Tuesday, March 25, 2008

The Anti-Retirement

Financial issues have been on my mind a lot these days. My generation has completely different financial waters to sail through to reach retirement and beyond. The baby boomers, who are and are approaching retirement, have had golden opportunities. They got to see the housing bubble more than quadruple their home equity, making it a reliable source of retirement income. They saw double digit percentage growth in the stock market for decades, making retirement accounts grow plentifully. They also saw more reasonable education loan terms, making investments in college education simple. And they benefited from low rates of inflation overall, with only short bursts of crisis (witness the 1973 oil embargo lasting several months).

My generation, on the other hand, will have fewer opportunities and none will be golden in comparison. We have seen the housing market bubble burst, and many of us have seen the little equity in our homes vanish, leaving behind negative equity. Those of us who have not yet purchased homes will find it even more difficult, for even though home prices are declining, lenders are tightening the reins, requiring up to 20% down, and even refusing to lend to people with modest credit scores. Add to that the rising local and school taxes, which affect new home purchases. These taxes are not paid by the baby boomers living in homes they have owned for 25 years. These taxes are paid by those in my generation who decide to join the homeowner club. Because of the housing crunch, the stock market has suffered. It is unlikely that we will see double digit percentage growth very much in the next several decades. There is a huge difference between 6% annual return and 12% annual return. It's about a factor of 2, meaning that your money takes twice as long to double in value, so a $10,000 investment becomes $20,000 in 11.5 yrs and 5.75 years, respectively. Thus, after 46 years, $10,000 becomes $160,000 and $2,560,000, respectively. Very disheartening indeed. But that's not all. Education expenses have grown almost as fast as the housing bubble, making a college education up to 4 times as expensive in terms of adjusted dollars. And the disparity in income between high school graduates and college graduates has widened, making it almost mandatory to get a college education just to find a job. And lastly, inflation may certainly rear its ugly head again, as we find manufacturers raising the prices on products they've shrunken. We are paying more for a smaller bar of soap. Included in that is also the rising price of gasoline, which is likely to hit $5 a gallon in the next 12 months.

We should also mention Social Security and Medicare at this time. Current estimates by most analysts would predict that Social Security, Medicare, and Medicaid will require the entire federal budget in order to exist in 2070. And that's if the physician reimbursements are cut 41% over that time frame. Congress has repealed the cuts in the last three years in order to prevent physicians from refusing to see Medicare patients. (If you knew your income would drop 41%, would you be looking for a new job or fight the system? Apparently, both.) That means it is likely these three social service plans will bankrupt the system even earlier. So where will my Social Security check be? At this point I'm a little skeptical that I'll even have one. A common misconception is that the Social Security taxes you lose in your paycheck are somehow going to a big federal bank where they will wait until you hit retirement to be paid back to you. In fact, the Social Security taxes you pay are for the current recipients of Social Security. So my generation is up a half leg, being that we are a smaller generation than the Gen Yers and the Millenials. But health care is getting more expensive. Insurance is getting more expensive. Medications are getting more expensive. There is no solution in sight, since the Presidential candidates won't talk about it for fear of derailing their campaign. It seems that at the very least I will have to be responsible for a large part of my medical costs.

So what is an after-baby-boomer to do to prepare for retirement? Max out my company's 401k? Make sure I have 6 months of pay in an emergency fund? Max out my Roth IRA? Pay down credit card debt? The answers to these question are all yes, of course. But they are non sequitur to the original question. These financial recommendations are sound, but will be very unlikely to prepare my generation for retirement. Unless the stock market enters another atypically long bull run, I'll be down $2.4 million without doing anything wrong. It will make me feel less depressed about the $50,000 of lost home equity in comparison, though. There is no good answer to the great question. The combination of lower yields, rising prices, later start date for saving, and reduced funds for contribution make it impossible to be secure for retirement. The math is straightforward and simple.

Having accepted the sad fate of being poor or bankrupt in retirement, I do wonder what happens when you run out of money after you retire. No one ever talks about that scenario. It's always just a cautionary reference, "make sure your savings will last up to 30 years after you retire." What happens if you don't have money? What if a baby boomer lives longer than he expected? What if he spends too much after he retires? Does he file for bankruptcy and move in with his kids? Does he move into a nursing home and become a ward of the state? Does he get a job? How does he eat? Is he homeless? Why don't people talk about this? There must be at least 1% of people that don't have enough for retirement. We've spent 6 months talking about the 1% of homeowners that have defaulted on loans because of poor planning. How about the people that planned poorly for retirement? It must not turn out well for those folks, but I'm not worried. If a large part of my generation is headed for incomplete retirement savings and history repeats itself, the federal government will bail us all out. So I can just spend my money as I wish and extend my credit to the tomorrows. The fed will save me from the consequences with a retirement stimulus package in 2045.

Saturday, March 22, 2008

Fueling the Gas Price Hype

America's financial outlook remains teetering in the balance. Warren Buffet says we are in a recession. The fed says we are in an economic downturn. Nonetheless, the housing market is still roiling, investment banks are bracing for more write downs, and oil is over $100 a barrel. Oil hit $107 a barrel last week before falling below $100 again. Gas remains over $3 a gallon and is predicted to climb to as high as $4.50 a gallon by late summer. It may even hit $5 a gallon by some predictions. There has been a lot of press about the price of gas. The oil embargo 1973 showed how high gas prices could cripple an economy. Certainly gas over $4 a gallon would be an ominous sign, but I would beg to differ.

I don't believe gas prices are really all that indicative of the general economic health. While it is in many respects a necessary resource for most people and businesses, it is not treated that way. I will argue that gas could go up to $6 a gallon until people actually curb their driving. There are three reasons why gas prices can climb much higher.

When you go to buy or lease a new car, there are certain qualities you look for. Surely, make, model, color, transmission, and cost are very important. You also look at the packages or perks--power anything, stereo, GPS, rear entertainment, moon roof, leather, heated seats, etc. But there is one thing that everyone looks at when buying or leasing a car, whether it is conscious or not--fuel efficiency. It's nearly impossible to miss. Numbers in large bold font right on the window sticker of every car, "18 mpg city, 25 mg hwy". We are all aware of the fuel efficiency of our vehicles, but do we register it? I would guess that if you asked a hundred people on the street why cars get less mileage in the city than on the highway, over 95 of them would have the right answer. Stop and go driving burns more fuel per distance traveled. More fuel is wasted by accelerating than by maintaining speed. This much is intuitive and does not require higher education. Yet every day as I drive to work there are people zipping in and out of lanes, racing to the get to the red light first, and tailgating if you aren't driving more than 10 miles over the speed limit. Does this aggressive driving waste more gas than cruising at the speed limit or even the common speed? Of course it does, and I think people know this. When gas is expensive enough that people actually drive less aggressively, then you'll know we have a gas crisis at hand.

Another reason people will spend $5 or $6 a gallon on gas is because they aren't paying for it. That's right, they aren't paying for it. What I am about to say may not be able to be proven, but given the history of people trying to cheat to IRS, I think it's more than likely true. Let's look at the big picture first. If gas prices go up, companies that deliver goods must pay more for gas. Which means that consumers in turn will pay more for goods, thus diverting the extra cost from the business. Companies have little incentive to stop driving because they are not taking the brunt of higher gas prices. But if there is a significant decrease in business because of the increase in prices from the increase in gas prices, they may decrease deliveries. Let's take it one step further. For people who have "company cars", they use that vehicle for both work and personal purposes. But I will guarantee that it all gets written down as "work" use and the company pays for all the gas. This may not seem like a terrible thing, especially for people who own their own business, since that money would come to them anyways, but that money will now also be tax deductible, offering more savings. Tell that someone who actually pays for gas with taxable income and see what he thinks about it. There is a reason the IRS is targeting more small businesses for audits now.

And the third reason gas can go up to $6 a gallon? Because people simply don't care that much, despite the hype fueled by the media.

Monday, March 3, 2008

Charity in Vain

I was watching Lost the other night, not because I enjoy the show but because someone else was watching it and I was in the same room. It was the episode where Charlie goes into the hatch and turns off the jamming frequency but then drowns as foreseen by Desmond. Later on Hurley goes off on a rant about following Locke so that Charlie's death would not have "been for nothing". That got me thinking about all the times in television shows and movies that the line, "he didn't die in vain," or some form of that line has been used to give meaning to a character's existence. I also thought about the myriad of news stories about slain children or servicemen and how if someone turned over a new leaf because of that tragedy or if some charity was successful at raising money that meant the death was not "in vain" or "for nothing". But are we simply making up a reason to comfort ourselves?

There are obviously many ways we measure a life's worth. There are monetary measures in terms of insurance, damages in wrongful death suits, and net worth accumulated over one's lifetime. There are also the accomplishment measures in terms of community work, societal impact and changes effected, charitable work, and masterpieces created. You can also measure life's worth by family and friends. Each of these measurements typically represents either total assets or total potential of assets over a lifetime.

So how is it that a posthumous accomplishment, change, or payout makes the loss not for nothing? If seven year old Jack is struck and killed by a drunk driver, does getting a law passed as Jack's Law that stiffens the penalty for DUI or forces bars to collect car keys make little Jack's death not "in vain"? If puppy dog Toto dies from neglect, does bringing awareness to animal abuse make his death not "in vain"? You could say that at least some good will have come from a tragic event, or that other people will be able to learn from these mistakes. But it would seem rather that these are simply "too little too late" good deeds to make the person suffering the loss feel better. Is that necessarily wrong? No, it isn't, because there must be some way to cope with grief. It's simply advertised as something more meaningful and lofty when it isn't. "I am educating people about drunk driving because I am devastated about my son's death and don't know what to do with this grief inside of me." That makes more sense than, "People should be aware of the dangers of drunk driving so my son's death will mean something." There is an innate hypocrisy in the second, since his son may not have been killed by a drunk driver had he gone out and educated people about drunk driving.

The same phenomenon is seen with charities. Let's be clear up front--charities are good. They serve good purposes. But have you ever noticed that when someone has a person close to them diagnosed with a disease or disorder, suddenly they are the biggest proponents of charities for that disease? Whereas before it affected someone close to them, they may have only been partially sympathetic to the charity if at all? The two most obvious examples of this phenomenon are autism and breast cancer. You could put two donation jars side by side anywhere. Label one "Find a cure for autism," and the other, "Find a cure for muscular dystrophy." At the end of the month, guess which jar will have more money? It doesn't mean you are a bad person if you put your money into the autism jar and not the muscular dystrophy jar. It just means that you're up a creek without a paddle if you have muscular dystrophy. And only a fraction of people would actually put money into both jars, which is why you rarely see charities asking for money right next to each other. How many fund raisers have two different and unrelated charities being supported?

This very predictable behavior of people toward charities is also easily exploited. Witness breast cancer awareness month. Created by Congress in good faith, October is slated for public education of breast cancer. With this awareness, the American Cancer Society and Susan G. Komen foundation gain a surge in charitable donations to education, research, literature, etc. With this awareness, for profit companies can generate more revenue by putting the right shade of pink on their products and stating that they will donate a portion of the profits to the Susan G. Komen foundation or the ACS. A portion such as 10% or less of the profit from the sale of the pink labeled said product. And so while shopping people are more inclined to impulse buy a pink labeled Susan G. Komen supporting product because "it's for charity, after all." So what losses the companies take from donations, they more than make up for in increased sales. A win-win you say? It's a win if actual researchers are shorted funding that goes into the executives' pockets? It's a win because some donation is better than no donation?

Then I have a charity for you. Donate to the Thin Slice of Life Fund. For each donation you will get a pink sheet of construction paper with a "Thank You" printed from my laser printer. But I promised that 5% of all donations received will go to the Susan G. Komen fund for breast cancer awareness and research. A win-win.