Will You Outlive Your Money?

Exactly how much money will you really need by retirement? The Million Dollar Answer!

deadbroke

There are two inescapable facts of life: death, and taxes.

When I was a young boy, it seemed like the number of people who lived to the century mark was so small, the average person only heard about someone achieving about it in the news. If you were lucky you might reach the 80’s but living past that was extremely rare.  In most cases, you were going to die sometime in your late 60’s to mid 70’s, and that was that. No one lives forever. We may not like it, but we do have to accept it. None of us are making it out of this world alive.

No one in my family has ever reached 80 , although my aunt has outlived everyone in the family thus far, and will be 77 in November 2018. That’s eleven years longer than my mother, her oldest sister who died at 66, and two decades longer than my father who died at 57, less than 2 months shy of his 58th birthday.   

I’m no fool, no siree I want to live to be 103

Unlike my late father who never lived long enough to retire, I do NOT plan to work until the day I die. Accidents do happen, but failing that I’m in far better health than my late parents due to changes in diet and medical advances that keep extending life expectancy in the USA.

Growing up, one of the things I remember is Jiminy Cricket singing the song  I’m No Fool for a series of educational safety cartoons on the Mickey Mouse Club TV show. He sings the chorus four times, staring with “I’m no fool, no siree I want to live to be 23, I play safe for you and me ’cause I’m no fool!” The age changes as the song goes on, changing to 33, then 53, and ultimately, 103! I always remember thinking to myself that no one lives THAT long.   Now, I’m encountering many people in my day job who are well into their 80’s and 90’s and more and more people are closing in on that mythical 103 from that song. With advances in health science, medicine, and technology progressing at its current rate, I could possibly even live to be 123! Who knows?

That being said, will you have enough money saved for retirement to cover you and your spouse and bridge the span from your last day at the job to your last day on Earth? For most people in the USA, the answer seems to be no. A deafeningly loud, resounding, emphatic NO! According to a report from the Economic Policy Institute (EPI), the  average retirement savings of all working-age families, which the EPI defines as those between 32 and 61 years old, is $95,776. So that’s about less than 2 years salary for the average American worker.

A fool and his money are soon parted.

If you’re not saving for retirement in a combination of 401k type plans or IRAs, you’re a fool who’s depending on a government ‘safety  net’ which will not allow you enough money to live on comfortably, and probably won’t even exist several decades from now. This past Friday April 6th 2018, I got into an argument at work with a social justice warrior who basically said moving away from Social Security into the stock market was ‘madness’ because the Dow closed down almost 600 points and he was citing everything from the 1929 Stock Market Crash to a total economic hypothetical meltdown where the market hit ZERO and starving people are wandering the countryside to find blades of grass to eat.  There was no reaching the poor fool. Every explanation I offered was met with another wacko hypothetical theory. He even brought up concentration camps!  It is NOT my job to give history, economic, or civics lessons to people who have the sum total of human knowledge at their fingertips, yet prefer the mindless indoctrination that they have willingly subscribed too. All I can do is worry about myself and watch the tragedy unfold around me by all those fools living in a Utopian dream world.  

 I am the RICHEST man in my family. I attained my WEALTH not by theft, or deception. I EARNED MY MONEY. I did not inherit it, win it in a lottery, or receive it through a fictitious privilege. I worked for DECADES and invested 10% of my income from DAY ONE! No one held a gun to my head and forced me to do this, I did it. ME, MYSELF, I! Just as I took responsibility for MY choices, you must be accountable for your own decisions. Sitting around waiting for someday and spouting what-if scenarios are what fools do.

Social security is NOT the answer. Everyone in my family who depended on social security, (or still does as is the case of my last living aunt) has lived and ultimately died in poverty.  According to Social security, based on my current contributions at my full retirement age (67 years), my payment would be about $ 2,342 a month. If I wait until 70 I’ll get about $ 2,906 a month, but if I jump the gun and snag early retirement at age 62, it would ONLY be $ 1,641 a month. But here’s the real kicker: My estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits.  79% of $1,641 is about $1300 rounded up.  I’m certain my rent will be more than that in 2034. If I rely on social security I’ll be the starving man roaming the countryside eating grass.

The Millionaire at large.

The Millionaire Next Door is a 1996 book by Thomas J. Stanley and William D. Danko. It details the financial habits of wealth Americans. These are people who did their ‘homework’ and don’t have money troubles. Although it is over two decades old at this point, the basic wisdom has not changed. Live within your means, don’t spend all your income, don’t waste your money, and invest! Fascinating as the Millionaire next door may be, he or she does not interest me. I’m concerned with the Millionaire under my roof. The Millionaire at large, A.K.A.  Michael James Oetting. At current projections, my 401k type retirement account balance should exceed a million dollars by the time I retire. I plan to retire LONG BEFORE 62, so I’m not even considering Social Security. I’m also probably going to retire before 59½ the minimum age you can make withdrawals from a 401k or regular IRA without incurring a 10% early withdrawal penalty. Now with a million dollars, if I maintain an average annual interest rate of 5% or greater, while making withdrawals of 4% annually, that would come to $40,000 per year without diminishing the million dollar balance which would still be increasing at 1%. This could continue up until the year I turn 70½ at which point I would be required by law to take the RMD or face the 50% penalty imposed by the IRS  on what I fail to take. That’s because, upon reaching this age, the IRS requires you to withdraw at least a minimum amount each year from all your IRAs and retirement plans—except Roth IRAs—and pay ordinary income taxes on the taxable portion of your withdrawal. If you don’t take withdrawals, or you take less than you should, you’ll owe a 50% federal penalty tax on the difference between the amount you withdrew and the amount you should have withdrawn. And you’ll still have to withdraw the required amount and pay any income tax due on the taxable amount. IF you ‘forget’ to do this, you can extend it to the following April 1 of the year after your turn 70½ as a ONE TIME late disbursement, but you’ll have to take out double that year, and pay double taxes should you do that because you would have to account for both the prior (late) year and the current year RMD. Failing that if you STILL missed your RMD, the IRS can waive the 50% penalty for good cause. To have the 50% penalty waived by the IRS you must correct your error. You must take the RMD amount that was not taken and file the IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. When you file this form, you do not have to prepay the penalty, but if the form is filed without payment of the 50% penalty and IRS determines that the penalty is owed, you could owe interest on the penalty payment. Form 5329 must be filed to start the statute of limitations clock. Attach a letter of explanation to Form 5329. The letter should include why the RMD was missed, the fact that it has now been taken, and that you have taken steps to be sure that future RMDs will be taken as required. This is also a onetime thing.  Do not make a habit of accidentally ‘forgetting’ either on purpose or by accident, because the IRS does not play games, and you will get financially burnt if you play with fire.

Just because you have to take the RMD doesn’t mean you have to spend it, you just can’t keep it in your retirement account. You can buy investment properties, put it in bonds or stocks in a brokerage account, donate it to charity for a tax-write-off, etc. Just don’t let the IRS take half of it away because you ‘forgot’. You can set up most plans to automatically issue the RMD and I would encourage you to also have them withhold the taxes on each disbursement so you don’t  end up owing the government taxes you don’t have the cash to cover. If you follow all these suggestions, your money should last as long as you do!    As always, I wish you happiness and success!

Are we BEAR yet?

Keeping your cool while others lose their minds over their investment losses.

Since 2009,  US investors have been enjoying the second longest running Bull market since WWII. But after closing once again at record highs on January 26th, 2018, the market started slipping into a correction. The two week period ending Friday February 9th 2018 saw a river of red on Wall Street. Historic losses occurred almost every other day, and the Dow closed down 1175.12 on Monday Feb 5th.  Less than a week later there was a second four-digit drop. In spite of all the excitement we are still ‘technically’ riding the Bull, despite the specter of the Bear periodically swiping at the markets and making the red ink spatter everywhere. So far it’s only a correction, and not yet a crash.  If you’re not sure of the difference:

  • A stock market correction is when the market falls 10 percent from its 52-week high.
  • A bear market occurs when the market falls 20 percent.
  • If the market falls 40 percent it’s considered a crash.  

So what makes the markets suddenly drop? The reasons are many, but usually it starts when large numbers of investors decide to ‘cash in their chips’ so to speak and lock in their gains. Perhaps companies didn’t make their earnings projections,  or investors are afraid that changes in legislation will affect profits. It does not matter but once enough people are selling instead of buying, stock prices start dropping. This spooks the second group of investors who now sell because the price is dropping, and they want to stop losses. This leads to a panic. Once a cascade sell-off effect begins, the only way to stop it is if enough potential investors decided to buy the dips, thus raising the price of stocks and ending the sell-off. Or possibly not. Prices of the shares may recover enough that a third group of investors decide that now they should sell and lock in the partial recovery of lost potential gains, starting a brand new sell-off. That’s why you start seeing these roller-coaster swings of market volatility.

 The key take away from all of this is that middle group of investors who sold out as the stocks plunged ended up losing their money.  It is impossible to time the market.  They were not in the market once it rebounded, which time has shown it will. The group who locked in at the market peak made money, and if they returned to buy the dips, they made even move money. When investing in stocks, you need to keep your head and make informed, intellectual trades. Emotional, panic sell-offs will hurt you financially.

Overtime, the stock market will continue to grow at an average return at about 12%. Crashes, corrections and Bear markets always lead to new Bull runs.  These market fluctuations are a normal part of the way the stock market grows and are not to be feared.  In September of 2017, stock guru Warren Buffet was widely quoted for stating that he believed that in one hundred years, the Dow would hit  one million points. When one of the eight richest men in the world tells you stock tips, you listen! Buffet didn’t get rich by luck. He recommends buying stocks when everyone else is liquidating their assets because you pick up bargains that given time, will more than likely rebound. He also recommends staying in the market and investing in passive, low fee index mutual funds and ETFs that track the markets. In many cases these index funds outperform the majority of actively managed mutual funds and offer a low-cost way for investors to track popular stock and bond market indexes while providing a diversified portfolio at the same time.

I’m getting too old for this excitement.

Although index funds and ETFs offer diversification they are still tied to the market. This is great news if you are young, because you can weather any storm clouds that the market may encounter. On the other hand, if you are nearing retirement and counting on your retirement nest egg being a certain amount, you don’t want to find yourself in a situation where you’re weeks away from punching the time clock for the final time only to have a sudden market crash wipe out 40% of your investments.  This is where a higher level of asset diversification towards less volatile investments will protect you.  Bond funds, precious metals and even real estate can provide a much more stable investment, just with comparably lower returns on investment. Only you can determine your individual retirement needs.

Two general rules of thumb based on age.

1) Take the number 100, and subtract your age. The remaining number is how much money you should invest in stocks.

2) Take the number 125, and subtract your age.  This number is the percentage of your investments which should be in higher risk stocks.

Some stocks are more volatile than others. This is reflected in a stocks beta number. The lower the number the more stable the stock. A beta number of 2.0 would fall twice as fast as the market, while a share with a beta of 0.5 would drop half as fast. Also you should research the 52 week highs and lows, as well as the P/E ratio and if the stock pays a dividend, how often it’s paid, and the what the ex-dividend date is. Bottom line, DO YOUR RESEARCH!  Financial matters are nothing to joke about. The wrong decisions early on will greatly impact you in your retirement years. 

Now I’m still south of 50, I’m unmarried,  I have no children, plus I’m debt free. In my individual circumstance, knowing what I know and being willing to accept the risks, I  tend to have ALL of my investments in higher risk assets. Thus far, it’s made me the richest man in my family, although it does get unnerving at times when you watch your portfolio take a big hit during a correction. In the past two weeks, my net worth decreased by more money than some people earn working a full time job for an entire year. It will come back given time, but a  financial loss like that would have killed my mother.

TheCrash

True story

My father, George Henry Lawrence Oetting Jr. was an intelligent business man. He went to St. John’s University, was a CPA, and was the editor of a local Queens newspaper. He understood how money and finances worked. That’s him in the photo above. I used to think that the screaming woman in the picture was my very melodramatic mother, but I’ve since learned it was a just a family friend. But I do remember that look. Everything was a tragedy for my mother when things didn’t go her way.  Now my father was a newspaper editor, so he was always on top of trends in business and investing opportunities.  He owned 50 shares of stock in a growing company called McDonald’s.  I’m sure that this is why my mother grew obsessed with the cheap burger brand. My father was great with finances. My mother? Not so much. That woman couldn’t handle money to save her life. If you gave her a dollar, she’d spend two! Anyway my father died suddenly when I was young, so he never saw the grand openings of the first NYC McDonald’s in Manhattan. My mother got re-married to her boss a year after my father died. About that time, the first McDonald’s in Queens opened at  13832 Jamaica Avenue, Jamaica, NY 11435. My mother still owned the stocks at the time, and she was there with my stepfather acting like she owned the place because she was a share-holder! I remember there was a guy dressed like Ronald McDonald and he was signing these stuffed Ronald dolls and my mother was buying them for all my cousins. She probably blew $100 that day on food and memorabilia which says a lot considering at the time the burgers were ONLY 30¢ each. Anyhow, a year after that, my step father also died. A year later, my mother was dead broke.  Between 1971 and 1975 she’d lost 2 husbands, 2 houses, the lifetime savings of two men, and those 50 shares of McDonald’s stock, which if I still had them today would be valued at three-to-five million dollars. A fool and their money are soon parted. My mother may have cost me a fortune because of her foolish spending habits, but at least I managed to inherit my father’s good looks and intelligence, and those pay their own unique dividends.  I’d like to believe he’d be impressed and proud of the man I grew up to be. As always I wish you  happiness and success!

A Wall Street Fairy Tale

Is the sky really falling?

chicken

Chicken Little lived in Storybook Land. He had a nice government job working for the King, Mr. T. Chicken Little wasn’t born rich, but he was smart and read a lot. He wanted to be rich someday like his cousin Goose Golden-Eggs. Money just seemed to drop out of Goose. She left a pile of wealth everywhere she sat. It didn’t seem fair that some people were  born rich and had more money than brains, but no one ever said life was fair. Chicken had feathered his nest with Index Funds from the Stock Market. He hoped to have a very nice nest egg when he retired. He always paid attention to what was happening with The Stock Market.

The Stock Market was co-owned  by Mr. Bull and Mr. Bear. No one had seen Mr. Bear in years, not since 2009. No one liked it when Mr. Bear ran the market, but thankfully he only did so about once every seven years, and he never ran it for very long. Mr. Bull did a much better job running the Stock Market and always managed to clean up the mess left by Mr. Bear. He even had a new friend keeping him company on Wall Street,  Fearless Girl who just showed up one day and has hung around with Mr. Bull ever since.

Now Chicken Little was always running home from work each day, because he always wanted to see what the Talking Heads on TV had to say. Everyone in Storybook land watched different Talking Heads. There were many of them and you could always find one you liked. The problem was that they all said something different, so you had to be really careful which ones you listened to. Some of them said some very bad and dumb things, and if you listened to them too much, you grew very sad and jaded, like The Old Witch.

The Old Witch liked to tell everyone how  smart she was because she was very old, and she watched the Talking Heads all day long, so she knew everything. As Chicken Little was passing her home, she waved him over.

“Hi Chicken, did  you hear what my favorite Talking Heads said today?”

“No Witch, I was busy working all day so I could have more money to feather my nest.”

“They said Mr. T the King is an idiot, his son is retarded, and he’s going to destroy the world.”

Chicken Little was aghast! He couldn’t believe anyone would say such terrible things, much less listen to them, so he decided to quickly change the subject.

“Say Witch, you’re old and know everything. What’s the best thing to do with your money? I leave ten percent of  my money in  The Stock Market with Mr. Bull and he takes great care of it.”

“The Stock Market?!” she yelled. “You’d have to be crazy to leave money in the Stock Market. Do you remember the big crash of 1929? Humpty Dumpty lost everything  in the Market and leapt to his death because he was so depressed. Only idiots put their money in the Stock Market. I hide all my extra cash in my mattress,  it’s safer than a bank, and I own a nice house, it’s made of Candy and Chocolate.”

Chicken Little didn’t own a house, he rented a nice apartment with a great view. He eyed her home skeptically. “Isn’t candy bad for you? I heard it makes you fat and gives you diabetes.”

 The Old Witch scowled and gave him an angry look.

“What do you know? You’re not as old as I am, and you’re not as smart. I watch the Talking Heads all day. Chocolate comes from cocoa, which is a bean.  Candy is made with sugar which come from sugarcane. So both come from plants and therefore they are both vegetables and vegetables are good for you. Now scat! I’m busy, my favorite TV show is about to start.”

Chicken Little walked away shaking his head. Next he came to the house of the Pigs.

Practical Pig owned a house made of Gold Bricks. He and his brother Fifer were in the yard gardening as Chicken walked past. He called to them.

“Hey Pigs! I was talking with the Old Witch about money, what do you do with yours?”

“All my money is invested in real estate and precious metals.” replied Practical Pig pointing at his house made of gold bricks. Fifer said nothing, he just smiled. 

Practical was older and smarter than his brother Fifer. Fifer lived with his brother and slept on his couch. Fifer  used to own a house made of sticks. It was built on a foundation of sand, and financed with a ‘Ninja’ loan. It was a variable rate mortgage which inflated quickly. Fifer eventually lost his house of sticks when the housing bubble bust, so now he had to live with his brother.

“Isn’t gold and real estate expensive?” asked Chicken.

“It can be, but everyone has to live somewhere, and gold had never been worthless so both are great investments.”  Practical replied.

Chicken alternated looks between Practical Pig and his homeless brother Fifer.

“Say Practical, do you ever hear from your other brother Fiddler?”

“Oh yeah. I spoke to him on the phone this morning. He just moved into a huge expensive mansion financed by BitCoin and Ethereum. It’s totally built out of Ones and Zeros. I worry about him, some day he’ll be sleeping on my couch too.”

Chicken waved goodbye at the brothers and hurried home to his maintenance-free apartment.

The first thing he did when he got home was to turn on the News to listen to what the Talking Heads were saying about the day’s business news. They were all screaming that the sky was falling because the market plunged nearly 666 points and that it was probably the end of the world.

Chicken Little was so shocked by the news that he passed out!

After he recovered from the shock, he reviewed the various news clips to see why the market fell.

Some of the Talking Heads blamed Mr. T the King  for constantly letting his pet blue birds The Tweets fly free,  and said that he didn’t play well with others. Some of the Talking Heads said the Market Fell because The Wicked Witch of the West was the rightful ruler of Storybook Land and the throne had been stolen from her. A few others blamed it on The Man in the Moon and yelled at the sky. A few blamed the Russians. A few said they had ‘no idea why, it was a mystery.’ A few said it fell because the market fluctuates and it’ll bounce back. Uncle Warren the Wise Wizard of Wall Street said he was going to buy lots of cheap stocks first thing in the morning.  Little Jack Horner  sat in the corner eating his pie. The Cheshire Cat smiled until he faded away,  leaving only his grin. Everyone seemed to react to the news differently.

In the end, Chicken Little checked that his nest was still intact, saw that his index stocks were still up for the year, and discovered that despite what some of the Talking Heads claimed, everything was going to be just fine. He decided to listen to Uncle Warren and pick up a few bargains at the Stock Market, and knew that one day, he too would grow up to be a Wizard of Wall Street.

The End

Fairy Tales were a traditional way to entertain young impressionable minds while at the same time conveying a moral lesson. Even Jesus Christ occasionally turned to parables when trying to covey complex ideas to the crowd. There are lots of individuals who have difficulty understanding  how the economy, the stock market, and even personal finances work.  Throw in politics and religion and people get real confused quite fast.

February 2nd, 2018 marked one of the largest drops of the Dow Jones Industrial Average  since 2009. The thousand point plunge from the prior week’s high probably scared the novice investor to death. It’s not as bad as some of the ‘experts’ are claiming. Investing in stocks still results in far greater returns on investment than real estate, precious metals, or even the dangerous new gimmick, crypto-currencies like BitCoin. I’d stay far away from that last one, when that bubble pops, it’s going to burst loud and hard!

The bottom line is that there are many factors which impact our day to day lives, and just as many pundits, cynics, and fools with opinions. Everyone has an opinion.  It can become quite the task to filter out the many voices and distill all the information to refine a pure source.  What do singers , athletes, and movie stars really know when they speak on a topic? For every one celebrity with an actual college degree, there are at least a hundred who barely even graduated  high school.  Check your sources, check your information, and review your facts before making a decision which could potentially ruin your future happiness. Just because everyone around you is telling you what you want to hear doesn’t mean it’s the truth. You just might be in an echo chamber surrounded by sycophants.   Tread carefully.  As always, I wish you happiness and success!    

Will you be left out in the cold?

Security in your golden years is up to you!

” Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler,  yet it stores its provisions in summer and gathers its food at harvest..” Proverbs 6:6-8 NIV

Grasshopper

The Grasshopper and the Ant  is one of Aesop’s Fables and draws its origin from Proverbs 6:6-8 in the Bible. Aesop is thought to have been a Greek slave who lived about 600 B.C.  The fable describes how a hungry grasshopper begs for food from an ant when winter comes and is refused. The situation sums up moral lessons about the virtues of hard work and planning for the future.

Cradle to grave– A Ponzi Scheme

Charles Ponzi was an Italian swindler who ran a fraudulent investment  con operation where returns for older investors were funded through revenue paid by new investors. This is by and large how Social Security works.

 The Social Security Act was signed into law by President Roosevelt on August 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement. The Social Security Administration will deny that it is a Ponzi scheme, even going into detail as to why it’s not a Ponzi scheme in one of its publications and again on its website. Social Security is part of a government attempt to provide ‘cradle to grave’ social welfare programs to provide for citizens of the USA. Relying on Social Security to support you in your old age is a terrible idea. It exists solely to provide funds for people too lazy to set aside funds for their retirement, and it will barely be able to cover basic needs. I have personally witnessed my mother and her sisters struggle and fail to make ends meet with Social Security. My mother would have been homeless without me bridging the shortfall left by her $450 a month SSA check the last five years of her life. My last living aunt is 76 and gets a meager $1060 per month.  She is constantly falling behind on the rent. She HAS been homeless, and will probably be again in the near future after alienating most of the family.   

“In this present crisis, government is not the solution to our problem; government is the problem.” – President Ronald Reagan

Your retirement is your business, not the governments!

The 401(k) provision was created in the 1978 Tax Revenue Act,  but went largely unnoticed for two years until Ted Benna, noticed that the tax clause in section 401, subsection (k), did not preclude pre-tax salary reduction when it stipulated that cash or deferred-bonus plans qualified for tax deferral.  It was a creative loophole that eventually led to rise of the 401(k) Plan as a major wealth-generating retirement tool.  Ronald Reagan had made personal saving through tax-deferred individual retirement accounts, or IRAs, a component of his campaign and presidency. (He went on to sign this new interpretation into tax law after he won the 1980 election. ) Payroll deductions for IRAs were allowed in 1981.

In February of 2005 Republican President George W. Bush outlined a major initiative to reform Social Security which included partial privatization of the system, personal Social Security accounts, and options to permit Americans to divert a portion of their Social Security tax (FICA) into secured investments.  In essence, he wanted to wean the populace off the teat of Social Security and move them into more financially lucrative personal IRAs. Democrats opposed the proposal and after gaining control of both houses following the 2006 Midterm elections, effectively killed the plan for the remainder of Bush’s term in office.  The Democrats created the failure that is Social Security, and they will fight to keep us under its yoke. The path to fiscal independence is paved with the gold bricks of IRAs and 401(k) plans. Countless fortunes have been made by investing in the stock market. No one have ever become wealthy by collecting monthly SSA checks.

IRA vs. 401(k): What’s the difference?  

Both 401(K) plans and IRAs (Individual Retirement Accounts) allow you to save money in the stock market through tax deferred contributions. Anyone with a job can contribute money to an IRA. You can only contribute money to a 401(k) or similar retirement plan if one is offered by your place of employment. In many cases employers will offer matching contributions. In other words: FREE MONEY. You should commit to contributing 10% of your salary to these plans as soon as you are eligible to enroll, and you should always be sure to contribute enough to  max out the employer match. Again, it’s FREE MONEY! There is no funding match for IRAs. As of January 2018, the maximum employee contribution for 401(k) and similar plans is $18,500. The max for an IRA is $5,500, but if you’re 50 or older you can add another $1000 to that as a catch-up fund.

 Retirement plans offered by employers include:

  • 401(k) plan – a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
  • 403(b) plan – also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. The basic difference is that a 403b is used by nonprofit companies, religious groups, school districts, and governmental organizations. The law allows these organizations to be exempt from certain administrative processes that apply to 401k plans. In other words, administrative costs for a 403b are lower.
  • 457 plan –  a kind of defined contribution retirement plan available to state and local public employees, but can also be offered by certain nonprofit organizations. They work much the same way as 401(k) plans.
  • TSP Plan – Federal employees and members of the uniformed services participate in the Thrift Savings Plan (TSP), a retirement savings plan similar to 401(k) plans offered to private sector employees

Both IRAs and 401(k) plans may be available as ROTHs. Roth IRAs and now the new Roth 401(k)s are named for Delaware Senator William Roth and were established by the Taxpayer Relief Act of 1997. There is no pre-tax savings on these, they are funded by after- taxed income, but they grow tax free.  

IRAs give you the largest number of personal investment choices, they are quite similar to a brokerage fund. 401(k)s tend to limit your investment choices to up to as many as twenty different funds, which may be passive index funds, or actively managed funds which will have periodic fund maintenance fees associated with them which will eat away at your returns.   

EXAMPLE: My company TSP Plan offers 6 funds:

G Fund: Government Securities Investment Fund (no risk bonds)

F Fund: Fixed Income Index Investment Fund – is invested in a separate account that is managed to track the Bloomberg Barclays U.S. Aggregate Bond Index

C Fund: Common Stock Index Investment Fund – tracks the Standard &Poor’s 500 (S&P 500) Stock Index

S Fund: Small Cap Stock Index Investment Fund – a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index.

I Fund: International Stock Index Investment Fund – a stock index fund that tracks the MSCI EAFE (Europe, Australasia, Far East) Index.

L Fund: Lifestyle Fund – diversifies participant accounts among the G, F, C, S, and I Funds using professionally determined investment mixes (allocations)that are tailored to different time horizons. The L Funds are rebalanced to their target allocations each business day. The investment mix of each fund adjusts quarterly to more conservative investments as the fund’s time horizon shortens.

The Bottom Line

I have been paying into Social Security since I got my first paycheck at my first job. It’s mandatory. You can’t opt out. I have been actively and intentionally contributing to my company TSP plan since I became eligible. It’s MY option to do so. No one is forcing me to do this. I can check the balances of both programs online. Needless to say, the mandatory government SSA plan which I am forced to pay into has far less in it than my personal TSP plan which I have been overseeing myself.  You will come out far ahead of the rest when you take a hands on approach to your money, and your retirement. A fool and his money are soon parted. Do you want to be wise, or is it your intention to be a fool? It’s your life, it’s your money, it’s your choice. As always I wish you  happiness and success!

You Can’t Time The Market!

The ‘right time’ to invest was yesterday.

The Dow Jones Industrial Average (DJIA) often simply called ‘The Dow’ was founded on May 26, 1896. It was created by Wall Street Journal editor Charles Dow, and is named after both Dow and statistician Edward Jones.  It is one of popular financial guides used to track how well investment stock markets are doing.  Other popular indices used by business and finical watchers include:

  • The Standard & Poor’s 500 – often abbreviated as the S&P 500, or just the S&P was introduced in 1923, but fully realized in its current form on March 4th 1957.   
  • Nasdaq Composite  – created on February 8, 1971 by the National Association of Securities Dealers (NASD)
  • CBOE Volatility Index or VIX –   a  measurement of  expected  volatility implied by S&P 500 index options, created by the Chicago Board Options Exchange on January 19, 1993. This last one is sometimes referred to as ‘the fear index’, and moves inversely to the S&P. You want this one to plunge.

I will be limiting the scope of this blog post to the American stock markets and  economy.  I have very little experience with foreign stocks and markets. One important thing to note, the stock market is driven by investment expectations and is an ’emotional’ response to the economy. It is not the same thing as the economy, but it can impact it. There are many factors that impact the market that can include everything from oil prices to politics to weather.  Ultimately, shrewd investors study multiple factors before committing their stock trades as past performance is  never an indication of future earnings. No one can know the future, but we can study the past and make an educated guess.

“The sad fact is that people are poor because they have not yet decided to be rich.” —Brian Tracy

The Time is NOW!

Quite often  a few misguided friends and co-workers tell me that they are waiting for the right time to invest in the market.  Fear of a correction or a crash keep them from potential earnings. Poor spending habits hamper their ability to invest. Ignorance and the refusal to seek wise counsel on fiscal issues keep them in poverty. You cannot spend your way into prosperity, the only sure-fire way to get rich is by making diverse, informed investments over a long period of time. You can’t achieve this if you spend every penny  you make on food, ‘toys’, and entertainment.   You need to first get your financial house in order because the money you use to invest must be disposable income not earmarked for essential monthly expenses. Refer to my many earlier blog posts on finances, planning,  and budgeting.   

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“Whenever I hear people talk pessimistically about this country, I think they’re out of their mind.” — Warren Buffett, Berkshire Hathaway chairman

But a crash is coming!

Maybe. Maybe not.  And, so what? There have been 14 crashes in the history of the Dow. The market has ALWAYS rebounded usually within a matter of months. The longest recovery period was from  the Great Crash on October 24th 1929 which lasted four years and then led to the Great Depression.

Three examples of why uninformed and/or misinformed investing is dangerous:

 #1 On November 8th 2016, Donald J. Trump became the 45th president of the United States. (Full disclosure,  I’m a Christian first, and a lifelong Republican second. I FULLY support the current President. I voted for him in both the primary and general election, and will vote for him again when he runs for his second term in 2020. I’ve lost friends because of this fact, but I stand my ground.)

When Trump won the election, there were a lot of newscasters , Democrats, and entertainers who said the country was DOOMED! I had a discussion with a very upset friend at work who thought that this was the end of the world. On Nov 07, 2016, the day before the election, the Dow closed at 17,994.64. I was hoping and praying that Trump won, because I fully believed that a Clinton win would be the death of the U.S.  and a disaster for its economy. Being precautious, I moved all of my investments out of the market, just in case the unthinkable happened and ‘That Woman’ won. (I had done the same thing in the 2008 election, more on that later.)  Fortunately the best man won.

The Dow shot up nearly a 1000 points over the next week, a gain which I missed out on because I couldn’t move my investments back fast enough.  It kept going up. About two or three weeks after the election, I told the same co-worker that I had read several financial analysts who predicted the Dow would hit 30,000 by the end of Trump’s first term, and 50,000 by the end of his second term should he win again in 2020. I EVEN showed him the articles stating this. He didn’t believe it, not a word, and dismissed it as propaganda.  As of Friday January 5th 2018 the Dow closed at 25,295.87!

#2 There’s an old Investment adage – Sell in May and go away, but remember to come back in September! It’s meant to avoid seasonal declines in the market, and I’ve used it more often than not. Sometimes I’ve benefited, other times I missed out on an unexpected spike in the markets during the Summer.  You can’t time the market, but you can attempt to lock in gains and minimize losses. You see market sell-offs all the time. These are mini corrections and just people trying to time the market because they think it may go down, then they plan to jump back in and capture the dip. In May of 2008, the Dow ran between 12,818.34 and 12,638.22, so it was pretty flat that month. I don’t remember the exact date I got out of the market that May, but It was probably near the end of the month. In either case it was a presidential election year, and I was not 100% thrilled with John McCain, but I absolutely HATED the other option and I’d sooner vote for Satan than a Democrat. (Unfortunately my guy didn’t win that year.)  The Dow closed at 9,625.28 On November 4th 2008. It plunged 500 points two days later and kept dropping. Fortunately as I knew that presidential election years are very unpredictable, I chose to stay out in May and remained out as I kept watching the market drop, and drop, and drop! It hit a low on Mar 05, 2009 of 6,544.10 before it started its long climb back. During this time I was still buying new shares of stock in my 401k, and even increased my paycheck deductions to 20% to capture these incredible bargains, all the while, my original balance total from May 2008 was locked away safely earning interest in a no-risk bond fund. When it got to May 2009, I uncharacteristically moved my nest egg back into the market and rode that elevator to the top! A co-worker wasn’t so lucky. He stayed in during the plunge, got out at the bottom and stayed out missing the rebound because of fear.

 #3 I was speaking about the market with a friend on December 16, 2017. He had his investments in a no risk fund, because he was fearing a crash, and was waiting for the ‘right time’ to re-enter the market. My investments were all in the high risk C Fund, or Stock fund. They still are, and probably will be for the foreseeable future. Anyhow, I told him there wasn’t anything to worry about and that the market would keep going up. December 15th 2017, the Dow closed at 24,651.74. Three weeks later on Jan 5th 2018 it closed at 25,295.87, up over 600 points.

Can any one of you by worrying add a single hour to your life?  Matthew 6:27 NIV

Let me tell you, I’ve been broke and deep and debt, and I’ve been debt-free and financially sound. Rich is better than broke. I’ve been investing for my retirement since I started working. If you keeping putting off investing in your 401k and building your savings because you’re afraid, you’ll always be broke. The USA has endured many disasters and tragedies which have impacted the stock market since its inception, yet it always rebounds and yields an average return on investments of above 10.5% over the long term. The fact is, if you let your life be ruled by fear and doubt, you will second guess everything, become skeptical with anything and succeed at nothing except making yourself miserable and poor. The decision is up to you, choose well. As always I wish you happiness and success!

Budgeting 101

Is there ‘too much month at the end of the money’?

The wise have wealth and luxury, but fools spend whatever they get. – Proverbs 21:20 New Living Translation (NLT)

If you’ve been paying attention so far,  I’ve already touched on the importance of having an emergency fund and avoiding credit card debt in earlier blog posts. There is a reason for these two steps being essential as part of any successful plan to get out of debt.  An increasing percentage of the populace lives paycheck to paycheck, lacking an emergency fund, and using credit cards to fill in the gap. This is a recipe for disaster. You cannot spend your way into prosperity.   The first thing you need to understand is that you and you alone are in control of your finances. The responsibility belongs to you alone, and if you have chosen to shirk this responsibility your finances will be in total chaos. Now is the time to take action and learn to budget.      

What is a budget?

A budget is a saving plan. It is not ‘punishment’, but if your finances are out of control and you’re living beyond your means, you will need to budget very tightly and stick to the plan to break the cycle of debt that you have fallen into. The good news is that it is possible. The bad news is that it will take time and effort, but I promise that if you do the work, it will pay off in the end.

Extra means extra!   

 Does your job pay enough for you to live on? Your paycheck is your biggest source of wealth. Social welfare programs trap you at the poverty level by doling out a meager subsistence and they should be avoided as a main source of income, preferably avoided altogether . Likewise, extra money earned from a second job, or from working overtime should not be essential to make ends meet. If you are starting out in a position of debt, you will need to increase  your regular income stream in addition to budgeting. Trust me, I know from experience.  Due to a series of unfortunate events from December of 1999 through January of 2002, I ended up $50,000 in debt, and it took 8 years of budgeting and working all the overtime I could endure to erase that mess. Overtime was extra income, earmarked for the specific purpose of eliminating my debt. It was never considered part of my regular monthly expenses. I have too many coworkers  who have trapped themselves into working mandatory overtime just to make their monthly expenses. This is a terrible way to live.

Step one :  Analyze

Do you get paid on Friday, only to be broke on Monday,  wondering where your paycheck went? Successful people work from a list and write things down. Get into the habit of tracking your spending, because you’re spending way more than you realize. Write down everything you spend, and always ask for a receipt. If a receipt is not available, (like buying a soda from a vending machine) jot down a quick note and create your own receipt.  Organize your receipts and record them in a journal of some sort listing the date, the store, the purchase, the amount, and the method of payment.  You don’t need a fancy financial ledger for this purpose, I recommend a spiral-bound notebook. I buy these on sale at my local Wal-Mart during the back-to-school sales by the dozen, usually for the low price of just 25¢ each!  Track your spending for about at least a month or two to get an accurate account of where your money goes. After this initial period, continue tracking your spending to see how it lines up with your budget.

Step two : Categorize    

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After you’ve collected your initial spending data  break it down into categories.

Suggested categories and percentages are :

  • Living expenses 50% total– Housing 25 to 35%, Utilities 5 to 15% (heat, light, phone, maybe internet and cable but those last two are questionable necessities ), Groceries 5%-15%, Transportation 5 to 10% (Bus/train fare,  or parking fees, tolls if any, and gas.) You’ll need to adjust those four sub-categories based on your individual circumstances. The combined total cannot exceed 50% of your income.
  • Savings 10%
  • Charity 10%
  • Dining and Entertainment 15%
  • Clothing 5%
  • Medical  5%
  • Miscellaneous 5% (this can include gifts, shopping, or anything out of the ordinary)

Step three: Organize

A great way to organize your spending categories is to use the envelope system.  Divide your  cash into the various categories using the suggested percentages.  This is all the allotment for each category.  When the envelope is empty, you have no money for that expense. If at the end of the month there is unused money in any envelope, put it into an EXTRA CASH envelope, and save this for emergencies.  

Step four: Follow the rules

  • First rule of Budgeting –  50% of your income MUST be able to cover 100% of your living expenses. This is absolutely essential! If you get paid bi-weekly like most people, you average 2 paychecks a month, and one of those paychecks should be able to fully cover your rent, utilities, groceries, transportation, medicines etc.  If you can’t achieve this with your level of income, I’m sorry to say you’ll need to find a better paying job, or cheaper living accommodations.   Living in your parent’s basement forever is not a viable option either. You need to stand on your own two feet. Man up!
  • Second Rule – The remaining 50% of your income should be as 20% Financial (savings and charity) and 30% Everything Else (dining, entertainment, misc.)  
  • Third Rule – Did you notice I didn’t include contributions to a 401k Retirement Plan in the two rules? That’s because you should be contributing 10% of your salary to one automatically BEFORE you even get your paycheck, and  this should never ever be thought of as part of your budget. You don’t consider any other payroll deductions like taxes or FICA as part of your budget, and you should likewise think of a 401k contribution as just another in the list of payroll deductions to your check before you even get paid. If you don’t plan for your future, you won’t have one!

 Cash is King!

Get into the habit of paying cash for everything! Credit cards are a tool, and can even offer benefits like cash back, but it’s way too easy to overspend and blow your budget due to impulse spending. Using cash creates a visceral reaction that credit cards lack. You really weigh your spending decisions when you leave through the dwindling banknotes in your wallet.  If you elect to use credit cards for payment, you should be fully prepared to pay the balance in full each month. Paying interest is like throwing away money.  If you lack the discipline to keep your spending in check, eliminate the temptation and get rid of those cards now! You’ll be happier in the long run. As always I wish you happiness and success! 

 

Who wants to be a millionaire?

Just double $1000 ten times!

There are over 6 billion people on Earth.

John D. Rockefeller became the world’s first official billionaire in 1916 as a result of his ownership of Standard Oil.  Just over a century later, there are now 2,043 billionaires in the world as of 2017 according to  Forbes Magazine. This means the odds of the average person becoming a billionaire are quite slim, almost non-existent.

However, according to a 2016 report by global consultancy firm Capgemini there are around 16.5 million millionaires in the world! A million is one thousandth of a billion, but it’s still a large number and you’ve got a far greater chance of joining the exclusive ‘7 Figure Club’ especially if you are fortunate enough to live in the USA, the Land of Opportunity and home to 10.8 million millionaires.

The current population of the United States of America is 325,316,130 as of Tuesday, November 14, 2017, based on the latest United Nations estimates. With that in perspective the odds of a US citizen becoming a millionaire are roughly 1 in 325. So what’s stopping you? 

The longer you wait to do something you should do now, the greater the odds that you will never actually do it.” — John C. Maxwell

A few blogs ago, I covered the Rule of 72 and the miracle of compound interest.

If you take $1000 and double it ten times you end up with $1,024,000!  

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Initially the compounding effect barely registers on the above graph, only to skyrocket at the sixth doubling.

Putting off retirement saving until your 30’s or 40’s practically destroys your potential retirement nest egg! 

Dave Ramsey, Tony Robbins and just about every wealth adviser worth their salt will tell you that the S&P 500 has yielded a historical average of over 10.5%. Low-cost index mutual funds allow the average investor to capture those same rates of return. (All 401k plans offer mutual funds in their investment portfolios and I’ll discuss this more in detail in a later blog.)

Coincidentally, (or not) both Dave Ramsey and Tony Robbins each have a chart in their books showing the effects of compound interest on the life savings of two friends. I’ve even seen several other versions online. The names, ages, and savings amounts are different , but the end results are the same. The person who started saving for retirement earlier always invests significantly less money, yet beats the friend who starts later and invests much more. The first time I saw this it blew my mind, but it illustrates the importance of saving for retirement early in life. According to almost every financial expert I’ve consulted, you’re going to need a minimum $1,000,000 to retire comfortably. It is possible for ANYONE to attain this goal provided they begin investing at the earliest possible age.

Dave Ramsey has his version of the aforementioned chart in his book Financial Peace on page 120. The Tony Robbins version appears on page 24 of his book Unshakeable.  I’m going to use Robbins’s version,  because it has a larger annual investment. The assumption is $3600 invested per year, with 10% interest.  Basically,  Joe and Bob are both the same age . Joe begins investing $300 in the stock market every month from age 19 to 27, saving a total of $28,000 and then he decided to quit saving altogether and let it sit and collect interest. Bob doesn’t even start saving until he’s 27 but keeps investing every year until he’s 65, for a total of $140,000. When they both retire at 65, Joe has $1,863,287 and Bob has $1,589,733. Because Joe started earlier, he invested $112,000 less, yet he earned $273,554 more than Bob! This is because of the power of compound interest.

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In 2018, the maximum annual 401k contribution allowed will be $18,500. Imagine being a 16 year-old teen living at home and being able to invest  that amount annually for 5 years. You could have over a million before you were 45! So what are you waiting for? Go and take steps to establish your retirement nest egg today, because you’re not getting any younger!  As always I wish you happiness and success!