

And this has been the secret to much of my financial acumen: sheer luck but well timed financial calamities that I was able to profit from. We were similarly blessed with the timing of home purchases, with generally low inflation over the last few decades and steady employment. Yes, we did a lot of the “responsible” things that responsible people should do. But had the Great Recession never happened I’d likely still be working full time and probably not enjoying it that much, still waiting for a day when I felt it was safe to retire.

Financial management on a fixed income

The Thinker by Rodin

My stepmother says that retirement is just another stage of life. After two years of retirement I’ve learned that she is right. It’s definitely a new stage of life for my wife and I. Many of the old rules no longer apply. For one thing, the rules of managing our finances have changed pretty drastically.

For example, when we used to have a mortgage, the bank did a lot of the thinking for us. They figured out our probable property taxes and paid them automatically for us. Since they had a stake in our house, they also worried about our home insurance and insisted on paying that too. All we had to do was give them a fixed amount of money every month in addition to our mortgage payment.

That’s changed. With no mortgage, my financial life actually got more complicated. Instead of one convenient payment, I now have to think about setting aside money for property taxes and home insurance. These are not exactly trivial expenses. Our property taxes are close to $8000 a year, which means I have to have $2000 set aside every quarter to send to the city, no ifs, and or buts. Moreover I (not the bank) need to remember to send these payments in. It used to be so simple.

Almost by definition when you retire you live on less money than when you were working. If you screw up your personal finances it becomes harder and more painful to make up for excessive expenditures. Because I am pushing 60, I cannot assume I can go out and find another job to make up the difference. This means I have to watch how I am spending money. When I see large differences between expected and actual expenses, I have to figure out what to do about it. The choices boil down to pulling money out of our portfolio on the assumption we won’t spend it all before we die (always a chancy proposition) or cutting expenses. Yes, it’s possible to take out a loan to live a larger lifestyle, but it’s counterproductive. You can’t dodge your financial mistakes when you live on a fixed income.

It’s a good thing retirement gives me the time to analyze these things. In truth though we are just emerging from a time of great transition that followed our retirements. Only now after moving four hundred miles, selling one house, buying another house and even living in temporary housing for five months are things starting to settle down. Our transition created so much uncertainty that keeping a budget was pointless for the last few years.

Steering your financial ship in retirement is a lot like taking a sailboat out on choppy seas and into a storm. You have a pretty good idea where you need to go but the end is hard to see. At best there are shapes in the mist and you have to rely on your handy compass, buoys and nearby lighthouses for general navigation. We have reached the point where the waves are 1-3 feet, visibility is good and the sun is shining. But there is more work to do. The deck needs a lot of clearing and new sails need to be raised.

So many things have changed. Take taxes. It used to be I sent a W-4 to payroll and hoped enough was withdrawn from every paycheck to pay our income taxes. In Massachusetts where I live now there is no reciprocal agreement with the federal government (my former employer) for withholding state taxes from my pension. So I have to remember to pay estimated taxes every quarter. That’s not too hard. I add it to my Google Calendar. The harder part is figuring out how much to send the commonwealth.

The commonwealth is unforgiving. Last year we were new residents. I didn’t start withholding estimated taxes but when I estimated our state taxes they looked minimal, under a thousand dollars, so I didn’t bother. I had bigger fish to fry. I learned later that the law is if you owe more than $400 when you file your tax return that you owe a tax penalty. Our taxes were about $800, so the comptroller eventually sent us a tax penalty bill. Frankly, I was pissed. I had sold a house, bought another one, spent four months in one state and the rest in another, estimated our state taxes as best I could and they were still going to ding me for this? Yes indeed. Fortunately the penalty was less than $20. It was cheaper to pay the penalty than to figure out for sure if I was subject to one.

We’re in a new house but of course this house will degrade over time too. Roofs will have to be replaced. Cars will need to be retired and new ones bought. The cost of maintaining a standard of living is never cheap but living on a fixed income means I have to anticipate these major expenditures. Yet they are so variable it’s hard to know how much to put aside. In twenty years when the roof needs replacement (assuming it lasts that long) how much will it cost to replace?

There’s no way to know for sure, but I did check how much it cost to put new shingles on our old house (about $3000 in 2002). I assumed an inflation rate of 3% over 20 years. This suggested that in 2035 I would need about $5800 to replace the roof. Effectively if I set aside $25 a month now for this future, we’ll be all set in 2035 … if my assumptions hold true. Looking at all our major future expenses like this, it amounted to about $350 a month that I needed to set aside. Or I could choose to ignore them and hope when the time came I had enough cash sitting around. That’s not a good idea because taking money out of a retirement portfolio usually means you pay taxes on what you take.

I also need to periodically look at my tax withholdings. Tax software makes this somewhat less painful but it can only project based on current tax law and expected income, deductions and credits. So I need to read news sources on changes to tax laws to anticipate them.

The good news is I am getting pretty good at all of this. I’m refining a system, basically a fancy spreadsheet with lots of worksheets. I’m thinking if I do need extra income, maybe I should set myself up as a retirement financial consultant. Only I haven’t really tested my system. It will take ten or more years of experience to know if my methods work, but if they do it should be worth something to someone.

To truly live on a fixed income though you need a system or you need a portfolio with lots of extra cash in it that you can draw from when you make mistakes. Perhaps I could sell this as a service, much like my bank used to do with my mortgage payment. You give me X dollars a month and I’ll make sure you have just enough cash to pay these bills when they come due. I’ll pad my portfolio with their fees because they won’t want to wrap their mind around this stuff. Maybe $50 a month would be fair.

Meanwhile, I’ll keep refining my spreadsheets. I’ll get it right one of these days; I know it.

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

The Thinker by Rodin

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.

Ca-ching!

Ducks in a row

The Thinker by Rodin

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.

Minted

The Thinker by Rodin

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 mint.com, a free online web site now owned by the Quicken people to help you manage your finances. If you are hoping that mint.com 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, mint.com 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. Mint.com 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!

Mint.com 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. Mint.com 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, mint.com 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, mint.com 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 mint.com.

Hopefully, mint.com 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.

Profiting from our financial ignorance

The Thinker by Rodin

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.

 

Wall Street’s puppet masters

The Thinker by Rodin

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.

Who wants to be a millionaire?

The Thinker by Rodin

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.