Friday, February 14, 2014

Saving for Retirement Takes Commitment. "Marry" Your 401(k).

As a company CFO, I routinely speak with our staff -- most of whom are in their 20s and 30s -- about the need to plan for their retirements and to get started with an aggressive savings plan NOW. I gave such a talk today, Valentine's Day, 2014. In keeping with the theme of love and commitment, I came up with the idea of treating your 401(k) like a life partner; i.e., whatever you make, think about sharing it 50/50 with your partner. Obviously, you can't share your entire salary with your 401(k). However, annual raises can be thought somewhat as being "found money," and if quickly shared on a 50/50 basis with the 401(k), the employee will simply moderate their lifestyle based on their remaining take-home pay, and they'll never miss what gets tucked away in the 401(k). Here's a scenario:

  • Pat and Chris start their careers at the same time and at the same salary.
  • They both get $5,000 raises following each of their first 5 years of work, followed by 4% annual raises thereafter.
  • They both start their 401(k) contributions at 10% of their gross pay.
  • Pat maintains his contributions throughout his career at 10% of his pay.
  • Chris "marries" her 401(k) and splits all of her raises 50/50 with her 401(k) plan; i.e., whatever her raise, half of it goes to her 401(k).
  • Chris hits the current annual contribution max of $17,500 in Year 6. She continues to contribute the max thereafter. [Take note: after 5 years of employment, both Chris and Pat have increased their salaries by $25,000. Stingy Pat has only given an extra $2,500 to his 401(k). Generous and loving Chris has shared her increase 50/50 to the tune of $12,500 with her 401(k).]
  • We'll keep things simple and won't show Chris or Pat taking advantage of the additional catch-up contribution of $5,500/year when they reach 50.
  • We'll assume the IRS authorizes 3% annual increases in the max during that time.
  • We'll also assume a 7% investment return and a 40-year career. 

After 40 years of work, Chris ends up with roughly $4.3 million in her 401(k), almost double Pat's total. If she draws on that money at a rate of 4% of the ending investment balance, she'll be able to replace 61% of her ending pre-retirement salary, whereas Pat will only be able to replace 31% of his. Adding social security on top of Chris's draw, she'll probably be pretty comfortable in retirement. Pat, on the other hand, needs a part-time job in retirement.

Is this a gimmick? Maybe, but I'd rather think of it as being a rational method to enforce a savings discipline. Retirement doesn't fund itself, and few people have pensions any longer. So, if it takes a gimmick to help people reach financial security, I'm all for it. Here are the numbers (click to enlarge on a new page):

Sunday, March 4, 2012

On Rush Limbaugh and the Freedom of Speech

Societies achieve their own acceptable levels of harmony when their citizens hold each other accountable to certain, generally accepted behavioral norms and standard practices (e.g., business practices, the rule of law, etc.). It’s not always easy to define those norms and practices, which is why we occasionally see protests in the streets, such as during the movements for women’s suffrage, organized labor, and civil rights, and even now with the Occupy movement.

Clearly, there are ranges of acceptable behavior; i.e., tolerance levels, and they vary from country to country. For example, the Japanese have a well known expression that captures the importance they place on conformity and homogeneity: “The nail that sticks up gets pounded down.” In contrast, the people of the U.S. are fairly tolerant, and accept wide ranges of behavior before they express outrage and attempt to corral those who step out of line. For example, we can accept having a Nazi party within our borders, but when that party attempted to march on the large Jewish population of Skokie, Illinois, there was outrage in every corner of the country. The Nazi’s freedom of speech equated to intimidation of another group, and most people felt that was intolerable.

Freedom of speech doesn’t mean that someone can say whatever they want and not be held accountable. Rush crossed over the line. Through his deliberate choice of inflammatory words, he chose to step outside of the range of acceptable behavior, and it is fair and right that he be brought back into line, especially given the magnitude of his influence, which is a courtesy of his publicly-granted access to the air waves. Even worse, though, he proposed to infringe on the hard-won rights of others, and we are now seeing a very healthy reaction by millions of vigilant people in this country who want those rights to be unassailable.

We’ve all heard the saying, “All that is necessary for the triumph of evil is that good men do nothing.” When someone steps out of line, we can’t just shrug our shoulders and say, “Oh well, it’s his right to say that.” It may be his right, but it’s also our right, and even our obligation, to protect the rights and values that are important to us and to counter venom with truth.

Sunday, July 10, 2011

We need more, not less, government planning

I listened to John Stossel's latest show today on Fox Business (see link below), in which he cited Austrian-born economist F. A. Hayek's 1944 book, The Road to Serfdom, which warned against the tyranny that Hayek felt inevitably results when government controls national direction via a central planning function. Stossel was supportive of Hayek's view, and seemed to imply that planning and goal-setting by themselves equate to harsh government control and the elimination of personal freedoms. Essentially, he said we should rely on the capitalist system and let our corporations do our planning for us, as if corporations -- which are largely global today and without national allegiances -- can somehow be relied upon to put the American public's interests before their own.

Hmm... With unemployment so high, with government spending and our national debt out of control, with our infrastructure in decay, with our economy repeatedly bouncing from boom to bust, and with over 25% of our national wealth in the hands of less than 1% of our population (up from 9% thirty years ago), does it seem like we're on a a good course and that it's a good idea to continue to not do any long-term planning with the people's interests in mind? Furthermore, ironically, the corporations that Mr. Stossel so admires all have central (i.e., strategic) planning functions. Such functions are considered to be essential in the business world. Given that people like Stossel constantly advocate for government to be run more like business, then why shouldn't such a function exist within government, but with the national interest in mind? As it is now, in the absence of a strong planning function, we aimlessly meander from election to election, never building towards a unified vision of a better society. In the meantime, China, which does have a strong central planning function, is gaining ground on us every day. It's very frustrating.

You can't get where you want to go without a road map, and a road map is a product of planning.

To read about Stossel's show on his blog, click here. The show will be repeated again tonight, Sunday, July 10th, at 6pm on Fox Business (Comcast channel 130 in the Bay Area).

Saturday, January 22, 2011

Helpful Behaviors for Building Wealth

There are some really good points in this article (link below), although the title is a little misleading. It's not so much about becoming super-rich, but rather, it's really about the behaviors that may help someone become more wealthy than they otherwise might, whatever their income level may be.

The author refers to these things as being traits, but they're really skills that can be developed by anyone. Not everyone has the ability or opportunity to become a financial expert or to even go to college, but that doesn't need to condemn them to a life of financial insecurity. It's never too late to develop these skills either, although they're certainly more beneficial if picked up at an early age. I agree that comfort and confidence with basic math is really important, as is developing a methodical approach to problem-solving. The article emphasizes planning skills as well. In my experience, I've found that many people have an aversion to planning simply because they are afraid of the unknown and what they might learn from the planning process. The simple truth, though, is that it's better to be prepared and to learn about potential problems as soon as possible in order to maximize the amount of time available to rectify them. Developing a willingness to encounter uncertainty and a fearlessness about tackling problems, therefore, can by extremely valuable behaviors. If parents could help their kids zero in on these skills, it would go a long way to improving their children's long-term prospects no matter what those kids end up doing in life.

What can someone do to develop these skills or to instill them in their kids? First, you get comfortable with planning simply by doing it. Start small in order to stay within your comfort zone. For example, if you find yourself running out of cash every month, then put together a simple monthly budget. If you're concerned about retirement, then play around with some of the retirement calculators that are available on the Internet. They'll help you determine how much you have to save every month prior to retiring in order to support your lifestyle in retirement. As far as the kids go, there's nothing wrong with getting them involved in household budgeting. Explain to them how much you make, how much comes off the top in taxes, and how you budget the remainder, which hopefully includes some savings. Demonstrate to them that it's important to not spend more than you make. Explain the concept of priorities. Help them understand that maybe spending $100 a month on a cell phone for them isn't a great idea when mom and dad are concerned about their retirement or making tuition payments. If kids don't know what the limitations are, then there will be no limit to their expectations. The main point, though, is you'll be getting them used to the planning process early, which they will hopefully carry forward into their adult lives.

Click here to read "Character Traits and Behaviors that Make You Rich," by Laura Rowley.

Sunday, December 19, 2010

Nassim Nicholas Taleb: A Crazier Future

The author of Fooled by Randomness and The Black Swan speaking at a Long Now Foundation event. Fresh and irreverent as ever.

The runtime is about 90 minutes, but it's a good overview of the key concepts in The Black Swan, if you haven't had time to read the book. The parable of the turkey is particularly humorous, but makes an important point: intentions that we infer from previous events that may tend to confirm a belief, may actually be the opposite of what we believe. As Taleb's story goes, by virtue of the farmer showing up every day and feeding the turkey, the turkey's trust grows more each day that he is loved and cared for, right up until the hatchet falls. Another good takeaway: don't confuse infrequency with randomness. There's nothing random about market crashes, terrorist attacks, great fires, wars, earthquakes, etc., as they are, in effect, planned or conditions-based. The normal distribution (bell curve) doesn't apply to them, yet we insist on assuming that it does, and often to our peril.

Click here to see the video.

As Yogi Berra said, "The future ain't what it used to be."

Wednesday, December 8, 2010

Fortune's Top 10 Stock Picks for 2011

Leigh Gallagher, assistant managing editor at Fortune, tells CNBC which stocks will be standouts in 2011. (The Raging Capitalist has no opinion on these stocks.)

You can read more from Fortune here

Sunday, November 7, 2010

Was the Stimulus Too Small?

Given Tuesday’s election results, there has been much reflection and debate in the media and in Washington about what went wrong for Obama and the Democrats. As suggested by Kathleen Parker in a recent op-ed, and I agree with her, "The election was a referendum on policies that are widely viewed as too overreaching and, ultimately, threatening to individual freedom. It's that simple." Others, perhaps most notably Paul Krugman, state that the stimulus was simply too small and was consequently ineffective, thus not reviving employment and turning voters against the Dems. As Krugman says, "Mr. Obama’s problem wasn’t lack of focus; it was lack of audacity. At the start of his administration he settled for an economic plan that was far too weak. He compounded this original sin both by pretending that everything was on track and by adopting the rhetoric of his enemies."

Although it's important to understand the political climate, we must address the real issue when we start talking about the stimulus and our economic recovery. We all want to reduce unemployment, but the first question to ask is, is unemployment the real problem or is it a symptom of something else? To date, the Fed and the Obama administration have approached our economic woes as if we were merely in an ordinary recession. Following the standard cures for such an event, they believe all will be well with a little time, provided we can just keep the public spending. In essence, they're trying to load the citizenry onto an arc so we can ride-out a tsunami safely at sea, and once the waters subside from our island paradise, we'll return to the shore and resume our lives. Well, I would suggest that the shore is not there any longer, and never really was.

I absolutely agree that we need to buffer our citizens from the shocks of this downturn. However, the real problem is that the economy we have known for the past 30 years was a myth. With the inventions of credit cards, second mortgages, and the mortgage securitization markets (the one sponsored by the government and its evil cousin, sponsored by Wall Street), we have been riding a debt-fueled bubble since the Reagan era. Debt-fueled growth was an easy path for the Republicans to take because it kept the economy firing on all cylinders once the growth associated with the post-WWII/baby boom era began to subside. The bubble worked for the Democrats as well, because it supported their social agenda of home ownership, and it enabled growth in the tax base that supported the progressive agenda of big, "the-government-shall-provide" government. The ruse created an unholy alliance between left and right that went unspoken, even when it became very dangerous. In any event, as we have learned twice now in the past 10 years, bubbles are not sustainable, and we experienced the inevitable collapse.

What disturbs me is that our political leaders still don't seem willing to face the reality that we need to create a new economy. When the dot-coms went bust, everyone knew the early-stage dot-coms didn't have viable business plans, so no one advocated that we devise ways to keep their employees in place until the public came to their senses and started finally using Webvan and Instead, we let those businesses go bust, we provided unemployment benefits to the dislocated, and we waited for businesses to get back on their feet and start hiring again. It actually didn't take very long. The current situation is more insidious, though. Because we were riding an inflated economy for so many years, many excesses became baked into our culture that simply cannot be sustained: federal and state agencies that don't provide a return on investment; ridiculous salaries, benefits and retirement schemes for many government workers; plus we had a misallocation of labor, with many civilians working in bubble-related industries, such as mortgage banking and construction. All of these excesses need to be eliminated in order to create a new, sustainable economy, as we are not going to have the money available to pay for governmental waste or to keep people in jobs that provide goods and services that are no longer in demand. Instead, rather than returning to a consumption-based economy, we must create an investment-oriented economy that is supportive of innovation and entrepreneurship. We must build a new economy that is based on viable business models that generate in-demand goods and services.

The current stimulus may, in fact, have been too small, but that's not to say that what has been spent was wisely spent in an effort to bridge us over to a new economy. The spending has been incredibly scattershot (details here), and virtually all of it supported the "arc and tsunami" scenario noted above. So far, we have spent on tax cuts to support consumption, we have kept government workers in their jobs, we have helped states keep their Medicaid programs going, we've provided unemployment benefits, and we've created some temporary jobs at incredible cost, not to mention doled out billions in pork to individual Congressional districts as quid pro quo payoffs to our Congressional reps. All of this spending has been done with no one -- not Obama, or anyone in Congress, or any members of the intelligentsia, like Krugman -- painting a picture of the new world we would emerge into once all the spending was done, nor have they given us a realistic, properly prioritized spending plan or timeline for getting us there. And do you know why that is? It's because they still haven't faced the reality that our world must change, and that's because they've never really searched for the root cause of our problems.

The answer is that we need to spend little AND we need to spend large. In other words, the spending needs to be differentiated and prioritized. Our former economy popped, yet the Fed and our government are spending trillions in doomed fiscal and monetary strategies to try to reinflate the same bubble. It won't work. Rather than clinging to broken systems, we need to accelerate the destruction of the old and the creation of the new. We need to support our brothers and sisters who have been displaced, but we need to steamline our spending so we can marshal the rest of our resources and refocus them on revitalizing the economy. Inconsistent with revitalization is spending on "make-work" temporary employment. Tempting as it may seem, it should be avoided, as there is no lasting value in the jobs, the projects cost too much to plan and supervise, and the work only postpones the inevitable. Moreover, the cost of the labor can oftentimes be exceeded many times by the cost of materials; e.g., there's more to the cost of a bridge to nowhere than the cost of the labor. The people are better off spending their time learning a marketable skill.

There are many things that we can and should be doing, and that's where the big spending comes in. For example, maybe I'm dreaming, but how much would it cost and how huge would the benefits be if we completely revitalized the city of Detroit? Can you imagine the economic and societal benefits of lifting half a million people up a step or two on the economic ladder? Undoubtedly, the cost would be enormous. Doing so might involve paying to relocate half of the population to other parts of the country (voluntarily, of course) and demolishing entire sections of the city, then consolidating the rest in order to make the city a community again. The remaining people would need to be trained and businesses would need to be provided with incentives to move in. This is just one grand-scale project that would cost big, but until we take it on, a city like Detroit will forever be an anchor chained to this country's feet. Of course, there are many smaller initiatives as well that we should take on: provide business start-up loans and grants; provide salary-based tax credits to existing businesses to take the risk out of hiring new employees; provide vocational training; provide businesses with tax credits for relocating and hiring the unemployed from economically depressed regions, and so on.

It's no wonder many people questioned the value of the stimulus. The problem we were trying to address had never been defined, a picture of the end game had never been painted, the objectives of the spending were too unfocused, and the results were not visible enough or were not individually significant enough to demonstrate the kind of success that would win public support. For example, there was no Hoover Dam, Golden Gate Bridge, AlCan Highway, or Tennessee Valley Authority, which were all projects from the Depression era that generated huge economic benefits, past and present. Moreover, as many on the left have criticized, expectations were not properly set. It was a mistake to let the public believe that a real fix could be effected in just a year or two. We are attempting to rebuild from a disaster that was 30 years in the making. That's going to take time, patience, determination, and a real plan.