Planner's Pulpit
Planner's Pulpit

Who Are They Kidding with These Headlines?

I was perusing a large, respected consumer finance website when I saw one of “those” headlines. The ones that grab your attention and make you do a double take. This one was entitled “Early Retirement Without a Fortune.” The introductory paragraph went on to say that it’s “not as hard as it looks.” This grabbed my attention, because I’ve always believed early retirement was indeed a challenge for most people not blessed with large inheritances or very high income. What did these people know that I didn’t? I plowed into the reading.

The article profiled a number of people who had quit work well before their sixties. And none of them had struck it rich as investors or entrepreneurs, nor had they hit the lottery or inherited millions. How had they managed to retire in their fifties, forties, and even earlier? It’s instructive to look at two examples of the people that were profiled.

Contestant #1 is age 62, and retired at 49. He and his wife live on $50K/year, deriving $17K of that from Social Security, and the other $33K from their investment portfolio. Only the value of the investment portfolio is just $350,000, meaning they are withdrawing at a rate of more than 9% per year. At that rate, they will likely run out of money before they run out of life expectancy. It looks even worse when you add healthcare to the mix:

One of the big unaddressed issues in many retirement plans is the rising cost of healthcare as we age. A study by The Center for Retirement Research at Boston College estimates that a pair of married 65-year-olds should expect to spend $197,000 in uninsured healthcare costs over the rest of their lives. And that’s not including the costs of a potential stay in a nursing home. So this couple did retire early without a fortune…but also without much long-term financial security.

Contestant #2 “retired” at the unbelievable age of 33. He probably lived with his parents. The article doesn’t actually say that. But it did say that he managed to save 80% of his take home pay each month while he worked. How does one do that while living independently?

Then he quit working, and managed to live on just $7,000 per year, spending $1,000 on hobbies, and the rest on basic living costs. That’s just $500 per month for food, housing, clothing, transportation, utilities, medical expenses…. It sounds like the parental basement to me. Oh, and his exit from the workforce lasted just four years, after which he got a job. That’s not early retirement; it’s a sabbatical or just extended unemployment.

The best description of most people’s goal that I have ever heard is this: having enough money to retire comfortably, and to stay comfortably retired. That’s doing it right. Retiring early is a great goal, but it’s not as desirable as retiring right.

Flip a Coin for Financial Security?

Three minutes before the start of a football game, the team captains meet at center field with a referee for a coin toss. The captain of the visiting team calls the toss. Winner of the toss gets to choose whether his team kicks off or receives to start the game. (There are other choices he can make, but we’re going to keep this analogy simple.)  One thing is certain: the winner of the toss will not receive accolades for his skill at predicting future outcomes. Everybody knows that the outcome is random, and that his odds of being right are 50-50. If he calls it right five times in a row, we call him lucky, not good.

On May9-10, Bloomberg Global surveyed 1,263 of their subscribers to poll them about their take on the economic future. Poll respondents tend to be financially savvy people: economists, investment bankers, hedge fund managers, and generally sophisticated investors. When asked if the S&P 500 Index would be higher six months in the future, 48% said yes. But 50% said no. And 2% were honest enough to admit they had no idea. So disregarding the honest 2%, half answered the question yes, and half answered no. I can say without any doubt that half of them are right. But then you’ll probably go and spoil things by asking which half.

This sort of 50/50 breakdown is not uncommon. Back in January, a Bloomberg poll found half of respondents declaring that a state or major U.S. city would default on its municipal bonds this year. But 46% — nearly half — thought that prospect unlikely. You can bet that the half that turns out to have gotten it right will say they were good, not merely lucky. The truth is there are way too may variables, both seen and unseen, that impact the outcome for anyone to “know” what’s really going to happen. But that won’t keep half of them from claiming they did.

This would be of little consequence if it were not for the fact that so many people make investment decisions based on the predictions of People Who Claim to Know. They buy gold at $1500 per ounce because their favorite guru claims it’s going to run up to $2500 per ounce this year. They move into (or out of) stocks. Or Treasuries. Or emerging market debt. Or commodities. All because of what somebody or other says is going to happen next.

Like a coin toss, all economic predictions have only two possible outcomes. They will prove to be correct, or they will not. But do you really want to risk any part of your hard-earned nest egg on something like a coin toss? I know I don’t.

Here’s a better idea: Acknowledge that the future is both unknown and unknowable. Instead of looking for a guru to follow with a great record in the coin toss, consider trying to build an “all-weather portfolio” that will allow you to make progress toward your financial goals under a wide variety of possible conditions. You want investments that will benefit if the dollar weakens, as well as investments that will benefit if it strengthens. You want to be prepared for inflation and deflation, expansion and recession. Rather than having to know what’s next, you can know that you are prepared for a variety of possibilities. I go into this whole concept in much greater detail in Chapter 11 of Making Mammon Serve You. It’s recommended reading, if I do say so myself.

Building an all-weather portfolio is not a piece of cake, and it’s not an exact science. But it sure beats betting the ranch on a coin toss.

Cars & Effect (part 3)

In Part 1, I detailed why I needed another car. In Part 2, I told you the car I ultimately settled on.  Now let’s talk about how this information might benefit you. Some folks will doubtless fail to understand why I spent money to buy a 17-year-old car. But consider the alternatives:

I could have leased a brand new 5-Series. It would be showroom fresh, with a comprehensive warranty. BMW is currently advertising a lease deal on the 550i at $759 per month for 36 months. Since it’s a lease, you pay over $27,000 (plus taxes and fees) to drive the car for three years, and you don’t even own it at the end of the term. I know people who prefer to always drive new cars by turning in their cars at the end of the lease and leasing another one. But that burns through an awful lot of money. If your life’s biggest dreams (like a great retirement) are not yet paid for, I wouldn’t recommend this approach.

I could also buy the new 5-Series, rather than lease it. But that requires me to put down a large chunk of money on a depreciating asset. The minute you put the plates on a new car, it is worth a great deal less than what you paid for it. That’s how fast they depreciate, and high end luxury cars depreciate even faster than basic transportation. A nicely equipped current 5-Series is north of $60K. With 25% down, the ballpark monthly payment will top $1,000 at current rates. I’d own the car after 4 years, having put in over $64K plus sales and excise tax just as the car is coming off warranty.

I have owned five BMWs. I really like them. But I know that at around 100K miles, most enter the automotive equivalent of the terrible twos. There will be a laundry list of worn out parts, and a lot of money to be spent to return the car to the condition it needs to be in to feel like the Ultimate Driving Machine.

The car I just purchased has already passed that stage. The predictable and expensive repairs have already been done by someone else. It doesn’t have far to depreciate. This is a car with a lot of life in front of it, perhaps 200K more miles of driving, with relatively low operating costs. It will look good, be fun to drive, and financially sensible too.

You may object that a brand new car, unlike mine, will have substantial trade-in value in four years, partially offsetting the price of the next new car you buy. True. But while the equity in your trade certainly reduces the monthly payments on your next car, the equity is just endlessly rolled from one depreciating asset to the next. Buying a less expensive car frees you to put this money will it can have a rate of return.

Of course, you don’t have to buy a 17-year-old car if you don’t want to. Once you make the decision to go pre-owned, it’s a matter of taste to decide what vintage car suits you best. Regardless of the brand of car you drive, making an old car work for you requires following a number of rules:

  1. Be prepared to search far and wide to find the right car at the right price from the right seller. The right seller is someone who has properly maintained the car, and can prove it by producing all the maintenance records.
  2. Pretend you have a payment. Life without car payments is great. But every month, put some money aside into a car fund that you will use to pay for repairs, and eventually for your next car. If you put, say, $300 per month into this fund, you’ll have plenty to handle out-of-warranty repair costs without wrecking your monthly budget. Remember, repair costs on a well-chosen old car should be far less than monthly payments on an equivalent new car.
  3. Know that maintaining the car well may mean ignoring manufacturer’s recommendations. For instance, BMW used to recommend changing the lubricants in the manual transmission and rear differential every 30,000 miles. Then they started selling cars with free scheduled maintenance included. Lo and behold, these fluids suddenly didn’t need changing anymore. Ever. They were “lifetime fill.” The fluids were the same chemical formulation as they had always been. The only change was that BMW was now paying for them. I’ll let you draw your own conclusions. If you intend to keep your car for the long haul, I say ignore the “lifetime fill” baloney and maintain the car the old-school way. And 15K miles between oil and filter changes? Forget it.
  4. Keep your tires properly inflated. This will not only save you money by making your tires last longer, it will help your car get better gas mileage. Buy a quality tire pressure gauge and check the pressure weekly.
  5. Keep the car clean. In the winter, be especially vigilant to wash away road salt. Faded paint and rust spots will both spoil your joy of ownership and reduce the value of the car when it is time to sell or trade it.

Car manufacturers come out with new models every year. They spend millions of advertising dollars telling you to trade your current car for the newest versions. Especially in certain industries, people put great stock in maintaining a prosperous image. You can start to feel pressured to keep up with the Joneses by buying a new car every three or four years. But driving a great old car for a long time can be even more involving and rewarding, and leave you with money in your pocket that the Joneses don’t have. That’s money you can put toward things that mean more to you than a car ever will.

Cars & Effect (part 2)

Looking for a replacement for my now deceased 325i was not shaping up to be easy.  I knew what make I wanted. I drive BMWs because I love the way they handle, I’m very familiar with their mechanical workings, and I like how long they last when properly cared for. In fact, they’ve become kind of a hobby. I joined the BMW Car Club of America and go to events like undercarriage tech sessions where I can talk about the merits of things like adjustable camber plates with fellow devotees. To my knowledge there is no twelve-step program for this. But I digress.

Buying a brand new Bimmer would entail either sinking a huge chunk of cash into a depreciating asset, or borrowing money and repaying principal and interest over time, thus paying even more for that depreciating asset.  Both of those ideas run counter to my financial planning instincts. So I scoured lots of car dealer websites for used cars, knowing that preowned cars both cost less and depreciate less dramatically than new ones.

But buying used cars from dealers can be risky, since they don’t generally have the maintenance records for their cars. The way a car is maintained from day one has a tremendous impact on its life expectancy and operating costs after the warranty period is over. Buying a car without knowing its maintenance and repair history is like rolling the dice.  So I looked for private party sales.

Have you seen some of the junk people are trying to sell on Craigslist?  People ask thousands of dollars for cars that can’t be driven, cars whose engines have lost compression, cars with ripped upholstery and cracked dashboards that made my dear departed 325i look pristine.

One night I logged onto to check out BMWs for sale. This board is frequented by enthusiast drivers, and I thought I might find better cars than I was seeing on Craigslist. I pulled up a list of older 5-Series cars. The first ad I saw was for a 1995 540i with 109K miles. The owner wanted $7,500. The second ad in the list had been posted just the day before. It was a 1994 530i. This V8 had the preferred manual transmission, was Iceland Green, and looked to be in great condition.  It had 101,000 miles. BMW had replaced the original engine under warranty at 77,000 miles, so there were only 24,000 miles on the engine.  The seller of this very clean car had upgraded the wheels, tires, suspension, and engine software, and added a modern audio system with MP3 and Bluetooth.  He was asking $2,250!

My first thought was that it was a misprint. I’d seen so many people asking $2K or more for beat up old parts cars that didn’t even run, I thought it must be a mistake. I contacted the seller, who was in Brooklyn, NY. I confirmed the price and quizzed him about the history of the vehicle. He had meticulously maintained the car, and he had all the maintenance records.  The car had just been detailed.  The engine compartment was spotless. He didn’t want to sell it, but a change in his job situation made him fear he would not be able to maintain this garage queen in the manner to which it had become accustomed. He wanted it to go to a good home.

I conveyed my appreciation for the model, with its classic design and bulletproof build. I assured him of my intentions to care for his car as religiously as he had. I knew this vehicle would likely be snapped up quickly, so I arranged to go to New York City to check it three days later.  My co-conspirator and I would drive down in one car, and drive back in two.

I never imagined there were such beautiful old neighborhoods in Brooklyn.  His neighborhood featured tree-lined streets and magnificent old houses reminiscent of the nicer sections of Cambridge, MA.  For some reason, I had assumed all New York residences were high rise buildings.  Live and learn.  After giving the car a thorough going over, we traded my cash for his title, and the 530i was mine.

The first trip was to the Department of Motor Vehicles to get a temporary transit permit. Since the vehicle would not be registered in NY, I needed a way to drive it back to MA. I had hoped to duck in and out of the DMV fairly quickly, so as to avoid rush hour traffic on the way home.  Silly me. “DMV” and “quickly” are not generally terms you can use together, and they certainly were not this time. I was in the DMV for nearly two hours before I got to the counter. Whereupon I was made to stand for another twenty minutes while the clerk straightened out a problem with the documents from the woman who had preceded me in line.

When she finally turned her attention to me, the clerk was hesitant to give me an in-transit permit, because Massachusetts does not recognize New York in-transit permits. My fair state seems to go out of its way to penalize and antagonize people who buy cars elsewhere.  Fortunately, I had researched this issue and come up with a plan in advance. I informed the clerk that I was not driving the car to Massachusetts, but to Enfield, Connecticut, just south of the MA state line.  There I would park the car, and take my co-conspirator’s car into Massachusetts, to the nearest Registry of Motor Vehicles, just a fifteen-minute drive from Enfield. I’d get the car registered and bring the plates back to Connecticut to put on the new old car. I hoped the New York DMV clerk would go for this plan, because if she did not, I had no way to get the car out of New York. While I held my breath, she stamped my in-transit permit and sent me on my way. Yes!

An awful lot of people live and work in the Big Apple.  And it seems they were all on the road when we set out for Connecticut at 4:00 pm. I generally find that driving a car equipped with a manual transmission is exhilarating.  But not when I’m stuck in stop-and-start traffic from Brooklyn to the Connecticut state line.

Our little two-car convoy pulled into a Hampton Inn in Enfield at around 8:00 p.m. Tuesday night. I was up bright and early to go to the Registry. The first problem I encountered is that the Registry in Springfield was not located where the RMV’s own website said it would be. Turns out they’d moved a year ago, and never updated their website. When I finally found the place, on the other side of the city, I hoped to get in and out quickly, so I could get back home and get to work. I’d already missed a full workday Tuesday, and didn’t want to miss Wednesday, too.  Once again, “RMV” and “quickly” were not a logical pairing.

I assumed the Registry in Springfield would be much less crowded than the one in Brooklyn. And it was indeed much smaller. But just like the one in NYC, this one was packed with people wearing the leaden expression of those resigned to dealing with the pitiless cogs of bureaucratic machinery. I found a small section of unoccupied bench and joined the waiting masses.  I eventually got to a window. And the clerk there wasn’t satisfied with my paperwork. Even though it was what they specified on their website.  Having nothing to lose, I went into sorely aggrieved customer mode, and told the lady I didn’t appreciate all the delays, starting with the outdated address on their website. Perhaps she’d already had her fill of aggrieved customers that day. She called over a supervisor, who immediately and silently stamped my paperwork, gave me my new plates, and sent me on my way.

Two hours later, my properly registered 530i was in my driveway. I’d found a fitting replacement for the car that “Bob” killed. And it was truly a blessing. I had basically traded a homely 191 horsepower 3-Series automatic with 288,000 miles and an iffy transmission for a sharp looking 238 horsepower 5-Series manual with just over one third the mileage, and only 24K miles on the engine. And in this trade I had even gotten several hundred dollars cash back, considering I paid less for the 530i than I got for the insurance settlement on the totaled 325i.

Maybe I should send Bob a thank-you note. Meanwhile, in Part 3, we’ll discuss what this all has to do with your personal finances.

Cars & Effect (part 1)

First, for those readers who do not hail from Eastern Massachusetts, I should explain that the headline should be pronounced the way a townie from one of Boston’s neighborhoods would: cahs and effect.  It’s a pun, you see.  I know, I know, a very small pun.

I’ve been thinking a lot about cars and their effect on people’s financial plans. All this thinking was triggered by the unexpected demise of my late lamented BMW 325i.  It was a ’95 automatic in Boston Green.  I got it with 31,000 miles on the clock, and drove it until the odometer read just over 288,000 miles.  Along the way I upgraded to 17-inch wheels and tires, Bilstein Heavy Duty shocks, and a few other subtle changes that made the car more fun to drive.

As time went by, the 325i worked its way into my financial seminars. I have always preached the virtue of maintaining a car to maximize its lifespan, because repair costs on a well-maintained car are usually much less expensive than monthly payments on a new car.

I also used to tell the audience a story, a sort of parable that helped investors come to grips with the realities of stock market volatility. It’s too long to reproduce here, but it was about getting rescued from a bad situation by someone driving a car whose color you didn’t like. The punch line was “volatility is the green car.”  I’d tell the story, get a chuckle and a few nods of understanding, and move on. At the end of the evening, a few seminar attendees who’d stayed around to ask questions always accompanied me to my car as I packed up my gear. That’s when they saw my green 325i with the vanity plate: VLTLTY. Volatility really was the green car. They’d laugh all over again.

All good things must come to an end. While this car still handled nicely, it was getting a bit long in the tooth. After thirteen years as my daily driver, the once gorgeous paint was faded, and the clear coat was peeling. There were some rust spots popping up in various places, and the carpet was worn through in the driver’s foot well. Since the car was a garden variety 325i, I didn’t deem it worth the expense of a full restoration. To top it all off, I felt the automatic transmission beginning to slip. I wasn’t sure I wanted to pay for a transmission transplant in this old car.

Enter a helpful driver I’ll call “Bob.” He made up my mind for me. I had parked on a main street in nearby Lexington while I went to do some banking. When I got out of the bank, I found my car had been sideswiped. The left rear wheel was bent, and the tire flattened. The wheel was angled sharply inward, as if the car had suddenly developed four-wheel steering.  There was a deep gouge up the entire left side of the car. The left side mirror was lying in the road ten feet in front of the vehicle. Fortunately, I had been hit by an honest man. Bob left a note on my windshield with his contact information.

The insurance company declared it a total loss and cut me a check.  Unfortunately, it was a check for just $2,400 or so.  After all, the car had 288,000 miles, faded paint, and some rust.  I resigned myself to having to lay out a big pile of cash to secure a replacement vehicle.  Ah, but sometimes the Lord works in mysterious ways. That’s next in part two.

Nightmares for Sale

The world is coming to an end. Again.

A friend sent me a link to a video entitled The End of America. The voiceover solemnly warns about the coming collapse of the U.S. dollar, and predicts riots, martial law, mass arrests, and that sort of thing. A bad time will be had by all – except those who are wise enough to subscribe to the newsletter the video promotes. They’ll learn a way to invest that saves them from the coming carnage.

We’ve seen this movie before. Remember Y2K?  That was the talk of the 1990s. Everybody was predicting economic meltdown then, too. It seemed that the end of modern civilization would come as the result of a computer glitch.  See, back then, computer memory was kind of scarce.  To save memory space, dates were always programmed with two digits each for day, month, and year: 12/31/97, for example.  Everyone knew that “97” was short for 1997. Since the first two numerals in a year were always 19, they were dropped to save memory. Then the realization dawned:  When the year 2000 came, computers wouldn’t know what to do with 01/01/00. Would your credit card companies think it meant the year 1900?  Would they charge you 100 years’ worth of finance charges on recent purchases? Would utility companies shut off service thinking that payment was 100 years overdue?  Would stock markets grind to a halt?  A million different doomsday scenarios were developed.

Just to dip their toes in the murky waters of digital destruction,  some people even turned the dates ahead on their VCRs. [For the benefit of younger readers, a VCR was the device that oldsters used for watching movies before there were DVD players or streaming video. ;-) ] When rolled to the double-aught year, most VCRs froze. They wouldn’t work, and the date could not be reset.  This was taken as proof positive that all the world’s computers would do likewise.

Of course, Y2K turned out to be a whole lotta nothin’.  Civilization did not end. Computer programs got patched or rewritten. The world let out a collective yawn and went about its business.

But many financial writers love a scary story, and employ them all the time.  Market crash!  Double-dip recession!  Your job outsourced!  What to do now! And every so often, a plausible nightmare scenario comes along that really grabs everyone’s attention the way Y2K did. I think there’s a part of most people’s psyche that actually likes imbibing a good dose of fear. How else do you explain the popularity of roller coasters and vampire movies?

Still, fear has no place in your personal finances. It can lead to paralyzing inaction, or worse yet, to taking crazy actions in preparation for extreme events that never come to pass. If you sink all of your money into building an underground bunker and stuffing it with canned goods and precious metals to ride out the apocalypse, you’re going to have serious regrets if this latest end-of-life-as-we-know-it turns out to be a bigger dud than Y2K.

In the end, the doomsayers make one mistake over and over. They extrapolate an ever-growing problem, such as our national debt – but they never extrapolate a growing ability to fix the problem. So inevitable disaster is always looming. Fortunately, history is not on the side of the nightmare salesmen. And it never has been.

I’ll say more on this, and how it relates to your financial decision making, in a future post. For now, let’s settle on what to call this gloomy brand of financial forecasting. Disasterology?  Apocanomics?  Chime in with your suggestions.  The winner (in the sole, arbitrary, and final opinion of yours truly) gets the internet immortality that comes with coining a new phrase!