Shy AND Retiring? Don’t Think So…

Headline:  Shy AND retiring?   Don’t think so..

Date: 12/9/2020

Body: I was at my full-time job working at the IRS, and I came across an article on a pilot study they are doing concerning Phased Retirement.  ( I regret that I cannot  insert a link to the source material, but I legally cannot.)  I thought this concept was important enough that it should be addressed in a post.

What is Phased Retirement?

A phased retirement is simply a way to ease into retirement.   This might include a decrease in work hours, working only certain days in the work week, or seasonal work only. (It is important to note that this type of “program” can be either formal or informal.)   It is a help to the retiree because they derive satisfaction from the work and benefit from the social interaction.   The cash doesn’t hurt either.   But, the employer also benefits because there is not that sudden “brain drain” that so many employers have to cope with.   Often, a portion of this arrangement is a “knowledge transfer” mechanism where the senior will coach junior employees. Per the IRS, there are some income limits before Social Security is affected (just over $18,000), but changes in Social Security have made it easier for many Americans to work after reaching full retirement age.

How common is it to find a phased retirement program at a workplace?

It is becoming more common, and since the pandemic is making many people work from home, I can’t help but believe that it might become even more common.  In 2016, the TransAmerica Center for Retirement Studies completed a study of 1,800 workplaces and reported that 40% of the employers had some type of program to support the concept of phased retirement.    Given the size of the Baby Boom generation, we need to mitigate this potential loss of knowledge within the workplace.

In a personal example, my father worked for an engineering firm that didn’t have this type of program.   He developed symptoms of a degenerative disease, and spoke with management.   He devised a schedule where he worked Monday, Tuesday, Thursday and Friday, so that he would only have to work 2 days sequentially before he could take time off to rest and recuperate.   He worked an 80% schedule and received 80% of his salary, and continued this informally-organized pattern for several years. 

Per the Society for Human Resource Management (SHRM) the number of formal programs are small, but the number of informal programs have been increasing.  This pattern discovered by SHRM are echoed by a variety of other experts too.  “We’re finding that informal arrangements exist at almost every employer, but formal programs are rare,” says Steve Vernon, a vice president at Watson Wyatt Worldwide.  Other individual companies seem to recognize the need for this type of arrangement and make them a part of their employee retention programs. “We don’t have a specific program for phased retirement,” says Karen Fowler-Williams, vice president of employee relations and diversity at Lincoln Financial Group.. “It’s all within our regular flex program.”

Source: Society for Human Resource Management’s 2017 Employee Benefits survey report.

One researcher suggested that employers might prefer the informal approaches because they can offer the arrangement only to the highest-value employees.   This would square with the story above as my father worked as an engineer for a defense contractor.   When he began to work for this contractor, he brought with him an education from the US Naval Academy and MIT, along with an impressive career as an officer in the submarine service.    Added to that, he was a gifted teacher, often helping out younger engineers.  Given the work that this contractor did, and his personality, his experience was perfectly suited to his assignments.    For these reasons, it made a lot of rational sense to be flexible enough to accommodate his medical needs.

Why don’t more employers offer a formalized plan?

To my reading, the reasoning turns out to be organization inertia, more than any other reasoning.   Until recently, when a person started receiving pension distributions, they were given a gold watch, a hearty handshake, and a kick out the door.  This might be a bit unfair to employers, who until recently had mainly defined-benefit pensions, and with these pensions, the regulations were extremely inflexible.  Is it any wonder that the employers themselves were also inflexible?  Now that defined contribution pensions are the norm, I believe that this situation will change, but for now, there is a large amount of inertia:

1.  Often, corporate policies will not allow for medical benefits to be given to less than full-time employees.
2. IRS regulations still favor the defined benefit pension programs.

Until 2005, this inertia was very real, but, the Pension Protection Act of 2006 allows workers 62 and older to receive pension distributions while still working part time.  So, there appears to be reasons to hope that a force might be applied to employers that will not allow them to “stay at rest.”

So, what is an older-employee to do?

In view of how uncommon formal programs are, the employees need to be assertive and begin the conversation with their managers.  Said one expert:

“In the absence of a formal phased retirement program, then it’s up to the employee to initiate a conversation with the employer,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “Set forth a proposal in terms of the value you are going to provide. Mentoring and training your successor can only help your case.”

If your employer uses your last few years of employment to set your pension benefits, it might be to your benefit to consider leaving the employer and becoming a consultant.  With their long experience, older workers can make a good case for themselves with new organizations.

REFERENCES

https://www.investopedia.com/terms/p/phased-retirement.asp

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/phased-retirement-challenges.aspx

https://www.monster.com/career-advice/article/benefits-and-drawbacks-of-phased-re

https://money.usnews.com/money/retirement/second-careers/articles/2017-11-13/6-challenges-of-phased-retirement

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

I Might be Bankrupt, but, Morally so…

Headline: I might be bankrupt, but, I am moral…

Date: 12/7/2020

Body: I was reading an article in the Penny Hoarder, and the topic was Bankruptcy.  It seemed to scream out for more context, and perhaps a narrowing of focus to be more appropriate to individuals.  The article is linked below:

What Is Bankruptcy? Here’s How Filing Affects Your Life (thepennyhoarder.com)

When you have nothing left…

No doubt, you’ve seen Wheel of Fortune once or twice, and sometimes, a contestant is unlucky enough to land on the piece of the wheel marked BANKRUPT.     All of the contestant’s winnings that round, and any prizes they have accrued, are taken away by the host.  Personal Bankruptcy is similar , but differs in a few important ways:

1.  Bankruptcy statutes vary a lot by state, so, please consult a specialist in your jurisdiction, if you ever have to deal with this issue.
2. Most state laws allow you to keep your house, car and tools that you use in your trade or business, and a few other assets.

What, technically, is bankruptcy and how does it work?

Bankruptcy is a court-mandated protection if you have a series of bills that you cannot pay (often, this is triggered by an unforeseen medical condition of a family member, or something similar.)  When you file for bankruptcy with a specially federally-designated Bankruptcy Court, the Court issues an Automatic Stay, which prohibits the creditors from harassing you while you work with the Court to pay them back.  You provide the Court with a list of all of your debts (secured and unsecured) that you currently owe and are unable to pay.  A representative of the Court will convene a Conference of Creditors (usually at the trustee’s office)  where all of your creditors will meet and discuss repayment possibilities.   Within the laws of the jurisdiction, all assets that can be liquidated will be, and the creditors will be paid off in the order mandated by law.   The last class of creditors (the unsecured debt holders) often agree to accept a percentage of repayment as payment in full (half a loaf is better than nothing.)  As a result of your honest representation of all debts, the Court discharge all debts that you disclosed.

A word of warning here.   If you do not disclose a debt, then in the Order, that individual debt  is not discharged.  Further, it should be noted that debt related to a student loan, Court-ordered alimony or child support, federal tax liens and a few other debts are NOT discharged in Bankruptcy.  And finally, never, never try to hide assets in a bankruptcy proceeding.    If found, the judge may refuse to execute the Order that would provide you relief.

Are there flavors of Bankruptcy

The short answer is yes.   The complete answer couldn’t be covered in a semester course.   Suffice it to say that different bankruptcies are divided into Chapters, and for individuals, they might face Either Chapter 7, or Chapter 13 bankruptcy.  Either route is not easy., and your credit WILL take a major hit.  That said, the protection afforded you, might be a lifeline and ensure your physical and mental health.

Chapter 7

This is the most common form of Bankruptcy for individuals and is known as liquidation bankruptcy.  This means that within State law, when the Court administrator convenes the Conference I spoke of before, all available assets will be liquidated in an attempt to cover the liabilities.    Credit counseling education will likely be mandated by the Court.   Please note that, as of 2005, this type of bankruptcy is means tested, and  can be expected  to take 3-6 months to complete.  Though your credit score will take a hit initially, the Chapter 7 bankruptcy will fall off your credit report in 7-10 years.  At that point, they are able to purchase a home.

Chapter 13

This type of Bankruptcy is used by households with  a higher level of income and more means to (within 3-5 years) pay back the debt.  In this type of bankruptcy, the trustee works very hard to restructure the debt that you have, so that you can pay down the liability over time.  (For instance, they might negotiate with your creditors to either lengthen the period you have to pay back the debt or decrease the interest rate your are being charged.)  There are debt limits on this kind of bankruptcy, but they can differ based upon year.

There are alternatives to Bankruptcy

1.  Credit counselingà These government-approved services will tailor a debt management plan to your needs and requirements of your creditors.
2. Take out a debt consolidation loanà Not a great option, it can be preferable to Bankruptcy, and offer you a longer period to pay off your liabilities.
3. You can contact your creditors and personally try to work out an accommodation with them.  Remember, their objective is to get something from the debt, so they might be willing to reduce your interest rate or lengthen your period to pay back the debt.

REFERENCES:

2 Types of Personal Bankruptcy (thebalance.com)

Bankruptcy: An Overview – FindLaw

Bankruptcy Basics: When Should You File for Bankruptcy? | legalzoom.com

Bankruptcy: How it Works, Types & Consequences – Experian

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Shopping at the right time?

Headline: Save Money and Your Life?

Date: 12/5/2020

Body: I was reading this wonderful article in The Penny Hoarder, and something really hit me between the eyes.   The article is linked below:

25 Ways to Save Money When You Don’t Know Where to Start (thepennyhoarder.com)

This article really gives some good food for thought (as it also gives thought to food.) and  this is part of what I wanted to explore

Everything has its Season, everything has its Time…

Be very glad that this is not a podcast, else, you would’ve heard me sing that.   All jokes aside, one of the tips from this article concerns the buying of food.  Within the article, the tip is, “Shop Seasonally and Locally.”   In the context of this article, it means that if you live in the Mid-Atlantic region, and it is either Summer or Fall, and you are looking for a vegetable, go towards any type of squash.  This is good advice because if it is near (or in) the growing season, there is likely to be a LOT of squash..   And if they are local, distribution costs are nil (almost.)  Because of these twin conditions, the prices of squash are likely to be low.

In a similar manner…

To get the best prices on merchandise, you might want to shop off-season.   For instance, if you need a new gas grill, if you look to buy in April or May, you will find MANY people looking for the same thing at the same time.   Manufacturers know this, and raise prices accordingly.   But, nobody (almost nobody) is grilling in late October, so, when you go looking for grills, you will have less company.   Manufacturers know this too, and thus offer price rollbacks to motivate people to buy the final units.

Are you going out of your gourd?

No, this has a point.   When choosing investments like stocks or bonds, some of the same concerns apply.     It is true, you cannot smell a stock, or pick it up and see how dense it is, but there are some similarities.

Seasonality

Just like in Nature, the financial markets have seasons.  Instead of Fall, Winter, Spring and Summer, we have Recession, Growth, Maturation, Decline.   It describes a sine wave, and acts pretty like the seasons.     In the Recession times, the anti-cyclicals do well.  (Think of these like stop-gap measures: Instead of a new car, you buy a used one.   Instead of buying a new home, you fix up your current home.)  Following this logic, the companies in these industries are likely to do well.      As things ramp up, companies need more raw materials, so the price of commodities are likely to go up.  In the maturation stage, technology stocks seem to do well (usually).   And in the falling stage, financial services stocks tend to do well.  However, the difference is that in the financial markets, investments are cheaper when they are NOT in their growing season.  When you purchase investments “out of season” they are often “on sale” to encourage consumption.

Locality

OK, this one might be an over-extended metaphor, but I think it works.   You might have a major facility of a company in your vicinity.  You can see most of the employees are happy, you can see the “Now Hiring” signs up, and you can hear the gossip in the coffee shop.   If you get a series of positive observations, it might be time to look at the numbers behind this company (which others might’ve overlooked.)  To make things more concrete, you might live in or near Louisville, KY, and you note that the UPS air facility is always busy, the people seem relatively happy, and the gossip is good.   So, you look at the numbers, and you decide that it might make a good investment, and you take a position.  Your location might’ve given you access to information that others would’ve had to invest much time and money to discover.

Related, you might be employed in an industry, and that might make you a “local” who knows that neighborhood better than most.  For instance, if you were a dog trainer, you might become aware of a new internet-based pet supply firm (e.g. Chewy) but many don’t see what the big deal is.   Many might fear this to be another Pets.com, and shy away from the investment.   But you like the way they seem to “get” owners, and pets, so you invest early.  (Then you retire early.)

The Verdict:

Both Seasonality and Locality play a role in investment, just like any type of shopping.   Buy at the right time, and in the areas that you have “local knowledge” and you are likely to get a much better price.

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Debt and Damnation?

Headline: Debt and Damnation??

Date: 12/5/2020

Body: I was scanning the Penny Hoarder, and I found this article.  Unfortunately, I think it’s pretty topical for a lot of people.

How to Deal With Debt Collectors: 5 Steps Anyone Can Take (thepennyhoarder.com)

It happened to me

This happened to me, so, it could happen to you.   Several years ago (being kind to myself) I had an eye surgery.   I had good insurance, so much of it was paid for.  But about 1.5 years later, after 2 moves, I got notice (from a collections agency) of the separate $500 amount that I had “FAILED to pay” and they were going to do horrible things to my credit.   I take this quite seriously, and paid the bill (once verified) and the matter was closed.    But, not before enjoying several nights of terrible sleep.  

Who are these “debt collectors?”

When you initially get a loan (e.g. for a car, or for a major purchase), usually that party will try to collect payment on the debt.  At some point in time, if unsuccessful, they turn this information over to a 3^rd party debt collector.   These businesses are paid (often with commission) to collect as much of the debt as possible.   There are some restraints on these entities (by legislation) but, these entities are awfully good at complying with the “letter of the law” while skirting the “intent of the law.”

What do I do if a debt collector contacts me?

First, know your rights.   Under the Fair Debt Collection Practices Act (FDCPA) there are some things that debt collectors are not allowed to do, and you should be aware of these proscribed practices.    Specifically, you have the right to allow these collection agencies to only communicate with you via e-mail.  You can even demand that they never contact you again (this is called a “cease & desist” letter.), but if you do, be aware that this looks really bad, and if litigation is started, this request can be taken as evidence of your intention not to comply.

Be aware that there are things that the FDCPA prohibits debt collectors from doing.  For instance, the hours that they can contact you are restricted (from 8AM to 9PM only), and if you notify them that they would put your job in jeopardy, they cannot contact you there.  Further, though they can call family members or friends, in most states they can only do this once.  They have only 3 to 6 years to complete these collections activities.

Please note that it is very unlikely that you will ever go to jail for debt.  Unless you commit a criminal act (e.g. fraud), prison is extremely unlikely.

After my pulse quiets down, what do I do?

Action	Contact Information
File a complaint about collection agency.	CFPB (855)-411-2372
File a complaint with your State.	State attorney general.
File a complaint with the Better Business Bureau.	BBB Online Complaint System
File a civil suit in state or federal court.	Contact the National Association of Consumer Advocates to find an attornd

Check carefully to ensure that the facts are correct.   Per the Act, collectors are required to send you a letter explaining all of the particulars of the debt.   To receive this detailed report, you can request a Debt Validation Letter.   This letter enumerates the circumstances of how the debt arose, the amount of the debt, and the creditor’s identification, among other information.   This letter should be received within 10 days of the first communication.   Once the collector does receive your demand letter, they are required to notate that account as “in dispute” and this works in your favor.

Please keep careful records of all communications with the collector.   Each time there is correspondence, notate the date of the communication and a brief description of the contents.  Retain the original of each letter received and print each e-mail.  If there is a phone conversation, also notate the name of the person you spoke with and the title of their position.

REFERENCES:

Don’t recognize that debt? Here’s what to do. | FTC Consumer Information

What should I do when a debt collector contacts me? (consumerfinance.gov)

Debt Validation Letter: What It Is and Why You Need It – NerdWallet

Should I tell a debt collector to stop contacting me? | Nolo

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Roth IRA May Make You Want to JUMP!!!

Headline: Roth IRA might make you want to, JUMP!!

Date: 12/5/2020

Body: I just read an interesting article at Investopedia about the potential disadvantages of a Roth IRA.    The article (linked below) made me think.

Disadvantages of Roth IRAs Every Investor Should Know (investopedia.com)

Until now, all that I had read extolled the virtues of investing in a Roth IRA.   Perhaps not?

What is a Roth IRA?

A Roth IRA is a savings account for your retirement.    It is different from a Traditional IRA (largely) because you fund the account (make contributions) with money that has already been taxed.  So, when you go to withdraw it in retirement, neither your contributions nor your earnings are taxable.  I later learned that with a Roth IRA, there are never any dreaded “required minimum distributions” (explained later) like with a traditional IRA.    On this basis, I was always instructed that as long as you meet the requirements, (described later) you would be better off with a Roth.  (Especially if you expect to be in a higher tax bracket after you retire.)

What are these disadvantages?

First, this kind of account draws from money that was already taxed.   This makes the “pinch” on your wallet a bit harder, especially early in your life.  Were we more rational beings (think Dr. Spock from Star Trek) this would be less of a concern.   But, we are not Vulcan, and we are living through difficult financial times, so, this is a valuable point to make.

Second, you need to have the account open for 5 years before you take distributions.    This shouldn’t be a concern, as you should be at least thinking about retirement before this, but once again, Life rears its ugly head (or perhaps the reverse) and things happen.    So, if you don’t plan ahead far enough, this could potentially become a pitfall.

Third, there are income limits.   You might have heard about MAGI.   This is not a fictional figure who sells hair or watch fobs.  It stands for Modified Adjusted Gross Income, (The IRS is so creative.)  You might recall that there is a line at the bottom of p.1 of the 1040, and this is your Adjusted Gross Income.   MAGI simply adds some things back and deducts some others from adjusted gross income. (This is the number at the bottom of p.1 of your 1040, and the top of p.2 of your 1040.) The limitations are quite high, topping out at $140,000 for single taxpayers and $208,000 for married couples( these are 2021 tax year numbers.).  Excluding a few zip codes, incomes like these should not exclude many people, and if they do, it seems likely that they would already have the financial advisors to make needed recommendations to take advantage of the Roth, if they deem it advantageous for the client.

Fourth, your employer might offer a better deal.   For instance, they might offer a 401(k) plan that allows for a far more generous contribution limit.  But, at some point (hopefully) you will leave the workforce to retire, and if you have the IRA set up outside the company, it is a relatively simple matter (usually) to make a trustee-to-trustee transfer to the outside IRA.

Fifth, there are some people who expect to retire with enough money in taxable accounts that their retirement money will mostly be left to charities they like to support.  In this case, the charities already enjoy tax-free status as a 501( c) (3) and it would make little sense to give them money that has already been taxed.    I think this probably only applies to some very wealthy individuals, and the large majority of people (like me) will need most of their retirement money.  If this does apply to you, might I suggest giving some to me?

Sixth, if you currently have your retirement income in a Traditional IRA or a 401(k), when you do a rollover to a Roth IRA, you could face a daunting tax bill.  But, you can sometimes recharacterize only a piece at a time of your 401(k) to your Roth IRA.  This allows you to spread out the pain of paying taxes, over time.

The Verdict

Roth IRAs are often the right investment vehicle, but, in some situations, they might not be.    To my way of thinking, for most individuals and married taxpayers, they make sense, despite the potential disadvantages.  (And for each of these disadvantages, there is usually a “workaround” to mitigate the tax bite.)  Before you do make any of these changes, consulting a CPA or financial advisor could make sense, or perhaps many more dollars.

REFERENCES:

The Pros and Cons of a Roth IRA – NerdWallet

6 Reasons to Say No to a Roth IRA (fool.com)

The Disadvantages of a Roth IRA | Finance – Zacks

Opening a Roth or Traditional IRA (thebalance.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

You’re already the Producer. Why not be the Director too?

Headline: Direct your own plays?

Date: 11/28/2020

Body:  I was reading Yahoo Finance and I found an article about a “self-directed IRA.”   I had never heard of this before, and I thought it was an interesting concept.  The article link is below:

What Are the Differences Between a Self-Directed IRA and a Traditional IRA? (investopedia.com)

What Is a Self-Directed IRA (SDIRA)?

A self-directed individual retirement account (SDIRA) is a type of individual retirement account (IRA), and differs from the normal IRA in that it is directed by the investor, and administered by a custodian.  Because it is self-directed, by IRS regulations, it can be invested in a far wider selection of investments than a more conventional IRA.   (By the same token, custodians are prohibited from making suggestions on what to invest in.)  It can be structured either as a Traditional IRA or a Roth IRA.

Traditional v. Roth IRA

The most important distinction between the Traditional IRA and the Roth IRA, is when the taxes are paid.  In a traditional IRA, taxes are deferred until withdrawn.   In a Roth IRA, taxes are deducted immediately, and contributions and earnings can be withdrawn tax-free.

Traditional vs. Roth Self-Directed IRA (SDIRA)

Self-directed IRAs can be set up as traditional IRAs or as a Roth. But keep in mind, the two account types have different tax treatment, eligibility requirements, contribution guidelines, and distribution rules.

	Traditional IRA	Roth IRA
Taxed	Taxed when withdrawn from IRA	Taxed when originally earned.
Income limits	No income limit	$139,000 (single) $206,000 (MFJ)
Required minimum distribution	RMDs start at 72.	No RMDs
Early Withdrawal	Tax and penalty free for withdrawal after 59.5.	No Early Wihdrawal penalty for contributions
Limits	$6,000 per year $7,000 with a catch-up contribution (over age 50)	$6,000 per year $7,000 with a catch-up contribution (over age 50)

Are there Risks Related to a Self-Directed IRA?

1.  Please be sure that you do not invest in the prohibited asset classes.   Some examples of these prohibited classes include: artwork, stamps and S corporation stock.  If you do invest in these vehicles, the total of the account could be deemed “distributed” to you.
2. Please remember that the custodian cannot provide advice on investments.
3. Be aware that the SDIRA has a complex set of fees that could make it an unfeasible choice.
4. Make sure that you have an exit plan, as some of the assets invested in are highly illiquid, and might be difficult to find a market for.
5. Fraud can be a big problem with the SDIRA.

Fraud, isn’t that the “F” word?

Fraud is a larger issue for the SDIRA than for other flavors of IRA because of the wide variety of assets that are available for investment.   One legitimate choice is Bitcoin and other types of cryptocurrency.    The possibilities for fraud within this arena are broad, and limited only by the imagination of the fraudsters and the black-hat coders with whom they work.

The Verdict

An SDIRA can be alluring in the abstract, especially with the volatility of the stock market these days.   But, there is really only one Pro argument (flexibility) and there are many Con arguments.   Further, I only found reference to one “case study” where an SDIRA worked out really well for somebody, and that somebody was Peter Thiel.   Far from being an average investor (like you or me), Mr. Thiel is the co-founder of a laundry list of technology companies and runs his own foundation in addition to Thiel Capital.  Seeing that his was the only case study in advancement of SDIRA, I think you can agree that he is not your average investor, and caution should therefore be exercised.  In relation to your retirement, you are the Executive Producer already.   Consider hiring somebody else as the Director; Your future is nothing to play with.

REFERENCES

Self-Directed IRA (SDIRA) Definition (investopedia.com)

A Guide to Self-Directed IRAs (usnews.com)

SEC.gov | Investor Alert: Self-Directed IRAs and the Risk of Fraud

Why Self-Directed IRAs Are a Bad Idea (fool.com)

If you play with FIRE, might you get burned?

Headline:  If you play with FIRE, Might You Get Burned?

Date: 11/23/2020

Body:  I was scanning Yahoo Finance, and I found an article on investing for retirement.   So, I began to read the article below:

Why Savers Pursuing Early Retirement Should Consider Limiting 401(k), IRA Contributions | Barron’s

I have a Graduate Certificate in Gerontology, and I started working for the IRS in 2008, just after obtaining my CPA license.   In my spare time, I love reading about investing for retirement.   But, 20 seconds into this article by Barron’s, and I ran into a term I had never run across.   The author casually mentions FIRE and really doesn’t take time to define it.

FIRE is an acronym that stands for, “Financial Independence, Retire Early.”  In basic terms, FIRE is an idea that you might put aside as much money as you could toward retirement (up to 70%!!).  The FIRE movement appears to be aimed at millennials, as a result to their sparse savings.  (Per the National Institute on Retirement Security, 66% of millennials have saved nothing toward retirement.)  This movement also encourages a person to consider many different types of investing, beyond retirement accounts.   Particularly, they advocate owning rental real estate and starting your own business.   At first blush, this might seem like a good idea, as most do not have enough savings to provide for a comfortable retirement, and many more worry about outliving their savings.

How did all this start?

This all started with a 1992 book entitled, “Your Money or Your Life by Vicki Robin and Joe Dominguez.  In this book, one theme they seemed to emphasize is the importance of always considering the tradeoff between your time and your money.  Now, there are several blogs and podcasts in the US and UK.

Are there variations on a theme and levels to FIRE?

In a word, yes, there are levels.  There’s “Fat FIRE” which seems to indicate a more conventional lifestyle,  emphasizing saving for retirement.  There’s “Lean FIRE” which seems to be a very strict sticking to the dogma of FIRE.  There’s “Barista FIRE”  which seems to be people who stick to FIRE principles, but once they achieve financial independence, they continue with at least a part-time job.  Finally, there is “Coast FIRE” which seems to apply to folks who PLAN on having a part-time job in retirement.

Objection(s)!!

Let’s face it, some people are not cut out to be business owners, and I have difficulty turning a wrench the right direction, so, owning rental real estate appears to be a mistake for me.  I do not think myself unique in this attribute.  I remember a really inspiring show with Suze Orman, where she was encouraging a young woman to continue renting an apartment instead of buying, and congratulated her for “standing in the light of her own truth.  I really think Ms. Orman was on to something important here.  If this movement encourages people to do things  like own a business, have rental properties and other types of activities not suited to their disposition or interest, failure will likely follow.  (In fact, some mistakenly think that to rush through work they hate is central to FIRE principles.   In fact, the idea is to engage in work that is meaningful to you.) 

Some claim that only the rich can afford to be frugal in this manner.  I know that I set aside 15% for my retirement, but that feels like a lot, and I am not married and have no children.  Adherents, once they do retire from full-tome work, are encouraged to act as retirees and only draw down 3-4% per year.  This is likely possible over a 20-year retirement but, if one retires at 40, will the savings last until age 90?   Not likely.  In a related criticism, some claim that the ascetic lifestyle encouraged by FIRE is not sustainable.  “It seems to me like the extreme version of the Atkins diet” explained a financial planner in London.

The Verdict   

In point of fact, one promoter, as he reached his goal, said, “A lot of this stuff is emotional and psychological.”   If seen as a goal, and realization of behavioral economics, this idea may make some sense. But, it seems to be largely aspirational to most.

REFERENCES

Financial Independence, Retire Early (FIRE) Definition (investopedia.com)

How to Turn Your Retirement Plan Into an Early-Retirement Plan – NerdWallet

11 Steps to Retire at 50 According to FIRE Retirement Pros | Investing 101 | US News

Does FIRE Early Retirement Make Sense for You? (thebalance.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Cold Confusion?

Headline: Cold confusion??

Date: 11/15/2020

Body:   I was reading the following blog entry on Yahoo Finance, and it does ask some good questions about the possible vaccine devised by Pfizer.   It is a good story, and I encourage you to invest 2-3 minutes to read it.

https://finance.yahoo.com/news/cold-chain-throws-cold-water-over-pfizer-vaccine-hopes-133716649.html

So, out of curiosity on a slow Sunday, I went to the Pfizer stock chart, and it does appear that the trend is upward.   And, if the vaccine is approved, and distribution issues are conquered (they have some very intelligent employees, I think there’s hope) the stock price can’t help but rise.  Right??

Well, maybe.  Before you go putting money into Pfizer or any other biotech firm using similar logic, please stop and think at least thrice.  Specifically, there are additional problems concerning this vaccine.   For some good reasons (and some not-so-good) a lot of people are going to refuse to receive this vaccine.   So, even if these distribution issues are effectively licked (sorry, poor word choice) they still have a massive “human factors” issue set to tackle.  Once again, they might do this successfully too, but it’s not guaranteed.

More generally, I am reminded of the Gold Rush in the middle of the 19^th century.    The oft-repeated phrase is, “Go West, Young Man,” and the advice was offered because there seemed a plethora of opportunity that many people could take advantage of.  Then, there came the advice to not prospect for gold yourself: Instead, open a shop that sells picks, shovels and clothing appropriate to the harsh gold-mining conditions, and THEN you’ll make the REAL money. (People like Levi Strauss took this to heart, and their brands remain even today.) All well-meant advice, to be sure.  Still, thousands of men returned home empty-handed, but for the Bankruptcy notices received from banks.

I am also reminded of another job posting I currently had.   I was a Budget Analyst for a local municipal government, and I had a boss, call him Dwight.    Dwight had a favorite saying, “Ask the NEXT question.”   What he meant by this is, once you ask the Roads Department how much a “high flow milling head” is going to cost, you have to ask them what the new investment will allow them to do.  When considering stock investing, I encourage you to always ask the next question.  In the case of vaccines, you might ask a few questions:

1.  Are there partners that might help with the logistical hurdles?  Maybe investing in these could make sense (or dollars?)
2. Are there international partners who might be able to continue progress on vaccinations in another portion of the globe?  Maybe investing in these could make sense.

At the end of the day, chasing momentary movements in stock price, due to current events, can be as challenging and dangerous, as it can be an interesting intellectual exercise.  As long as you have your other bases covered (e.g. day-to-day expenses, saving for retirement) this could be an exciting thing to watch.  But, as mentioned before, perfect crystal orbs that perfectly predict the future do not exist.  If you decide to gamble like this, be sure to do your research and be realistic about taxes and trading costs.

Given that most people have put vacations on hold, and held other plans in abeyance, there are a lot of people sitting on money.   They rightly ask, “So, what SHOULD I invest in, Drew?”   This question is worthy of a lot of thought, but it boils down to 2 things: Time Horizon and Stage of Development.  If you want to invest your money, but know that in 1-2 years, you’ll need the money, my advice would be one thing.  But, if you have 15-20 years before you need that pot of money, my advice might be very different.  Stage of Development is an interesting attribute because it has nothing to do with age.  A 66-year-old might be trying out a new career, and they would be at an early stage of development.  In all stages, I like the advice “Invest in what you know.”  So, early on, think about investing in education and experiences to help burnish your credentials or earn new ones.   Later in development, consider investments within sectors you have experience inside of.

At the end of the day, it’s your Life.  Be sure to tell a good tale.

Does Consumer Confidence have only a Rumor of Competence?

Headline: Should I Care About Consumer Confidence?

Date: 11/23/2020

Body:  I was scanning Yahoo Finance and I found the following article:

Black Friday sales, Consumer Confidence: What to know in the week ahead (yahoo.com)

I learned briefly about consumer confidence in economics class in college (about 2 decades ago).  But I do remember that I was unsure as to how much value this number had in determining the nature and direction of the larger economy.  As we are getting very close to the holidays, I think this is a good time to review what this index really represents.

What is the Consumer Confidence Index?

The Consumer Confidence Index is an index that looks at consumers’ own appraisals of the present economy and their expectations of future conditions.   The Consumer Confidence Index is based on the Consumer Confidence Survey, which is a monthly survey of 5,000 households. There are five questions asked—two related to present economic conditions and three related to future expectations.  Two questions probe the consumers’ appraisals of the current market conditions, and three questions probe the consumers’ appraisals of what market conditions will likely be in 6 months.  The questions focus on family income and the availability of jobs.

What is the Conference Board?

The Conference Board is a non-profit group that was formed in 1916 to boost consumer belief levels in corporate governance after 3 major business catastrophes, including the fire at the Triangle Shirtwaist Factory that you might remember from your U.S. History classes in High School.  It was started in Boston, by a collection of CEOs worried about how the poor conditions within their factories could negatively affect both their employees and their revenue.  It seemed to really gain prominence during WWI and then in 1919 published its’ first report on cost of living increases.   This led to the Consumer Confidence Index.  History is important here to evaluate the credibility of the organization administering the survey.

Criticisms of the Index.

I have found various articles by credible sources and they seem to be about evenly split on whether the CCI is a leading or lagging economic indicator.   I suppose a cogent argument could be made for each given the distribution of the questions, but, I find it disconcerting that this issue is in dispute.  (Any doubt why economics has been considered, “the dismal science.”?)

The Federal Reserve Bank of Kansas City did a study of this index, and the conclusion was as follows:

“I found very little evidence that they were useful predicting consumer durable spending.”

The report goes on to observe that the CCI often ran in a nearly opposite direction compared to another index of consumer confidence during the 1980s.  Despite this word of warning, I think that the number might still be of some value, as consumer spending represents more than 68% of the economy per Inc. magazine.  Since durable goods (think cars, washing machines and kitchen ranges) are often priced out and budgeted for, over a number of months, this might still have some value.  One economist opined that this index might be more a measure of the business cycle than a measure of consumer confidence.  

So, what does this all mean to me and my household?

Much is made of the Consumer Confidence Index in the media.  But it seems like a rather small sample and the questions that are asked have only 3 responses: positive, negative or neutral.    As it seems likely to be a prediction of the future for the business cycle, I think that people should likely take this number as only an indication that total business might accelerate or decelerate in the intermediate future, not an economic exclamation point   I think of it more as a yellow light than a flashing red on the dashboard of the economy.  

On a personal level, I think this might be a signal to prepare to buy large ticket items.   As confidence declines and demand slackens, retailers need to move their inventory, and they might be more apt to institute a meaningful sale.  At the very least, it is a signal to the consumer that negotiation might be more possible.   This knowledge should give consumers some confidence.

REFERENCES

Consumer Confidence Index® | The Conference Board (conference-board.org)

Consumer Confidence Index (CCI) Definition (investopedia.com)

What Is the Consumer Confidence Index? (thebalance.com)

Consumer Confidence Surveys: Do They Boost Forecasters’ Confidence? (stlouisfed.org)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Tuition can Lead to Institution.

Headline: Tuition can Lead to Institution.

Date: 11/22/2020

Body:  It’s not news that student loan debt is a serious issue.   I read this article on Yahoo Finance:

Former Treasury Secretary Larry Summers is ‘skeptical’ about student loan forgiveness (yahoo.com)

Is the size of student loans significant within the U.S.?

In a word, yes!!  In a few more words, the New York Fed reported, in October 2020, that student loan debt represents a $1.55 Trillion drag on this nation’s future.  For a bit more context, as of 2017, the average undergraduate student has $7,200 of student loan debt.   The average Graduate student had $25,700 in student loan debt.  (This is up 47% from when it was measured in that same 1995 study.)  And, due to shame and related guilt, I feel pretty confident in saying that this is likely an undercount of the true debt.   Houston, we have a problem.

What caused this problem?

I could not find any good relevant research for this question, so, I will speak from my own experience.   I think the problem sprouted from good intentions, the best of intentions.  Growing up, it was taken as an article of faith that my sister and I would graduate from High School and go immediately on to college.  The conversations began when I was 6 or 7  years old that I had to save money so that I could “go to college.”   My father went to the Naval Academy, and MIT for Graduate School, so, his point of view is relatively easy to see.   My mother was the first in her family to have graduated from college (grandma followed 9 years later.)   So, she had to really fight to gather her education and prized it highly.   When both were growing up, the twin ideas were:

1.  Go to college and get your ticket punched for an easy life.
2.  Go to college and avoid the draft, and possibly a premature death.

So, the power behind their devotion to education is pretty easy to see.

But, in the haste to follow these two tacit edicts, alternatives were not conceived of, let alone discussed.  Due to visual problems and other health issues, the military was out of the running for me.  (Though the Marines did try to recruit me 6 times.)   The possibility of community college was not discussed (though, in retrospect, would’ve been another excellent choice.)  I really don’t want to even compute the amount spent on my education: Fortunately, we were in a position where this was possible.   For many, it is not.

What are the Funding possibilities?

You could get a variety of aid, but, each comes with its unique pitfalls

You could apply for and get scholarships, but it requires a great deal of effort on the part of the matriculate to find the offerings and make the application.

You could apply to the Federal Government for a Grant or Loan.  In either case, the paperwork is pretty onerous, and often, parents are often uncomfortable having detailed discussions of their finances with their adult children.

You could get a part-time job while at college, working in the Library or doing something else.   These are often not hard to get, but once obtained, juggling a full-time school schedule with a part-time job and time to recreate, can itself be exhausting and perhaps impossible.  Grades could slip, and the dream could expire.

You could take out private student loans.   Often, repayment of these loans is deferred until the student has graduated.   Finance companies are quite happy to extend these loans, but, beware:

1.  College loan debt is NOT discharged in Bankruptcy.
2.  The interest charged can be stratospheric.  Per Nertwallet, it can vary from 3.82% to 14.5%.    This rate of interest can torpedo a promising financial future, as during the deferral period, the interest accrues and is added to the loan amount once payments commence.

The Verdict

The verdict once again depends upon case-by-case facts and circumstances.   At the end of the day, I think that if you have a defined plan of what you want to do, and it requires a BA or BS, going to a 4-year College or University can pay handsome dividends.   But, if you’re like so many of my friends were (and some still are) and have no definite plan, please consider a trade school or more cost-effective education at least initially.   If you finish 2 years and feel inspired, then it is only 2 years at the expensive 4-year school.  If not, take your certificate and skills and join the work world, until you crystallize your plan.  There is a gigantic need for trade-educated personnel, and the opportunities to start a business later, are nearly limitless. 

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.