Every once in awhile I run across an old newsletter that I used to communicate with clients when my practice was at an early stage. The April 1989 issue was directed to Baby Boomers who were between the ages of 25 and 43 at the time. Next year, that same generation will be between 43 and 61. Here are some quotes from almost 18 years ago.
"....The movement of your generation through our economic system has been compared to that of a snake swallowing a rabbit. For example, when you became school age, the educational system was forced to expand rapidly to meet the demand. The result was shortages of teachers, textbooks, and classroom space. ..........The same thing happened as you entered the labor force and competed for a finite number of entry level jobs. Now that you have moved into postitions of increased responsibility, there is a serious shortage of entry level workers and a surplus of managerial and supervisory talent. When you needed housing, the increased demand caused an increase in home prices and interest rates."
".........In some 17 odd years, many of you will be eager to stop working and enjoy the benefit of many years of labor. In the beginning this may not be too dificult; however, as you grow older, the number of workers paying into the retirement system will decrease, making it less likely that you will be able to recoup the funds which you have so faithfully paid into the system."
"......... If baby boomers don't drastically increase their savings habits, they won't have funds available for retirement. If they do, they may drive rates of return down resulting in insufficient retirement assets. What can you do to avoid this competition for high investment returns? The best answer lies in becoming serious about saving and investing before of others of your generation discover the need to do so.........we might also look at the current high interrest rate environment to lock in rates at the current levels. I am about ready to start moving into instruments such as zero coupon treasuries with a 10- year maturity or long-term fixed annuities with a 10-year rate guarantee. ........I believe that there is a 10-20% probability that interest rates in the 90's will return to the low levels of the 60's and I intend to invest accordingly."
These quotations from almost 20 years ago are some examples of what we can do to develop a vision of the future and plan our investment strategies accordingly. Very few people would have beleived that the yield on a 10 year treasury would drop from 9% in 1989 to 4.5% today. During that same time increased investor demand drove the Dow from 2418 to 12,121. It is also an example of statistical information that is "set in stone." We absolutely knew that a large segment of the population would go from the 25-43 range in 1989 to the 43-61 range in 2007. It was only a small step to extrapolate what behavior changes might occur as that change became reality. Following that investment strategy enabled me to enjoy the comfortable lifestyle that I now have..............Now if I could just figure out what to do for the next 18 years. Come to think of it, it is the need to do just that that has prompted me to start this blog in the first place. Give me a call or drop me a quick e-mail if you want to discuss some of these issues and develop a strategy for your own financial independence.
Monday, November 27, 2006
Wednesday, November 22, 2006
JUST WHAT IS A CASH FLOW GARDEN?
Some of my readers have asked me why I named this blog "Cash Flow Garden." A short answer is because I believe that the central issue in developing financial independence is not assets, it's cash flow. Its about replacing the cash flow derived from work (trading time for dollars) with cash flow from more enjoyable pursuits, like investing.
Over 20 years ago when I enrolled in a program to earn my commercial real estate designation (CCIM), one of the first things the instructor emphasized was that any investment could be evaluated based on a series of cash flows. That message stuck with me as I helped clients plan for their retirement. When I used the financial planning methodology for calculating the funds needed for retirement, I had to make a number of assumptions such as life expectancy, average return on investments, inflation, etc. The final result was dependent on my making those assumptions of which were little more than educated guesses. As an example, consider the fact that a recent article I read calculated that a couple earning $50,000 a year would need $1.75 million for a "comfortable" retirement. Now ask yourself, what couple earning $50,000 a year has a prayer of accumulating $1.75 million? Stated another way, what couple with $1.75 million worth of investment assets will be satisfied with $50,000 a year?
When I read Robert Allen's book on "Multiple Streams of Income", I reached the conclusion that cash flow from a wide variety of sources was the actual key to financial independence. I envisioned that the process was something like planting a garden from which cash flow could be derived. Like a garden, some crops were dependable (almost anyone can grow zucchini but sometimes you can't even give it away). Other crops are more valuable (every one likes home grown tomatos but the yields often vary due to weather, pests, and soil conditions). Still the garden needs a variety of crops to produce a reliable food supply.
I would like to wish all of you a happy Thanksgiving. Of the many things I am thankfol for, I appreciate my clients, past present, and future which are a part of my cash flow garden. As a side benefit, I have been blessed with some very valuable friendships from this group. Think about your financial independence and call or e-mail me if I can help you construct your own cashflow garden.
Over 20 years ago when I enrolled in a program to earn my commercial real estate designation (CCIM), one of the first things the instructor emphasized was that any investment could be evaluated based on a series of cash flows. That message stuck with me as I helped clients plan for their retirement. When I used the financial planning methodology for calculating the funds needed for retirement, I had to make a number of assumptions such as life expectancy, average return on investments, inflation, etc. The final result was dependent on my making those assumptions of which were little more than educated guesses. As an example, consider the fact that a recent article I read calculated that a couple earning $50,000 a year would need $1.75 million for a "comfortable" retirement. Now ask yourself, what couple earning $50,000 a year has a prayer of accumulating $1.75 million? Stated another way, what couple with $1.75 million worth of investment assets will be satisfied with $50,000 a year?
When I read Robert Allen's book on "Multiple Streams of Income", I reached the conclusion that cash flow from a wide variety of sources was the actual key to financial independence. I envisioned that the process was something like planting a garden from which cash flow could be derived. Like a garden, some crops were dependable (almost anyone can grow zucchini but sometimes you can't even give it away). Other crops are more valuable (every one likes home grown tomatos but the yields often vary due to weather, pests, and soil conditions). Still the garden needs a variety of crops to produce a reliable food supply.
I would like to wish all of you a happy Thanksgiving. Of the many things I am thankfol for, I appreciate my clients, past present, and future which are a part of my cash flow garden. As a side benefit, I have been blessed with some very valuable friendships from this group. Think about your financial independence and call or e-mail me if I can help you construct your own cashflow garden.
Monday, November 20, 2006
HAVE YOU EVER HEARD OF A CANROY?
Canroy is short for Canadian Royalty Trust. These are investment vehicles out of Canada which have been very popular with American retirees. An abbreviated definition is that these trusts own interests in natural resources mainly oil and natural gas. In recent years trusts have been formed for iron ore, coal, and synthetic oil. Their popularity with income oriented investors is because they tend to distribute 75% of their income on a monthly basis. Yields have reached as high as 16% on invested capital. One of the reasons for the high yield is that they haven't been subject to Canadian corporate taxes....No longer true. Canada's relatively new minister of finance has announced that in the future, they will be taxed as corporations. This to the dismay of retired investors, many of which sold off their investments for as much as 25-40% lower than pre-announcement prices. One of my colleagues, a very seasoned investor announced that "Canada will never get another dollar from me. Not even a Moosehead."
Most of our clients didn't lose money in this disaster, mainly because we preferred to keep our royalty investments in the US, where we think we are more familiar with the investing environment. Now that prices have dropped, are canroys now attractive? There are a number of reasons to think this may be true. 1. While corporate taxes will definitely mean that there is less to distribute to investors, the new taxation will not be implemented for existing trusts until 2011. The rules may change by then. 2. Plans are under way to reduce Canadian corporate tax brackets which will reduce the effects of the new rule. 3. Depletion allowances are such that much of the income is considered to be a return of capital and not taxed. If 12-14% distributions sound good to you, it might be a good idea to diversify your income stream by adding small amounts of these vehicles to your portfolio. While we probably won't add these to accounts other than those large enough to absorb some risk, I may add some to family accounts.
Getting back to real estate, I was interviewed by a reporter for an article that appeared in the November 20 of Time magazine and quoted as saying something to the effect that "As soon as you have a bunch of empty bedrooms, you should consider downsizing to a smaller house because owning more house than you need is a poor allocation of capital." I qualified that statement that stated that this was from a strictly financial perspective. I don't know if that was clear in the article but I am well aware that it is never a strictly financial issue. Living under the bridge along Cherry Creek gives you the benefit of a good neighborhood at very affordable prices from a "strictly financial perspective." Still, did we really need to go from an average new home size of less than 1000 square feet in the 1950's to almost 2400 today? One of my main concerns is that the economy of the future may not allow us to continue to allocate so much capital for the simple purpose of putting a roof over our head. We should discuss this more in future posts. Send me an e-mail if you have any ideas on this subject.
Most of our clients didn't lose money in this disaster, mainly because we preferred to keep our royalty investments in the US, where we think we are more familiar with the investing environment. Now that prices have dropped, are canroys now attractive? There are a number of reasons to think this may be true. 1. While corporate taxes will definitely mean that there is less to distribute to investors, the new taxation will not be implemented for existing trusts until 2011. The rules may change by then. 2. Plans are under way to reduce Canadian corporate tax brackets which will reduce the effects of the new rule. 3. Depletion allowances are such that much of the income is considered to be a return of capital and not taxed. If 12-14% distributions sound good to you, it might be a good idea to diversify your income stream by adding small amounts of these vehicles to your portfolio. While we probably won't add these to accounts other than those large enough to absorb some risk, I may add some to family accounts.
Getting back to real estate, I was interviewed by a reporter for an article that appeared in the November 20 of Time magazine and quoted as saying something to the effect that "As soon as you have a bunch of empty bedrooms, you should consider downsizing to a smaller house because owning more house than you need is a poor allocation of capital." I qualified that statement that stated that this was from a strictly financial perspective. I don't know if that was clear in the article but I am well aware that it is never a strictly financial issue. Living under the bridge along Cherry Creek gives you the benefit of a good neighborhood at very affordable prices from a "strictly financial perspective." Still, did we really need to go from an average new home size of less than 1000 square feet in the 1950's to almost 2400 today? One of my main concerns is that the economy of the future may not allow us to continue to allocate so much capital for the simple purpose of putting a roof over our head. We should discuss this more in future posts. Send me an e-mail if you have any ideas on this subject.
Tuesday, November 14, 2006
UNPLEASANT BUT IMPORTANT
Would it be possible for someone to take over your finances this afternoon? Could they locate the required documents? Could your spouse guide them in the right direction? I ask these questions because I am often called on to do just that and find it amazing that it is such a difficult task. Sometimes its an unexpected death; however, in others it is in a situation where dementia has gradually lessened someone's ability to decide what's important and worth keeping. In those cases, there is often so much unorganized, trivial information that it is impossible to sort through it all to locate what's really needed.
If you expect insurance companies to be a big help in this area, you can be sadly mistaken. Mortgage cancellation policies are particularly difficult. I have spent hours on the phone talking to mortgage companies before locating someone who has a clue as to the benefits available under these policies. In one instance, the surviving spouse was told that the policy was an accidental death and dismemberment policy with no benefits available for natural death. Since the premium appeared to be way to high for an AD&D policy I was determined to get more information. After speaking with five or six representatives over the phone, I finally found someone who could give me an insurance company and policy number. The spouse got a $40,000 benefit but it was stress she didn't need at the time.
Living trusts are another example. These are supposed to be devices to avoid probate and simplify distribution of an estate but they are worthless if you don't put any assets in them. Sometimes successor trustees have been appointed and never given a copy of the trust documents. In some cases, they weren't even told that they would have this responsibility. The same is true for durable and medical powers of attorney.
Perhaps the worst instances are those in which one spouse has handled all the finances and the surviving spouse has no idea what to do when left alone. Even if a detailed record of all the assets is available, the surviving spouse may not be able to determine how to derive income from those assets. I have seen cases in which the surviving spouse had to cope with considerable anxiety along with grief until we were able to determine that she would be able to support herself without the deceased pension and private annuity income. The moral of that story is that income planning can be the central issue in estate planning as well as retirement planning.
I could devote several posts to this unpleasant topic but I hope this one gives you the motivation to contemplate what those who depend on you would do without your presence in in handling your affairs. It certainly has me. Stay tuned for my next post on the topic of canroys. If you don't know what those are you are probably in the majority. I've had to do a bit of research myself to become more familiar with this topic.
If you expect insurance companies to be a big help in this area, you can be sadly mistaken. Mortgage cancellation policies are particularly difficult. I have spent hours on the phone talking to mortgage companies before locating someone who has a clue as to the benefits available under these policies. In one instance, the surviving spouse was told that the policy was an accidental death and dismemberment policy with no benefits available for natural death. Since the premium appeared to be way to high for an AD&D policy I was determined to get more information. After speaking with five or six representatives over the phone, I finally found someone who could give me an insurance company and policy number. The spouse got a $40,000 benefit but it was stress she didn't need at the time.
Living trusts are another example. These are supposed to be devices to avoid probate and simplify distribution of an estate but they are worthless if you don't put any assets in them. Sometimes successor trustees have been appointed and never given a copy of the trust documents. In some cases, they weren't even told that they would have this responsibility. The same is true for durable and medical powers of attorney.
Perhaps the worst instances are those in which one spouse has handled all the finances and the surviving spouse has no idea what to do when left alone. Even if a detailed record of all the assets is available, the surviving spouse may not be able to determine how to derive income from those assets. I have seen cases in which the surviving spouse had to cope with considerable anxiety along with grief until we were able to determine that she would be able to support herself without the deceased pension and private annuity income. The moral of that story is that income planning can be the central issue in estate planning as well as retirement planning.
I could devote several posts to this unpleasant topic but I hope this one gives you the motivation to contemplate what those who depend on you would do without your presence in in handling your affairs. It certainly has me. Stay tuned for my next post on the topic of canroys. If you don't know what those are you are probably in the majority. I've had to do a bit of research myself to become more familiar with this topic.
Monday, November 06, 2006
ANOTHER FANTASTIC MORTGAGE DEAL.
Here it is again folks. A fantastic deal just waiting for you call. I saw this advertisement when I pulled up my e-mail. At the bottom of the screen were several silhouettes showing people dancing around some text that said "$510,000 mortgage for less than $1,698 per month." Being a curious sort of fellow, I got my trusty HP 12C calculator out, put in the numbers and came up with in interest rate of 1.25%. Reminds me of the TV commercial that offers a mortgage that's the "Biggest no-brainer in the history of Earth." I never knew there were lenders out there who would loan home buyers money at a rate less than the US government pays. Some lenders even advertise those as "30-year fixed." How can they do that? The secret is that the payment is fixed for five years...........Well, not exactly fixed but it escalates at a fixed rate of 7.5% per year. Still sound like a good deal? Look at your loan balance. It goes up every month, not down.
Another "fantastic deal" is the 50 year loan. With a half million dollar principal, it saves a borrower $365 per month over a 30 year loan (assuming the same interest rate). The worst thing about those advertisements is that they claim the payments on this loan are even lower than interest only loans. Think about it. How could a loan with any principal payments whatsoever have lower payments than an interest only loan? (Again, assuming the same interest rate). Another mathmatical mystery. Maybe some of my clients with an MBA in finance can send me an e-mail answering this question.
We continue to watch the real estate markets. It appears that most commercial real estate is overpriced relative to the income it produces. We have yet to see much weakness in this area. The housing market is another story. If you look hard enough it is possible to buy houses at lower prices than a year ago. The high foreclosure rate, along with overbuilding, is putting downward pressure on home prices. All this at a time when the rental market is growing stronger. We may be approaching a point in which rental housing is becoming more attractive relative to other investments. We are not quite ready to recommend jumping into the market at this time. When the current excess inventory begins to diminish, we will be ready to scour the markets for buying opportunities.
Another "fantastic deal" is the 50 year loan. With a half million dollar principal, it saves a borrower $365 per month over a 30 year loan (assuming the same interest rate). The worst thing about those advertisements is that they claim the payments on this loan are even lower than interest only loans. Think about it. How could a loan with any principal payments whatsoever have lower payments than an interest only loan? (Again, assuming the same interest rate). Another mathmatical mystery. Maybe some of my clients with an MBA in finance can send me an e-mail answering this question.
We continue to watch the real estate markets. It appears that most commercial real estate is overpriced relative to the income it produces. We have yet to see much weakness in this area. The housing market is another story. If you look hard enough it is possible to buy houses at lower prices than a year ago. The high foreclosure rate, along with overbuilding, is putting downward pressure on home prices. All this at a time when the rental market is growing stronger. We may be approaching a point in which rental housing is becoming more attractive relative to other investments. We are not quite ready to recommend jumping into the market at this time. When the current excess inventory begins to diminish, we will be ready to scour the markets for buying opportunities.
Subscribe to:
Posts (Atom)