Anne’s Blog

There is a company advertising a book for sale right now and the tag line is “How to not run out of money in retirement”. I don’t know how much they are charging for the book, but given the extent of the ad campaign, I’m sure it’s quite a bit. So, I’ll save you a bunch of money. 

The way to not run out of money in retirement is to plan, plan, plan and when  you retire, spend less than you earn each year.  Actually, that’s the the key to not running out of money in life, not just retirement. 

It seems that people are always looking for this panacea that is going to make them wealthy overnight so they can retire on a yacht in the Greek Isles and never look back.  The panacea doesn’t exist.  Even for people who are extremely lucky and literally hit the lottery, the panacea doesn’t exist.  According to a number of studies, most of them blow their way through the money and end up in the same financial circumtstances they were in before, sometimes even worse. 

The only way to get that dream retirement is to plan for it.  And, the earlier that you plan, the better.  And, if you haven’t already done so, change your consumer patterns now to make sure you spend less than you earn.  That’s how you don’t run out of money in retirement.  That and not spending gobs of money on yet another book offering a quick fix.

In early August I was ranting to a friend about the Federal Reserve and the fact that they didn’t lower interest rates at their last meeting.  “If they don’t lower them a little bit now, they’ll have to lower them a lot later and in the meantime, it’s going to get ugly.” 

My friend looked at me with a little disgust and said, “I think Bernake knows a lot more about economics than you do.”

“Yes, I replied.  And I know infinitely more about business than he does.” 

I was thinking about this conversation on recently when the Fed, after an emergency meeting, lowered interest rates a remarkable 3/4 of a point.  Virtually unheard of.  And then, less than a week later, lowered it another 1/2 a point.  Again, unheard of.  A sign the Fed is in panic mode.  Trying to dig themselves out of a mess they got themselves into.  And, absolutely no surprise to me. 

Don’t get me wrong.  Every economist I’ve ever met has been a super-smart, very nice person who knows a whole lot about a very narrow topic.  But, economists don’t live in reality. They live in an ivory tower.  Economists are tasked with keeping track of very specific things.  The European Commerical Bank (ECB) for example, is tasked only with keeping European inflation in check. The Federal Reserve in the US has the responsibility for monitoring (and influencing as best they can) inflation and economic growth.  Both of those are far from managing an entire economy.  And, within their VERY narrow field of expertise, most economists are quite accomplished and do a fairly good job.

But the problem with economists is that they are not prognosticators.  They don’t predict the future. They only study the past.  They make their best guess as to what is happening today based on numbers from last month, or last quarter.  They have no idea what is happening today. And, today can be a whole lot different than 30 days ago, or 90 days ago. 

The other problem with economists is that they consider things in a vacuum.  If you’ve ever taken an economic class (I’ve taken quite a few), you know that the most common phrase in economics is “all other variables remaining constant”. Well, all other variables don’t remain constant.  The only constant is change.  And, everything in an economy is interrelated.  So, you would think they would study everything. Take everything into consideration. But, they don’t. They are specialists not generalists.  They look at the very narrow area that they have been tasked with. 

If you combine these two things, you can see why economists never know we are in a recession until after we are well into it.  They never know the recession is over until we’re way out of it.  If you want to know what’s going on with the economy, talk to someone who is affected by it.  Talk to a small business owner.  In 2001 I knew we were headed for a recession (even without 9/11) long before the economists. 

How did I know that?  My customers stopped placing orders. Why did they stop? Because their customers weren’t buying. Why weren’t they buying? They were uncertain about the future.  Sure enough, about 4 months after I started telling people we were in a recession, the Fed came out and announced, we had been in a recession for about, gasp, four months. 

Am I psychic?  No.  I pay attention. So, how did I know in August that if the Fed didn’t lower interest rates a little bit then that we’d be in the situation we’re in right now?  By paying attention.  Credit had dried up. Companies couldn’t get loans. Without loans, they weren’t buying new equipment. Without new equipment, they weren’t expanding.  Without expanding, they didn’t need new employees and really didn’t need some of the employees they already had.  Everything was set for problems and then to top it off, the subprime mess was gaining steam.  The writing was on the wall as clear as day to anyone who was looking.  But the Fed was so focused on imaginary inflation that it wasn’t looking at anything else. 

So, now, the Fed is in catch-up mode which is always a bad place to be.  But, I can’t really blame them. They’re economists. They’re just doing what they’re trained to.

I know a woman who is in her late 50s.  She has a son and daughter, both in their late 30s.  Recently she was telling me how her daughter can’t save two pennies if her life depended on it.  She is constantly “having” to help her daughter out.  But, the woman assured me, when the woman and her husband die, the daughter will have more than enough money for the rest of her life. 

It struck me as an odd thing to say for several reasons.  I don’t know this woman very well.  She has a son and a daughter but apparently only the daughter gets any money (now or in an inheritance). And, why on Earth would anyone have an inheritance as their retirement plan?  Especially, why would you encourage your children to wait until you die to be financially self-sufficient?

If kids have financial issues (or even if they don’t) and the parents want to give them money and they have the means, great.  That’s the parents’ decision.  But to encourage your kid to think of their inheritance from you as a way to plan for the future strikes me as more than a little irresponsible. 

This woman is in her late 50s.  She’s in good health. Statistically, she’ll live another 20 years.  A lot can happen in 20 years to eat up any planned inheritance.  There could be health issues.  More than half of retirees who file for bankruptcy do it because of unexpected health issues that wipe them out.  Maybe the “huge” chuck of money that you have to live out your life on doesn’t last you your whole life.  That’s actually not uncommon.  People often forget to remember that over time, inflation eats into your savings.  $1 million today isn’t going to have as much value in 20 years. 

If you are wealthy, it might not be an issue but this woman isn’t wealthy. She and her husband have worked hard and put away money but not vast sums.  And yet, her daughter is apparently wasting away some of her prime savings years under the assumption that when she’s ready to retire mom and dad will kick the bucket and she’ll get enough money to live on for the rest of her life. 

If I was a betting person, I wouldn’t bet on it.  There seem to be much better ways to plan for the future.  You don’t have to start big, but start saving.  The sooner the better.   And, let Mom and Dad live as long as possible without feeling guilty about it.

My definition of prosperity is having enough of what you need when you need it. 

Most people associate prosperity with the amount of money someone has, or their net worth.  I think this is because of the mistaken belief that if you have enough money, you can always buy what you need.  In today’s consumer-driven society, it is true that in most circumstances you can buy what you need but it is not always true. 

Consider this scenario.  It’s a raging blizzard outside.  Feet of snow cover the roads.  No vehichle can make it through.  The news reports say to expect to be stuck in your house for three or four days.  You have assets of over a million dollars.  You live in a 7,000 square foot home, have five cars, wear designer clothes and have vacation places in Colorado and Hawaii.  You have no food in your pantry. 

Your neighbor’s entire net worth is less than $1000.  His car barely runs, his house is less than 1,000 square feet and he hasn’t had a vacation in 10 years.  He has enough food to support his family for a week. 

In this scenario, your neighbor, with the net worth of less than $1000 is much more prosperous than you because he has what he needs in this situation – food.  All of your money in the bank, your second homes and fancy cars aren’t going to feed your family for the next three to four days. 

Prosperity isn’t a matter of degree.  If your neighbor had six months of food, he wouldn’t necessarily be more prosperous.  Maybe he has six months of food but doesn’t have a generator for electricity when the power goes out.  Likewise, having three generators doesn’t do him any more good than having one. 

So, I’ll say it again, prosperity is having what you need when you need it.  Yes, it’s true that most of us will never be stuck in our houses for three or four days because of a blizzard.  But, it makes the point.  Prosperity is not about how much money is in your bank account and IRA.  It’s not about “keeping up with the Joneses”.  It’s about having what you need when you need it. 

If you think of it this way, it’s not only liberating, it’s also much easier to achieve.  It also makes prosperity much more personal.  What you need to be prosperous is not necessarily what anyone else needs.  Maybe you need more time with your family.  Maybe it’s a vacation each year to an exotic destination.  Maybe it’s the security of owning your home without debt.  Whatever it is, you can define it, work towards it and accomplish it.  And, be prosperous. 

By changing your definition of prosperity to having what you need when you need it instead of having $X and so many cars and a job title of such and such, you are taking the first step to under-living.  And, the first step to prosperity.  Here’s to you being prosperous very soon!  For more information on personal finance, visit www.annemwallace.com

I was recently watching on of the many “flip this property” TV shows.  This one chooses a different “flipper” for each episode.  In the first two minutes of the program, I knew that flipping the house in question was going to result in a financial reality check for the owner. 

How did I know this? Because the person trying to flip the house forgot the most basic rule of real estate investment.  No, I don’t mean “location, location, location”.  Even more fundamental than that.  The most basic rule of real estate, regardless of whether you are purchasing to live in, to rent, develop, or to flip is that you make your money when you BUY not when you SELL. 

If you buy poorly, you’ll never do as well as if you buy wisely. 

Buying encompases a lot of things including location, timing and price.  In this particular case, the people lived and died by “location, location, location”.  They should have lived and died by “if you pay too much at the beginning, it will cut into your profits at the end.” 

Real Estate agents want you to buy into the “location, location, location” falicy because, quite frankly, they make more money when you spend more on a property – remember, they are on commission.  Yes, location is hugely important. But, you can make a lot more money under-buying in a less desireable location than you ever will over-buying in the most desirable location. 

Timing, timing, timing is also critical.  You buy at the top of the market and you won’t make any money until the market starts rising again. 

That was the problem with these people.  They bought, at a premium price, in “THE” location at the top of the market.  The market went down and even if they had not spent one more penny, they would have lost money.  Instead, they put $80,000 into the property to bring it “up to standards” for the area.  They thought they could make a profit of $300,000.  Pretty attractive and why they get so many people to watch these shows.  Who wouldn’t want to make $300,000 in a few months’ time. 

But, the buyers naivly (you could be more generous and say optimistically) hadn’t realized the market entered a downturn.  They ended up selling the house for a loss of almost $200,000.  Very, very few of us can absorb a loss of $200,000.  And, even those of us who can absorb it don’t want to. 

So, the next time you’re looking at a property and the real estate agent is talking about location, remember, location is only a good deal if you pay the right price.   For more on personal finance and investing, visit www.annemwallace.com

I belong to an on-line writer’s forum.  For the most part, I enjoy it.  I get to read what other writers are writing.  I am exposed to different ideas, backgrounds and strategies for writing.  The writers give criticism, usually but not always constructive, to each other with the idea that it makes everyone a better writer.  The site also has a series of discussion boards people can participate in.  Some of them are more useful than others. 

Every now and then, I spend a few minutes browsing to see if there is something new and interesting.  I especially like the topics that relate to the craft of writing. But, since the discussions are open, the topic can be anything.  I recently came across a new thread. This one was complaining about how the person never had any time to write.  What was interesting about it was that the person posted comments over a several hour period on the board.  In other words, the person had time to get on the discussion board for hours but didn’t have time to write for hours. 

It reminded me that it’s all about priorities.  If you want to be a writer, write.  If you want to be a reader, read.  If you want to be a skier, ski.  But, if you just want to talk about it, you’ll never be it.  And, no, in my mind, complaining about having no time on a discussion board does not qualify as writing. 

Of course, this person found many people to commiserate with, they all have no time to write but seem to find time to talk about how they have no time.  For me, I skimmed the hours of discussion in a few minutes and decided I had better things to do. 

In the movie Shawshank Redemption, Tim Robbins character says, “It’s time to get busy living or get busy dying.”  I think of that quote a lot because it’s so true.  Every day you have choices and your choices are made by your priorities.  Do you choose to make use of your time?  Or do you choose to talk about how you don’t have any time? Everyone gets the same 24 hours in each day.  It’s how you use it that varies.  And, with a few exceptions, we are the ones who choose. 

So, think about what you choose to do with your time wisely. Because, you are either choosing to get busy living or get busy dying.

You’ve spent a lot of time and energy coming up with the perfect mix for your portfolio.  You did research or consulted with a financial advisor.  Your portfolio mix reflects you and your financial goals.  It has exactly the amount of risk you want.  It’s going to hit the growth targets you want. 

Then, 12 months later, you look at your statement and something is very wrong.  Suddenly, it seems, everything is out of whack.  It didn’t really happen suddenly but when you notice it, it seems that way.  What really happened is that over the course of the year, your portfolio changed. 

The reason is because some things will have increased in value, others decreased.  Maybe you got some distributions which were reinvested causing you to own more of one thing than you planned.  And, when you look, your perfectly crafted portfolio doesn’t exist anymore.  What to do?  Rebalance. 

Rebalancing is important because you want to keep your portfolio the way you designed it.  As some of your investments grow, they become a larger percentage of your portfolio.  If they are the riskiest, that means that your overall risk increases as well.  Or it can be the reverse and you end up with a much more conservative portfolio than you planned on. 

Rebalancing seems counterintuitive.  If something has been successful and grown, why do I want to get rid of some of it and buy more of something that was less successful? The idea is that in the coming year, the one that was less successful may become the more successful one and vice versa.  By rebalancing, you get your portfolio back to where you want it risk-wise and return-wise.  A portfolio that isn’t rebalanced ends up skewed in one direction or another. 

If you manage your portfolio yourself, you’ll have to rebalance it on your own.  If you have a financial planner, they should do it for you.  Some plans have an automatic rebalancing, others don’t. But, either way, it’s important that it be done.  Do your research or work with your financial planner to decide how often you need to rebalance.  It may not be every 12 months.  And, when you rebalance, it can be a good time to see if your financial goals have changed.  When you rebalance, you can take that into account.  And then when you get your statements, you won’t get that panicked feeling that something is different than it should be.  For more information on personal finance and investing visit www.annemwallace.com

Time’s either on your side or it’s working against you. 

The most beautiful thing about about investing early in life is compounding interest.  When I was a teenager, my dad gave me an “IRA calculator”. It is a simple piece of cardboard with two pieces that slide in and out. One is for interest rates and one is for years of investment.  In the middle of the cardboard is a series of numbers and next to each number a small hole.  By moving the two pieces around, you can see how much money you will make if you invest a given amount over a certain time at a certain interest rate.

The whole point of the “calculator” and of my dad giving it to me as a teenager is that the more time you have, the more money you will make even if you invest small amounts. The reason for this is because of compounding interest.  You can also have the reverse, compounding debt. The idea behind compounding interest is that the interest earns interest.  Over time, the number becomes quite large. 

The point of having compounding interest is that your money works for you, not the other way. And, as the interest amount becomes larger the harder it works for you. 

Let’s say you start with $1,000 at a 7% annual return. After one year you have $1,070 dollars.  If you don’t add anything, then at the end of the second year, you will have $1,144.90.  Year three will see you with $1,225.04.  In three years, you have added $225 dollars without you doing anything. After 20 years, your initial $1,000 investment is worth $3,869.68.  After 30 years, it is $7,612.26.  All by investing only $1,000.

Now, here’s what happens if you start with $1,000 at 7% interest compounding and add $1,000 per year that also compounds.  In 20 years, you will have $47,734.86.  In 30 years, you will have $108,635.30. That means that over 30 years, you have put in $1,000 per year ($30,000 total) but you have an investment worth over three times that amount for a “profit” of $78,635.30.  Money you didn’t have to work for.

Say you are able to put in $3,000 per year for 30 years, you end up with $326,055.89.  If you watch your money and under-live and are able to invest $10,000 for 30 years, you end up with $1,086,852.96.  And you only invested $300,000.  That means you have a profit, that you didn’t work for, of over $700,000.  So, you see how compounding interest works for you.  You take small amounts and over time end up with much larger amounts and you don’t do anything, your money does all of the work.

Obviously, in real life, each year you will be able to invest different amounts and over time the interest rate will fluctuate.  But, you can control when you start putting away.  Consider this, a 20 year old who puts away $3,000 a year for 30 years at 7% has $326,055.89 at age 50.  But, a 40 year old will have to put in $19,500 for 10 years at 7% to get $326,639.64. 

Which is easier to sock away, $3000 per year or $19,500 per year?  So, start early, even if it’s a small amount.  As your income grows, your ability to put away larger amounts of money will grow as well.  The longer time you have to let your money compound, the less the fluctuations in rates of return will affect you and the more money you will have in the end. 

And, the best thing is, the money did all the work!  When my dad gave me my “IRA calculator”, they were hard to find. Now, with a quick search on the internet, you can find lots of them.  Take some time and plug in some numbers.  You’ll be amazed at what you find. And, with any luck, it will motivate you to start saving right now! 

For more information on personal finance and investing visit www.annemwallace.com

Timing the market…if it was easy, everyone would be doing it.  If it could be done, someone would be doing it. 

I’m sure you’ve read about the investment contests won by monkeys who choose companies randomly by tossing darts or picking cards.  That’s because even the “experts” get it wrong – quite often.  Have you ever watched the financial shows?  Even their experts can’t agree.  How should you know what to do if they can’t agree? 

Since you can’t time the market, the best thing you can remember is “buy low, sell high”.  That’s hard to do and even harder to remember.  I have an ad from a newspaper from several years ago. It says, “There are two times when people forget their investment principles. At the top of the market and at the bottom.” That’s because on the way up, everyone thinks the sky’s the limit.  On the way down, people panic.  There’s no way to know when a stock that is going up is going to stop.  There’s no way to know when a stock that’s going down will bottom out. 

The investors who do the best are the ones who hold on and wait it out, both the up and the down. They stick with their strategy and avoid the lemming approach of “if everyone else is going it, I should do it to”.  That strategy will most often burn you. 

Over time, the market goes up. When it does, assuming you are diversified, you will gain.  Not all of your investments will make you a fortune. Individual ones may lose. Inevitably, some will perform better than others and you will be tempted to put all of your money in those.  Only to find out a couple of years later that the underperforming ones are now the top performers.  Over the years, through the cycles, by sticking with your strategy, the whole portfolio will go up if you fight the temptation to time to market. 

Do your research. Or find a professional who is willing to do it for you.  Even if you hire a professional to manage your investments, it’s always useful to educate yourself.  Find companies or funds that have good fundamentals.  Find companies or funds that seem undervalued to you.  And remember to diversify. 

Over time, you’ll beat the person who thinks they are timing the market. Because, they aren’t.  Not really.

For more information on personal finance and investing visit www.annemwallace.com

In my previous blog, I talked about the basics of diversification.  This time, I’m going to talk about the basics of risk with regard to return in investments.  Risk is critical for people to understand and yet few people do. 

Almost every day there is a story in the paper or on the internet of some shady “financial planner” who has bilked people out of lots of money because they didn’t understand the basics of risk. 

So, here it is.  The higher the potential reward (return), the higher the risk.  And, there are NEVER, EVER, any guarantees. 

If you start at the most basic level, the “safest” thing you can do with your money is dig a hole in your backyard and stash it there, or stash it in you mattress.  Assuming that your yard doesn’t wash away or your mattress doesn’t burn, you can dig your money up or take it out in 30 years and have exactly the amount you put in.  However, even this “safe” plan has risk because it offers you no return on your money.  So, every year your money is sitting in your backyard, you are losing value.  Whatever the rate of inflation is, you lose each year.  The idea is that if inflation is 4% per year, you need to be making at least 4% per  year on your money or you are losing purchasing power. 

Another thing many people consider “safe” is putting money in a savings account in a bank.  They think it’s “safe” because it’s insured by the FDIC (generally up to $100,000 per person per bank) and it is earning interest.  Again, there is risk because with the interest you are earning, you probably aren’t even keeping up with inflation.  So, again, you are losing value. 

There are Certificates of Deposit.  They can be good for the short-term. But, over the long-term, you are, again, most likely not keeping up with inflation.  So, even by being “safe” there are risks and costs. 

But, the real risks and costs begin when people start looking at other investments. Such as the one in the paper recently where the “financial planner” guaranteed a 15% return to a group of clients.  First, you are never guaranteed a return.  Secondly, if it’s 15% there’s risk, more risk than something that would offer an 8% return.  If you happen to buy in at the right time, when the market is booming, you may get 15% out of it. But, if you buy in at the wrong time, you could get 0 or even worse, lose money.  Something that has a 20% return will have even more risk while something with a 5% return will be relatively risk-free. 

You see it and hear it all the time with financial investments, prior year returns do not guarantee future returns.  Markets go up.  Markets go down.  And not just the stock market but also real estate markets, commodities markets and just about every other investment market out there.  Remember that and remind yourself of it every day.  You will find a lot of investments that are too good to be true.  They probably are. 

In order to invest successfully, you need to understand the basics and you need to understand yourself.  What is your risk tolerance? What are your goals?  When will you need the money? What are you going to use it for; retirement, a new car, your children’s college tuition?  Answering these questions will take you a long way towards knowing what kind of risk and return you need.

And when someone “guarantees” you a return, walk away.

For more information on personal finance and investing visit www.annemwallace.com