The Truth About Savings

by Ouida on August 24, 2010

I think that most folks who have read my blog understand that I am not a fan of the 401K.  The market crash of 2000 and each market crash after that have lead me to believe that the vehicle of tax-deferred savings with the majority of those savings going into the stock market is simply not going to help the average worker reach any sort of secure retirement.  A couple of years ago, I wrote and and published an article outlining what a scam I thought the stock market was and is.  I also put the article on my blog.  Recently I have posted to my Facebook page links to articles I have found around the web about Social Security.  These articles are not so much about the need to overhaul the program, they are about what financial planners are telling their clients in anticipation of changes to the program.  I have posted these articles for one reason only:  The people getting the financial advice are 6-figure income earners.

Throughout the Bush era, the median household income was $43, 000.  That income threshold is now slightly above $50,000.  Only 25% of US households earn above $66,000 dollars.  In other words when financial planners are talking about building a secure retirement future, they are not talking to the majority of working Americans.

CNN posted an article, Secrets of Extreme Savers, that I also posted to my Facebook page.  Many of these savers were six-figure income earners but not all were, some were single, some were not, some had children, some did not.  The one thing that they all had in common?  They all saved 30-40% of their after-tax income.  The one who saved the least, 25% actually started a side-business to make up the difference.

This turns the whole concept of living within your means on its ear.  Living within your means will land you in the poorhouse, the truth is that you have to live well below your means.  Unfortunately this concept is entirely at odds with an economy that has consistently outsourced its manufacturing to cheaper labor markets and has become increasingly dependent on a spending consumer.

The mantra of save 10%, get a 50% match then invest in the stock market for 15-16% long term returns and a secure retirement is simply a financial myth.  Every financial book written in the 1990’s had some version of this formula in it and retirement savers adopted the strategy en masse.  Simply “googling” the search terms, history of the 401K, leads one to the inescapable conclusion:  that the proliferation of 401K plans led to the very stock rally that culminated in 1999 and that retirement savers hope will occur again today.  It won’t.  In 1982 the DOW sat at roughly 800 by January 2000 it was at roughly 11,700. The last decade has been classified as a bear market.  The demographic trend, the baby boomer generation, that created the bull market run of more than a decade ago has passed.  Those boomers are no longer saving for retirement and driving the markets, they are collecting Social Security.

The truth is that we have to save more and investing for appreciation in the hopes that that strategy will lead to a secure retirement is probably a fools game.  The crazy thing, though, is that the 401K was never intended to get anyone rich.  It was intended to supplement Social Security.  From Teresa Ghilarducci professor at The New School for Social Research, “In a perfect world, an average worker could amass something like $400,000 in a 401K by retirement.  After nearly three decades of 401K contributions, though, the average account balance for people nearing retirement age is about $60,000.  Far less than what’s needed.  So it’s no surprise that when a recent Gallup poll asked what Americans want most from government, more chose guaranteed pensions than guaranteed jobs or health care.  Most people save less than 5% of their income for retirement, and many start withdrawing funds early because of layoffs, divorces , and other unexpected events.  The consequence of these 401K leaks is that workers retiring in 15 years will do worse than their parents and grandparents, according to the Center for retirement Research at Boston College.  Almost two-thirds of households will probably face declining living standards in retirement.”

In short, the 401K was intended to be a base hit, not a home run and saving 10% was the least a worker could do to prepare for the future, but not the only thing.

I used a retirement calculator to calculate the payout over 30 years for a given retirement fund balance.  Then I went to the Social Security website to find the benefit of a person born in 1948 and retiring at age 62.  An individual with a $400,000 nest egg in retirement + Social Security will yield an initial retirement income retiring at age 62 of $2000 per month.  Assuming 3.5 % investment return and 3.5% inflation that worker will be able to give himself additional modest increases in income throughout retirement.  This retirement calculator at hugh’s calculators is a handy tool.

As I plan my retirement now, I look at what I have today and what I can buy today that will give me cashflow in retirement.  Buying buckets of bonds and dividend-yielding stocks will give cashflow in retirement.  Buying stocks for appreciation won’t.  Buying rental property will, buying a house won’t.  Starting or investing in a business will, looking for a job unless, I intend to save a third of my income so that I can engage in one of the other strategies I just mentioned won’t.

Am I saying that a person who is unemployed with the wolves at the door shouldn’t look for a job?  I will answer that question by paraphrasing author, Robert Allen.  In 2002 I attended a Robert Allen seminar and he basically said this:  Some of you are here today because you are hurting financially.  Many of the opportunities we will discuss here are not going to be for you.  I urge you instead to do what you need to do to get stable.

I take that to mean find a job, sell your crap, sell your ideas, what ever you can to establish an income stream then save 30-40% so that you can buy things that generate cashflow.  The truth is that most folks generate income to pay the bills, but that is a pretty narrow view of money.  Each dollar generated has to pay the bills today and work to build a future.  It is a lot to ask of a dollar to do two and three jobs at once, but we have to do it.  Creating a situation where each dollar does more than one job versus only doing one job is the difference between taking a leisurely stroll in the park on a sunny day versus running an endless marathon in the mud.

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Shirley Sherrod

by Ouida on August 3, 2010

Last week Bob Herbert, op ed columnist for the NY Times went on a rant about Shirley Sherrod.  Generally I believe Mr. Herbert to be a whiner, complaining about the world as he sees it without offering any clear solutions.  But how do you offer any credible solutions involving an incident in which edited video is taken as fact and lies as the truth?  Lies become actionable and not necessarily to punish the liar.

Now that we have a Black man in the White House, hurling the “R” word at someone causes even the most unlikely people to head for the exits, abandoning the supposed racist in the dust; and, sadly, no one fact checks.  President Obama gave an incredibly beautiful and on-point speech about racism during the 2008 campaign.  When I heard it, I could not believe my ears because he spoke honestly about the state of race-relations in America.  The mess surrounding Ms. Sherrod simply underscores that, racially speaking, things are worse than we thought.

The unedited speech is rife with irony.  At its beginning, she speaks of the pride she has serving in the administration of the first Black president. At its middle she speaks of the anniversary of the murder of her father, a Black farmer who was murdered at the hands of a white farmer who was never brought to justice even though there were witnesses to the crime.  The murder of Blacks in the South from the post Civil War days through the 1960’s was not uncommon.  Since the men who committed these crimes had no fear of prosecution, they often made no attempt to hide their identities.  Midway through her speech Ms. Sherrod mentions a white farmer who came to her for aid 24 years ago.  Did Ms. Sherrod really say what was depicted in the 2 and a half minute video posted on the website?  She sure did, that and so much more.  Her original speech was 43 minutes long.  Andrew Breitbart lifted 2 and a half minutes right out of the center of it.   When her father was murdered, Ms. Sherrod decided to remain in the South to work to change the status of Black people.  Her involvement with the Spooners, the white family who came to her for aid, taught her that she was there to help all people, people who lack access because of their socioeconomic status.  Ultimately for her, poverty became a larger issue than race. Ms. Sherrod talked about the need for unity among all races, she talked about the need for community development in Black communities and that our communities should foster education and economic empowerment through business ownership.  Ms. Sherrod helped the Spooners, now in their 80s, remain on their farm and they have all remained life-long friends.  Ms. Sherrod is not the most gifted speaker in the world, but her speech is lovely and worth a listen to;  although, sadly, the NAACP did not remember enough of the speech to avoid condemning Ms. Sherrod, they have graciously provided the unedited version on their website.

Did Ms Sherrod initially attempt to limit the assistance she provided to the Spooners because of race?  Yes she did.  Did she then give more than her all and help the Spooners remain on their farm?  Yes she did.

Was her initial attitude so surprising?  Not really; it was the mid 80s.  Three Black men, including 16 year old Yusef Hawkins had been murdered by white mobs in New York City, it would be a few years before Rodney King would be beaten before our very eyes on national television and I and my brown-skinned classmates heard the “N” word more times in Manhattan uttered by our supposedly well-educated white medical school classmates than I ever heard growing up in the South.

The Sherrod affair is sad.  We’ve come a long way since the wholesale murder of Blacks was condoned by society.  We’ve come a long way even from the 1980’s, but Shirley Sherrod reminds us that in a sound-bite society in which the “R” word has become the new “N” word, we still have a ways to go.

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Is Being Cheap Ripping You Off?

by Ouida on July 23, 2010

Okay that is such a clumsy title for a post,  but there it is.  I am still reading Ellen Ruppel Shell’s Cheap:  The High Cost of Discount Culture.  Ms.  Ruppel Shell’s premise is simple, our quest for low prices is anything but harmless.  We pay for it in damage to the environment and the ultimate loss of craftsmanship and quality.  Cheap goods allow us to move toward a throw-away society.  Charles Fishman argues in The Walmart Effect that Walmart makes sells cheaply-made lawnmowers so cheaply that you’d never think of repairing one, you’d simply replace it when it breaks which it is likely to do each and every year.

The abundance of cheap goods has masked the very real problems of inflation and wage stagnation.

I love getting a good deal, but I love getting a good deal for a quality item.  The problem is that much of what we buy is low on quality.  The most enlightening chapter of Ruppel Schell’s book is the chapter entitled, “The Outlet Gambit.”  Premium outlets are designed to  get you to part with your money while connoting value.  The problem is that the reference prices on which the discounts are based are fiction and many brand leaders manufacture lower quality products specifically to sell in “premium outlet” malls.  Ruppel Schell and Dr. Gillian Naylor, marketing professor at the University of Nevada, Las Vegas College of Business, travel Las Vegas malls with Dr. Naylor distinguishing between quality and garbage merchandise and, more importantly, whether or not suggested retail price is truly reflective of a product’s quality.  More often than not the answer was no.  Rupel Schell writes, “Given this assiduous attention to value, Naylor’s opinion of outlets is worth noting:  She uses them, but sparingly. She prefers department stores which she said generally carry better quality merchandise at prices that are frequently lower than outlet levels.”

This book has merely confirmed something that I began to suspect long ago:  That manufacturers use the allure of outlets to unload inferior merchandise that they make specifically for the outlet. The Coach belt that I bought at the Premium Outlets mall outside Santa Fe, pulled apart within months of purchase and the Coach leather coat, that I paid a pretty penny for has loose stitching and the beautiful rich brown color that I found so attractive on the day of purchase is coming off after only one season of use.  I have vowed to never return.  Coach Premium Outlets is selling junk and if they are doing it in Santa Fe, they are doing it in your neck of the woods.  The implication in Cheap is chilling:  by shopping at an outlet store, you could end up paying $300 dollars for a suit that is really only worth $200 dollars at full retail.

Even online super discounter practices the reference price shell game to lead you to believe you are getting a deal.  I began to suspect something was up when product reviewers suggested in very direct language that Amazon was outright lying about the suggested retail prices on some of its products.  A few months ago I was in the market for a new coffee maker.  Amazon lists the suggested retail price on the Cuisinart DCC-1200 as $145 dollars and they offer it on sale for $69.95 a savings of 52%.  But what does Cuisinart sell it for? $79.95 and there is no suggested MSRP.  Macy’s has the same item listed for $79.95 with an MSRP of $99.95.  We have to conclude that the Amazon MSRP is simply a fantasy used to bolster the value of the perceived deal.  Amazon is really selling the item at $10 dollars off, a savings of 8.7%.  A pretty thorough Internet search has lead me to believe that this item’s retail price is $79.95 and that even the Macy’s MSRP is made up.  This item is easy to compare because Cuisinart only makes one model of the DCC-1200, but what if there are different models of the same item? Take the Buck 110 folding hunting knife.  The Amazon price is $41.36 with a suggested retail price of $66 dollars.  The implied discount is 38%.  Would that it were true.  LLBean sells the same knife for $34.95 and there is no suggested retail price.  Bass Pro sells the same knife for $44.95 and does not list a MSRP on their site.  Hunting Blades does list the MSRP as $66 dollars while selling the knife for $47.95.  What does Buck sell this knife for?  $45 dollars.  Buck actually sells two versions of this knife.  The knife with brass fasteners is $66 dollars and the one with nickle fasteners is $45 dollars. The image on each site appears to be of the higher-end knife, but none of the sites uses the Buck model number so it is virtually impossible to make direct price comparisons.

Provided that all 4 sites are actually selling the same knife, this exercise illustrates several things:

1) Whether the MSRP is real or not retailers use that number to provide context for the deal you think you are getting.

2) Without accurate model numbers, it is impossible to truly compare prices from store to store

3) It pays,  literally,  to shop around.  Provided we are talking about the same item, LLBean clearly offers the best deal on this knife.

4) It makes sense to go directly to the manufacturer to verify the MSRP.

5) Price is clearly relative.  Clearly all for sites want to sell this knife yet only one site offers substantial savings over the other three.

Amazon’s pre-order price guarantee is a zero-sum game.  The  guaranty only applies to prices in effect on the day an item ships.  The guaranty does not apply to rock-bottom price fluctuations that may have occurred before the item shipped.  Price fluctuations that some buyers will be able to take advantage of, but not you if you pre-ordered the item and expected Amazon to monitor the price for you.  The best thing to do is not participate in the pre-order program and watch prices yourself.   The other thing to do is place the item in your cart then remove it to buy later.  If you do that Amazon will watch the price for you.

I am reminded of the Donna Summer song, “she works hard for the money”.  The fact is that we all do, yet I do believe that we want quality and value not junk as we plop down our hard-earned cash for the products we desire.

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Birds, Brains and Personal Finance

by Ouida on July 17, 2010

I love encouraging things to grow.  My backyard garden is bigger and brighter this year than it was last year.  Each year it blooms and surprises me because it never looks the same from one year to the next.  I have been thinking about this post for over a year.  The idea for it came to me one day while I was watching the birds feeding outside my window.  Before I get into this post, though, let me tell you about my ants and aphids.  I hate them both.  A few years ago, I began spot spraying in my yard.  Aphids love fast growing plants.  They tend to congregate on new growth and literally suck the life out of that new growth, distorting the plant, injecting viruses and depending on the plant’s age and overall health, destroy a plant.  Ant’s help the aphids by transporting  them up the target plant and, together, they force the new growth to secrete the juices that both insects seem to love.  I see an aphid and I go into Rambo mode, get out the insecticide and scream “die, die, die” as I spray jets of poison onto the affected plant.  Looking for aphids is part of my daily routine.  Trouble is that spraying is a vicious cycle.  I spot spray because I know I have beneficial insects in my garden that I do not want to harm.  I have aphids, however, because they seem not to be doing their jobs.  There is a part of me that screams, “kill the lot of them, and start over,” then rationality takes over and I look for other ways to solve my pest problem.  When I spot spray, I will control the pests in one area of my yard for a month or so then the problem recurs.  Once you spray, you have to continue to spray and therein lies the problem.  Pesticide is cheap, though, and what I need to do to control the problem naturally is comparatively more expensive.

Turns out that birds and wasps love ants.  Lady bugs love aphids but will get swarmed by the ants if they are present on the same plant.  I have decided that every creature in my yard must have a job and do that job.  The birds are no exception.  In order to keep them around, I actually have to set multiple water stops and feeders around the yard. Funny thing is that when the feeders are full, the birds won’t eat the ants.  A couple of days ago, I watched a beautiful green oriole perch itself on the broad leaf of a sunflower plant.  Patiently it picked at the ants.  The feeders were empty.  I imagined that perching itself on a leaf while eating was hard for that bird.

When I put bird feed out, birds eat in a predictable pattern easiest to hardest.  First they eat the seed that fell on the ground when I filled the feeder, then they sit in the open feeder and feed, then they feed at the hanging feeders with perches on them.  To use these feeders the birds have to perch on a bar or small platform and pick their food.  Then and only then do the birds forage on the ground or perch on the plants for food.

What I realized is that when it comes to personal finance, we are like birds.  We do what is easiest first and we do the hard only when forced to.  So the easiest thing in the short term is not to have a financial plan at all.  The next step up is to start saving a portion of earnings each and every month.  The next step is to decide what to do with those savings by deciding the asset classes we want to invest in, analyze investments and make sound investments while simultaneously incurring, yet minimizing, the risk of loss.  Somewhere along the way we have to protect our income and assets through the proper use of disability and life insurance.

Not having a financial plan is like standing on the ground and eating the food that just happens to spill to the ground either when the feeder was filled or while the other birds feed from the feeder.  Setting up a savings plan is like hopping into the feeder.  It requires a bit more effort, but the long term rewards are significantly greater than just waiting around on the ground.  Analyzing and purchasing investments and protecting your income and assets is like foraging on the ground or perching on the plants and picking food.  It requires a great deal of effort and some risk, but the food is in abundance.  I have ants, worms and beetles galore in my yard but I also have predators.  One year I watched a bird and a bull snake tumble on the ground near a stand of trumpet honeysuckle.  The bird lost the good fight.

The next time you have trouble putting your financial plan into action, consider the next bird that you see and realize that your brain is so much bigger than his!

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