Are We Saving Too Much Money for Retirement? This topic has been the subject of several magazine articles and internet sites recently. Some of these have been downright hostile to the financial community. The premise is that brokerage houses, insurance companies, and financial planners have shown that the average person will need assets of one to two million to retire comfortably. As I have said before, the calculations are mathematically correct and are based on the average inflation rate, life expectancy, and average returns from various asset classes. The devil is in the details. Small changes in assumptions we make can have a huge effect on the final sum needed for a comfortable retirement. The final result can be off by large amounts and are usually biased on the high side because many clients instruct those making the calculations to use somewhat pessimistic assumptions. So why is the financial services industry telling us that we need to save too much. Their detractors say that it's so we can make more money selling financial products. I don't agree with this hypothesis. Many of those who make these calculations actually believe the results. I don't.
Maybe We Aren't Saving Too Much, Just Worrying Too Much. Several years ago, a financial planner made a big issue out of saying that the College For Financial Planning taught students to use a method for calculating retirement needs that under estimated the amount of assets needed by $15,000. If we could come that close every time I would be forever thankful. In my opinion, these calculations are an exercise in futility. In the future, our retirement will be a much more dynamic situation with frequent adjustments necessary to stay on track. We may need to work periodically, change our residence, use reverse mortgages, and change our spending habits.
Our Health is Probably The Most Critical Variables. The high cost of health care can deplete a good sized retirement nest egg in a hurry. We can use long-term care insurance to offset some of this risk but the most reliable risk management tool is to stay healthy. If you are retiring, you will need to budget some of your time and money for maintaining a healthy lifestyle. I don't claim to be an expert in this area but you had better become one regarding your own health. Not only can poor health deplete your finances, it can also damage your ability to enjoy life regardless of how much money you have.
My Posts Have Been Less Frequent Lately. I have been busy with the business of life. Enjoying beautiful spring weather, planting flowers, and catching and releasing numerous bass. I particularly enjoyed a visit from my old friends and business partners, Larry and Helga Davis. Maybe some of you other folks would like to come by. Give me a call and lets make some plans.
Tuesday, April 24, 2007
Tuesday, April 10, 2007
A FEW MORE FACTS ABOUT GLOBAL WARMING
If We Are Going To Comment About Global Warming We Need To Be Informed. News people love to talk about global warming. Many don't know what they are talking about.I have researched a few facts that I think we should be aware of before we get too deeply into supporting one side or another.
1. The rise in the Earth's temperature is correlated with the increase in carbon dioxide levels in the atmosphere. While this is a true statement, even an amateur statistician will tell you that the fact that two things are correlated only means that an increase in one variable is usually followed by in change in the other. This does not mean that one change caused the other. In many cases both are related to a third variable which causes both to change.
2. Carbon dioxide is an unavoidable consequence of burning virtually everything we use for energy. With a few exceptions like nuclear and hydrogen, everything burned for energy produces carbon dioxide. Man first began to produce carbon dioxide when he discovered fire. Even if we learn to produce totally efficient clean burning fuels, as long as we are burning carbon containing materials we will produce carbon dioxide. The bottom line here is that, the only way to produce less carbon dioxide is to burn less carbon containing fuel. Ethanol produces less carbon dioxide than gasoline; however, the processes by which ethanol is produced at this time (fermentation), produces carbon dioxide before the end product produces the first unit of energy. In the final analysis, smaller cars and houses along with less consumption of manufactured products is the only thing we can do to burn less fuel. I wonder how many of us are willing to take that step. Before we get too anxious to blame the oil companies manufacturing industries, and the government, we need to look in the mirror to see the real culprits.
3. We should also ask ourselves if we are sure that carbon dioxide is the real culprit. It is undoubtedly true that carbon dioxide levels are currently 26% higher than the average of the past several hundred years. In absolute terms, the best estimate of this average is 280 parts per million. To get an idea of how much this is, consider that if you took $100 to the bank and converted it to pennies, you would have 10,000 pennies. If all were Lincoln pennies except three indian heads, this would be the same as the historic level of carbon dioxide. If we added a fourth penny, this would be equal to the increase of CO2 levels produced by recent history. This doesn't mean that CO2 isn't responsible for at least some global warming but it does cast some doubt on the issue. It also gives you an idea of how much we are going to have to sacrifice to have some effect on the situation. As the biggest consumer of petroleum based fuels in the world, the US has been criticised for refusing to sign the Kyoto accords. We must remember that China and India are exempt from these and their rapidly growing economies are slated to produce one coal fired energy plant per week over the next few years. If we do elect to participate in this treaty, we had all better be ready for a totally different economy and the transfer of wealth from our economy to those countries that are exempt.
4. We may discover that decreasing our consumption of petroleum products won't be a choice in the future. While it is true that there are ample reserves of petroleum, natural gas, and coal, it is also true that the cheaply accessed reserves are rapidly being depleted. We can get more oil by shale, Canadian tar sands, and deep water drilling; however it will be increasingly more expensive. In the future, it may well be that our concern may turn from how can we burn less to how can we find more at a price we can afford to pay.
5. I predict that learning to cope with climate change will replace trying to figure out how to stop it. In my opinion, regardless of the treaties we sign, rants from environmentalists, and efforts to manage these climate changes, we won't be able to stop the current trends. Learning to cope may well be the only viable strategy.
The next generation will face multiple challenges from the aging of the population to the huge obligations of the federal government. Undoubtedly, we will have to manage our finances, protect our environment, and find ways to manage global conflicts. We may well have to choose our battles more wisely and select those which we have higher probabilities of winning and learn to cope with those where the probabilities of success are lower.
1. The rise in the Earth's temperature is correlated with the increase in carbon dioxide levels in the atmosphere. While this is a true statement, even an amateur statistician will tell you that the fact that two things are correlated only means that an increase in one variable is usually followed by in change in the other. This does not mean that one change caused the other. In many cases both are related to a third variable which causes both to change.
2. Carbon dioxide is an unavoidable consequence of burning virtually everything we use for energy. With a few exceptions like nuclear and hydrogen, everything burned for energy produces carbon dioxide. Man first began to produce carbon dioxide when he discovered fire. Even if we learn to produce totally efficient clean burning fuels, as long as we are burning carbon containing materials we will produce carbon dioxide. The bottom line here is that, the only way to produce less carbon dioxide is to burn less carbon containing fuel. Ethanol produces less carbon dioxide than gasoline; however, the processes by which ethanol is produced at this time (fermentation), produces carbon dioxide before the end product produces the first unit of energy. In the final analysis, smaller cars and houses along with less consumption of manufactured products is the only thing we can do to burn less fuel. I wonder how many of us are willing to take that step. Before we get too anxious to blame the oil companies manufacturing industries, and the government, we need to look in the mirror to see the real culprits.
3. We should also ask ourselves if we are sure that carbon dioxide is the real culprit. It is undoubtedly true that carbon dioxide levels are currently 26% higher than the average of the past several hundred years. In absolute terms, the best estimate of this average is 280 parts per million. To get an idea of how much this is, consider that if you took $100 to the bank and converted it to pennies, you would have 10,000 pennies. If all were Lincoln pennies except three indian heads, this would be the same as the historic level of carbon dioxide. If we added a fourth penny, this would be equal to the increase of CO2 levels produced by recent history. This doesn't mean that CO2 isn't responsible for at least some global warming but it does cast some doubt on the issue. It also gives you an idea of how much we are going to have to sacrifice to have some effect on the situation. As the biggest consumer of petroleum based fuels in the world, the US has been criticised for refusing to sign the Kyoto accords. We must remember that China and India are exempt from these and their rapidly growing economies are slated to produce one coal fired energy plant per week over the next few years. If we do elect to participate in this treaty, we had all better be ready for a totally different economy and the transfer of wealth from our economy to those countries that are exempt.
4. We may discover that decreasing our consumption of petroleum products won't be a choice in the future. While it is true that there are ample reserves of petroleum, natural gas, and coal, it is also true that the cheaply accessed reserves are rapidly being depleted. We can get more oil by shale, Canadian tar sands, and deep water drilling; however it will be increasingly more expensive. In the future, it may well be that our concern may turn from how can we burn less to how can we find more at a price we can afford to pay.
5. I predict that learning to cope with climate change will replace trying to figure out how to stop it. In my opinion, regardless of the treaties we sign, rants from environmentalists, and efforts to manage these climate changes, we won't be able to stop the current trends. Learning to cope may well be the only viable strategy.
The next generation will face multiple challenges from the aging of the population to the huge obligations of the federal government. Undoubtedly, we will have to manage our finances, protect our environment, and find ways to manage global conflicts. We may well have to choose our battles more wisely and select those which we have higher probabilities of winning and learn to cope with those where the probabilities of success are lower.
Wednesday, April 04, 2007
PRE-RETIREMENT CHECKLIST.
Everyone Needs a "To Do" List. My wife and sister-in-law are the two most compulsive list makers I have ever seen. I would be seriously worried if I ever saw either of them without a list. I tease them about their compulsiveness but I secretly admire how much they accomplish by staying focused on a list.
I Don't Live By A List. But I freely admit that I might get more of the right things done if I did. One place where a list is particularly valuable is before you retire or decide to devote less energy to the world of work. Ideally, the list should be started at least a year before the event. The following list may not be totally comprehensive but it contains a number of things that you need to think about before you leave your job.
1. How Much Income Do You Need? It's surprising but a lot of people hate the exercise of putting together a budget or spending plan. Still, it's very important that you determine how much income you need to replace the income you are earning from work. I have clients tell me they need $5,000 a month only to find that the average from the past six months is $8,000. If they need only $5,000 a month what happened to the extra $3,000 they brought home every month. Now is the time to be realistic in estimating expenses. Of course, this is not to say that you can't identify areas where expenses can be cut but you might also add expenses for travel, recreation, etc. While I don't want to belabor the issue, the more through you are in this step, the more secure your retirement will be.
2. How Much Income Will You Have? In this exercise consider only those sources of income that you will have that are relatively secure such as a company pension, social security, or income from high grade government or corporate bonds. If the result of this step is equal to or greater than from step 1, you should have a relatively worry free retirement. If not, you are going to have to figure out how to make up for the shortfall.
3. The Most Secure Means of Meeting the Shortfall is Cutting Expense. Many retirees just accept the fact that they will always have a car payment and that a few dollars in credit card payments are acceptable. In fact, they usually aren't. Automotive and credit card interest is not deductible and it is quite difficult to achieve an after-tax return on investment equal to the interest paid on cars and consumer debt. Becoming debt free, with the possible exception of mortgage debt is a worthwhile objective.
4. Pay Particular Attention to Your Mortgage. Often, the best means of improving your post retirement cash flow situation is retiring or re-structuring mortgage debt. In order to do this, you sometimes have to think "outside the box". If you think your low interest mortgage with 10 years remaining is worth holding, think again. Often, it is the high principal payment, not interest, that is hurting your cash flow. Sacrificing cash flow today for a paid for house when you are 75 is a poor choice for many retirees. Of course, you can pay it off if you have funds available to do so but be very careful making these choices. A wrong decision here can have a profound effect on your retirement security for years to come.
5. Pay Attention to Social Security. In the 70's and early 80's the standard advice was to take your social security at age 62 because you will draw more than enough during the next three years to make up for the difference between the benefit now and that of age 65. Now that interest rates are lower and life expectancies are higher, this might not be the case. The most important factor is whether or not you might work part or full time after retirement. If you retire at age 62 and are forced to return to work because of boredom or financial pressures, you will be severely penalized for every dollar you earn over a set limit. (Somewhere around $12,000). You might be forced to pass up an attractive employment opportunity or pay that penalty if you receive your benefits early.
6. Don't Neglect Your Health Care. Many retirees have become accustomed employer- provided health care benefits at little or no cost while they were working. They are often shocked at how much they will have to spend to take over this responsibility themselves. The most critical time is the gap between retirement and medicare eligibility. Even after medicare takes over there can be problems such as the shrinking number of physicians accepting medicare or the high cost of drug benefits. You have six month after becoming eligible for medicare and electing to pay for medicare part B which covers doctor benefits. You have the same six months to decide a on supplemental policy. After the six month period you will pay a penalty for medicare part B and you may not be able to get a supplemental policy if you are in poor health. Medicare also has a drug benefit for little cost but you may still have to pay more than you are accustomed for prescriptions.
I didn't expect to devote so much space to this post. Obviously, I am leaving a lot out. I will cover some more in subsequent posts.
I Don't Live By A List. But I freely admit that I might get more of the right things done if I did. One place where a list is particularly valuable is before you retire or decide to devote less energy to the world of work. Ideally, the list should be started at least a year before the event. The following list may not be totally comprehensive but it contains a number of things that you need to think about before you leave your job.
1. How Much Income Do You Need? It's surprising but a lot of people hate the exercise of putting together a budget or spending plan. Still, it's very important that you determine how much income you need to replace the income you are earning from work. I have clients tell me they need $5,000 a month only to find that the average from the past six months is $8,000. If they need only $5,000 a month what happened to the extra $3,000 they brought home every month. Now is the time to be realistic in estimating expenses. Of course, this is not to say that you can't identify areas where expenses can be cut but you might also add expenses for travel, recreation, etc. While I don't want to belabor the issue, the more through you are in this step, the more secure your retirement will be.
2. How Much Income Will You Have? In this exercise consider only those sources of income that you will have that are relatively secure such as a company pension, social security, or income from high grade government or corporate bonds. If the result of this step is equal to or greater than from step 1, you should have a relatively worry free retirement. If not, you are going to have to figure out how to make up for the shortfall.
3. The Most Secure Means of Meeting the Shortfall is Cutting Expense. Many retirees just accept the fact that they will always have a car payment and that a few dollars in credit card payments are acceptable. In fact, they usually aren't. Automotive and credit card interest is not deductible and it is quite difficult to achieve an after-tax return on investment equal to the interest paid on cars and consumer debt. Becoming debt free, with the possible exception of mortgage debt is a worthwhile objective.
4. Pay Particular Attention to Your Mortgage. Often, the best means of improving your post retirement cash flow situation is retiring or re-structuring mortgage debt. In order to do this, you sometimes have to think "outside the box". If you think your low interest mortgage with 10 years remaining is worth holding, think again. Often, it is the high principal payment, not interest, that is hurting your cash flow. Sacrificing cash flow today for a paid for house when you are 75 is a poor choice for many retirees. Of course, you can pay it off if you have funds available to do so but be very careful making these choices. A wrong decision here can have a profound effect on your retirement security for years to come.
5. Pay Attention to Social Security. In the 70's and early 80's the standard advice was to take your social security at age 62 because you will draw more than enough during the next three years to make up for the difference between the benefit now and that of age 65. Now that interest rates are lower and life expectancies are higher, this might not be the case. The most important factor is whether or not you might work part or full time after retirement. If you retire at age 62 and are forced to return to work because of boredom or financial pressures, you will be severely penalized for every dollar you earn over a set limit. (Somewhere around $12,000). You might be forced to pass up an attractive employment opportunity or pay that penalty if you receive your benefits early.
6. Don't Neglect Your Health Care. Many retirees have become accustomed employer- provided health care benefits at little or no cost while they were working. They are often shocked at how much they will have to spend to take over this responsibility themselves. The most critical time is the gap between retirement and medicare eligibility. Even after medicare takes over there can be problems such as the shrinking number of physicians accepting medicare or the high cost of drug benefits. You have six month after becoming eligible for medicare and electing to pay for medicare part B which covers doctor benefits. You have the same six months to decide a on supplemental policy. After the six month period you will pay a penalty for medicare part B and you may not be able to get a supplemental policy if you are in poor health. Medicare also has a drug benefit for little cost but you may still have to pay more than you are accustomed for prescriptions.
I didn't expect to devote so much space to this post. Obviously, I am leaving a lot out. I will cover some more in subsequent posts.
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