Posts Tagged Pension

Getting Rich in America Book Review and Summary, Part 3

griaThis is Part 3 of my review and chapter summary of Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life by Dwight R. Lee and Richard B. McKenzie.

You can read the first two parts of this review by clicking the following links:

Getting Rich in America Book Review and Summary, Part 1

Getting Rich in America Book Review and Summary, Part 2

Rule #5. Get Married and Stay Married

“Marriage is like life in this - that it is a field of battle, and not a bed of roses.” - Robert Louis Stevenson

Contrary to all the bad press, marriage can lead to greater wealth accumulation.  The evidence points to married people earning disproportionately more and having disproportionately more wealth than single people living separately or together.  While marriage is not essential to making it in America, it can greatly improve your chances of making it.

Married men earn up to 26% more than unmarried men.  Married women earn more than unmarried women, as long as they remain childless.  Married couples have an income that’s 15% greater than the median income of all families.  Due to their higher incomes, married couples have more wealth later in life than unmarried couples.

The cooperation required by marriage can lead to economies of scale and specialization.  This specialization leads to efficiency, which allows for more time to do other things, among them work, which brings in more income.

Married people have the advantage of not having to look for a life partner (unless they want to get in trouble with their spouse).  The time and money invested in this endeavor can be enormous, as clubs and dating services have their own distinct costs.

Divorce often occurs because spouses devote insufficient resources to developing and maintaining the marriage contract.  An extended dating and engagement period affords the partners the time to test each other beforehand.

Marriage can extend the life expectancy over that of single people.  The most general reason is that married couples have better health than single and divorced people, as highlighted in the following research findings:

  • Divorced men have twice the lung cancer rate of married men;
  • Divorced men have three to four times the rate of other cancers;
  • Divorced and single men and women have from two and a half to three and a half times the married men’s rate of death from heart disease;
  • Married people have fewer problems with anxiety and depression;
  • Marriage increases the likelihood that women will have children, and women who have given birth tend to have a lower rate of breast cancer.

Children can be expensive.  Many couples delay their savings until after the kids are out of the house.  This could prove disastrous to your accumulation of wealth, as college costs take precedence over retirement savings.

The key to a happy and successful marriage, not surprisingly, is to find someone who is both emotionally and financially compatible.

My Take

Not to get too sappy, but marriage was probably the best choice that I’ve ever made, so I have to second the authors’ advice.  I think it’s key to take the time to get to know each other thoroughly, just so there are no surprises (look at me acting like Dear Abby).  It’s also nice to know that at least one person in this world has your back, and will miss you when you’re gone.  From just a financial perspective, having a compatible partner allows you to both follow the same goals of wealth accumulation.  It’s been working for us so far. ;-)

Rule #6. Take Care of Yourself

Why accumulate wealth and destroy your health in the process?  Healthy people miss less work, are more productive at work, and are more likely to be promoted and earn larger salaries.

Taking care of yourself increases the odds of living to a ripe old age, but we Americans aren’t taking full advantage of our opportunities.  The average life span of an American is ranked twenty-third in the world (must be all of that supersizing at Mickie D’s).  Wealth can increase the opportunities for indulgences that are unhealthy.  Resisting these unhealthy temptations will pay long-term dividends both physically and financially.

The good news is that you can choose to live a longer, healthier life.  Consider these facts:

  • A male who smokes forty or more cigarettes daily will lose eight years of his life.
  • 90% of premature deaths can be attributed to smoking cigarettes, overeating, misusing alcohol, failing to control high blood pressure, not exercising, or not wearing seat belts.
  • Death is seventeen times more likely on a motorcycle, motor scooter, and motor bike than in a car.
  • 40% of traffic accidents result from speeding, failing to yield right of way, or tailgating.
  • A 20mg/dl drop in blood cholesterol reduced deaths due to heart disease by 16%.
  • An active life and a long life go hand in hand.  Those who exercise can expect to live longer than couch potatoes.

The longer you live, the better return you’ll receive on defined benefit plans such as Social Security, pensions, and annuities.  The definition of retirement is also changing.  Many people are retiring on the “Installment Plan” for various reasons:

  • Satisfaction derived from work;
  • Work is becoming less physically demanding;
  • Career shifting will become natural;
  • Technology has allowed working from home and flexible hours;
  • Companies have shifted from defined benefit plans such as pensions to defined contribution plans like the 401(k).

The chapter offers some practical advice for taking care of yourself, such as exercising every day, making exercise fun, controlling your weight, eating healthy foods, not smoking, moderate drinking, not doing drugs, getting enough sleep, being careful, doing volunteer work to feel good about yourself, and staying mentally active as well as physically active.

My Take

I’d like to stick around to enjoy my money, too.  I’ve taken better care of myself this year, changing up my diet and exercise routines.  I’ve even tried to eliminate caffeine from my life.  The “be careful” message reminds me of the movie Along Came Polly, where Ben Stiller tried to get insurance for a Richard Branson-type daredevil who enjoyed dangerous hobbies like BASE jumping.  Maybe “dangerous” things like skydiving or motorcycle riding make life worthwhile for some people, so you can’t generalize and have us all live in protective cocoons.  I think I’m on board with the new kind of retirement, too.  I don’t think that I’ll have the patience or the money to play golf for thirty years, so I’ll continue to work in some manner.

Don’t miss Part 4 of this review.  Click this link for email updates: Email Updates

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5 Ways to Grow Your Shrinking Nest Egg

18/31 :: Robin
mary_thompson

Your 401k is looking more like a 201k.  A pension is a relic from your parents’ time.  Pretty soon, you may not even have a job to complain about.  Maybe your dreams of early retirement will have to remain only dreams.  SmartMoney recently had an article listing 5 ways to stretch your savings:

Wait a Bit

Each year that a person delays taking Social Security benefits, the value of the monthly check increases by about 8 percent.  Also, a person who retired at 66 rather than 62 could increase their retirement income from investments by as much as 40 percent!

This is probably the path that I’ll take, and not just for the financial side of it.  I actually like working, and having a reason to get up in the morning.  I can’t help it; it’s been wired into my head since I was a teenager.

Rethink the Home

Many retirees opt for a change of scenery by moving to a cheaper location.  For those staying local, selling a home and renting can sometimes cut costs, especially for those who invest the proceeds of the home sale.

This is definitely an option.  Although I plan on working in my Golden Years, that doesn’t mean that I have to live where I currently live.  I might even achieve my goal of becoming location-independent.

Ride in Style, Used

You don’t need a new car to enjoy retirement. A driver who buys a 2005 model Audi A4 sedan instead of a brand-new one, for example, chops more than $19,000 off the five-year cost of owning the vehicle; most of that comes from savings on the purchase price, but other factors help too.

While I don’t feel the need for a new car, I currently lease my vehicle.  I could certainly end this cycle when my lease is up, and buy a used car.  My commute is short, under 10 miles each way.

Tap the Right Cash

One tip: Spend money in regular IRAs before tapping Roth IRAs. Roth withdrawals aren’t taxed, so retirees can dodge that expense — and therefore take out less money each year — as they get older.  Other advisers suggest that current retirees tap their Roth savings first, so that they can take smaller withdrawals now, while the markets are down, and avoid having to sell assets at a loss.

I’m a long way from having to tap my IRAs, so I’ll need to do more research on this one.  Hopefully, I’ll have something to tap!

Postpone Some Pampering

Those who do splurge may as well get something in return: Web sites like BillShrink.com can help consumers find credit cards with rewards programs that best fit their spending habits.

We’ve really cut our spending down this year, our vacation notwithstanding.  We’re cutting more coupons than ever, and dinners in restaurants are few and far between.

All of these strategies could help you get more out of your shrinking nest egg.  What changes have you made in response to the economic crisis?

You can read the original article from SmartMoney by clicking this link: Nest Egg 2009: 5 Ways to Stretch Your Savings

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Barbaric Book Review: The Wealthy Barber

wb51x5dcrdnnl_sl160_The Wealthy Barber by David Chilton was first published in 1991.  It’s a basic financial guide, told in a narrative style, about three young people who seek financial advice from the town barber.  Yes, you read that correctly, a barber.

The story follows a young teacher as he learns, along with his sister and a friend, the basics of saving, investing, wills, insurance, real estate, retirement, mortgages, and income tax.  The lessons are given in one month increments, as the students visit the barber for haircuts.  The culmination of their learning is that each one has started on the path of financial independence.

Chapter 1: The Financial Illiterate

The author admits that he failed a basic financial planning test from a magazine, and intends to seek his father’s advice.

Chapter 2: A Surprising Referral

His father recommends that he visit Roy at the barbershop for better advice than he can provide.

Chapter 3: The Wealthy Barber

The three friends visit Roy, the Wealthy Barber.  They receive an introduction as to what awaits them.

Chapter 4: The Ten Percent Solution

Roy advises to pay yourself first, before you can spend it.  Invest 10% of your income for long-term growth, in an equity mutual fund.  The fund should be global, invested across many different industries.  Use dollar cost averaging to mitigate risk.  Don’t overlook the magic of compound interest.

Chapter 5: Will, Life Insurance, and Responsibility

The students are shown the problems of dying without a will, as the state will distribute your estate according to strict laws.  Roy recommends seeing a good lawyer for the details on wills, living wills, revocable living trusts, and naming an executor.  Wills should be kept up to date, and include a net worth statement to ensure that no assets are missed.

Roy insists on having adequate insurance coverage.  Maintain the proper amount of life insurance for loved ones.  Insurance is basically financial protection for your dependents, or income replacement insurance.  Carry enough to offset inflation, and don’t forget future lump sum obligations such as college tuition.  He recommends buying term insurance rather than whole life, and investing the difference in the premium cost.  Make sure the insurance is renewable and convertible, and opt for non-participating insurance.

Chapter 6: Planning for Retirement

Roy tells the students not to count on Social Security to be anything more than a safety net, but to ask for a Personal Earnings and Benefit Estimate Statement.  They should also consider rising medical costs, dependent parents, and inflation.

Pensions are becoming rarer, with inflation indexing rarer still.  He recommends IRAs, but is split in regards to investing in mutual funds versus CDs.  He recommends that whatever they choose, they should start investing now.

He cites the example of twins, at age 22, who take different investment paths: one twin invests $2,000 each year for 6 years and stops; the other doesn’t start until the 7th year, and invests $2,000/year for 37 years.  At age 65, both would have the same amount:$1.2 million.

Roy also explains Keogh, SEP, 401K and 403(b) plans.

Chapter 7: Home, Sweet Home

Roy enlightens his students with his insights on home ownership:

  • The reason most homeowners say that their house is the best investment they’ve ever made is because it’s usually the only investment they’ve ever made.
  • Paying rent is not always throwing your money away.
  • There are many tax-related benefits to owning a home, such as writing off property tax and mortgage interest, and the one-time capital gains exclusion.
  • The interest saved by shortening the length of your mortgage.

He also cautions about the housing bubble, an eerie prediction from 1991 that applies to the 21st century:

“Over the last several years, a few factors have combined to cause the prices of houses in many areas to skyrocket…higher disposable income is being spent on housing…the baby-boom generation…is fueling an increase in the demand for housing.   And…people are no longer averse to borrowing heavily…The consumer-debt rate is alarming.”

When he’s called a doom and gloom prophet, he responds:

“As long as they can service the debt, there is no problem.  But two things can happen that can lead to an inability to carry that debt.  One: rising interest rates…Everyone…is in debt up to their eyeballs…the mountain of debt will someday lead to higher interest rates…the second…Economic woes: layoffs, shutdowns, lower incomes…You remember how a recession works.”

Chapter 8: Saving Savvy

Roy gives some lessons on saving, such as:

  • A dollar saved is two dollars earned - while a two-dollar raise often nets just over a dollar in disposable income, a two-dollar savings nets you…two dollars.
  • Credit cards are antithetical to well-managed finances - credit cards are a destructive force that allow you to spend money too easily.
  • Save up before purchasing an item - you’ll get more satisfaction from a purchase by knowing the discipline and sacrifice that went into saving for it.

Chapter 9: Insights into Investment and Income Tax

Roy talks about the courage to buy when others are selling.  He again warns about the coming housing bubble:

“The halcyon days of guaranteed easy money in real estate are coming to an end.”

He also states that successful investors have an eye for value, and that you should do some research before making any investment decision.  Roy also restates the tax-deferred benefits of retirement plans, mortgage interest, and property tax.

Chapter 10: Graduation

Roy addresses the need for emergency funds, but recommends only a few thousand dollars as a cushion.  His reasoning is that most of your catastrophes are covered by insurance or a line of credit at your bank, reasoning obviously developed before the current credit squeeze.

College education can be funded by U.S. Savings Bonds, prepaid tuition plans, or an equity mutual fund for the long run.  He also identifies grandparents as a source of college tuition.

He reiterates the importance of health and disability insurance, as one in four people have a chance of being disabled for a one-year period.

The chapter ends with the three students receiving diplomas.

Rating: 4 out of 5 barber poles

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See links to more book reviews on the Barbarian Approved page.

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Barbaric Book Review: Die Broke by Stephen M. Pollan, Part 3

This is Part 3 of my review of Die Broke.  You can read parts 1 and 2 by clicking on the following links:

Die Broke, Part 1 - Quit Today

Die Broke, Part 2 - Pay Cash

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Step 3: Don’t Retire

Don’t retire?  I thought we should be planning for retirement from the time we start working.  In Die Broke, retirement as we know it is portrayed as a fairly new concept, which has worked properly for one generation only.

Social Engineering?

The authors argue that retirement is a form of social engineering that was a byproduct of the Industrial Revolution.  At the end of the 19th century, the demand for jobs shifted from rural to industrial, and older workers were encouraged to “make room” for their younger replacements.  Pensions were bestowed upon workers aged 60 or better in an effort to increase efficiency.  The New Deal created Social Security, where the benefits would be paid for by taxing the younger replacements.  This tax wasn’t as great a burden as it is today, as the average life span was 63, and the retirement age was 65. This led to:

Enabling

Parents of Baby Boomers benefited from a real estate boom, as their children drove up home prices in a scarce market.  Their living expenses were covered by pensions and Social Security, and their health care was covered by Medicare and Medigap policies.  Everything fell into place, as evidenced by:

The Impossible Dream (for Baby Boomers at least)

The parents of Baby Boomers had retirement income from the following sources:

  • Government assistance: 42%
  • Personal wealth: 20%
  • Pensions: 20%
  • Current wages: 15%
  • Other sources: 3%

What Boomers Can Expect

  • Government Assistance - Boomers will get a lot less money, and receive it later
  • Personal Wealth - Boomers will see a 34% income increase over their career, while their parents experience 524% growth
  • Pension Income - The shift from pensions to 401K plans, where less than half of those eligible participate
  • Wages - Boomers will have to work longer, and live on less
  • Other Sources - Inheritance?  Don’t count on it, as longevity increased health care costs may decimate any expected inheritance

A Fiction Built on Four Lies

  1. Age 65 is old - People are living longer, more healthy lives
  2. Leisure is more fulfilling than work - It’s nice to have a reason to get up each day
  3. Older people need to make room - With the workforce decreasing, the need for productive workers increases
  4. Younger worker = better worker - Older white-collar workers make fewer mistakes, have fewer absences, and an eye for efficiency

My Take

I’m years away from retirement, and I enjoy going to work.  This may change as I get older, but I find that I need somewhere to go each Monday.  Given the economic future that the authors have laid out for me, I may take a non-traditional retirement, and work part-time or even full-time.  The advice is to move the finish line from age 65 to death, which allows for a greater period of investment in equities.  The authors also advise us to keep an emergency fund, and have adequate health and disability insurance.

Part 4 of this review will cover the fourth and final step, called Die Broke.

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