Ultimately, it’s all about retirement

By BOB CUNNINGHAM

On this website, and hundreds of others like it that I read and monitor, we talk about practically anything that has to do with money/personal finance.  And we should… there’s a helluva lot to cover about the subject.

But what it all boils down to, whether you’re in your 50s or half of that, is preparing for the “Big R.”  What proactive steps are you taking, now and in the near future, to properly prepare for retirement?

So let me ask you, is that what we should really focus on ad nauseum?

While planning for the long-term future is certainly important, I contend that excelling in the short-term, including the ‘now,’ is at least equally vital.  In fact, one often facilitates the other.

Maximizing your efficiency in saving and investing now, logically, will result in you having more money to work with later.

Let’s take a quick look at why planning for retirement has become such big business, cliff notes version.  You ready?  It’s because virtually all private companies have deserted the traditional pension system in favor of a 401K/IRA-led way of saving for one’s own career conclusion.  And, many public and government agencies appear headed in the same direction.

Sure… just save some money with your company in its 401K, or do it on your own with an Individual Retirement Account, combine those with the scraps that are our social security payouts – assuming those rates stay where they are now – and you’ll be set.  Who needs a big, fat monthly pension check when the S&P 500 historically averages a 10% annual return?

I’m tellin’ ya, it’s bananas.  And yet our society has fully accepted this monumental shift in monetary focus.  But what people fail to properly gauge is that, while $500,000 in a retirement account may sound like a butt-load of money, it is in fact barely enough to keep a retired couple above the poverty line.

Undoubtedly, you’ve heard that experts traditionally recommend drawing down your nest-egg at about 4% per year, so that you can live while retaining the full balance of your primary account.  In other words, if you start with $500,000, and want to leave a legacy, you should take annual withdrawals from that account of no more than 4%.

Really?  Hmmm… let’s see how that might play out.

Let’s say you’re an average wage-earner in the U.S., about to retire.  Your household income, says Betterment.com, is about $68,000 a year gross.  That’s roughly $50,000 net spendable money after taxes.

If you expect to maintain the same standard of living you’ve become accustomed to, you would have to have about $1.25 million saved.  And that’s not even considering the erosion caused by inflation.  At a 3 percent inflation rate, $50,000 of net spending power becomes just $25,000 in about 24 years, which is roughly the average length of retirement nowadays.

Of course, you can always sacrifice your kids’ inheritance and spend down your money – in fact, I think you should because it’s your money.  But try making $500,000 last 24 years when you’re taking $68,000 withdrawals on a taxable account.  According to calculators on the BankRate.com website, do that and you will be out of money in less than 15 years.

Your retirement account is a Roth IRA?  Cool.  No taxation on the withdrawals.  But with $50,000 annual withdrawals and inflation, your investments had better return more than 14% each and every year if you expect to continue paying the bills 24 years later.

Also, we didn’t enter increased medical expenses or anything else into the equation.  Scared yet?  Ya should be at least nervous.

So what do we do?  If we’re smart, we utilize specific strategies that take the guesswork out of money, and we start doing them now… to benefit us now, a little later, AND into retirement.  We do things that allow us to live a better, smarter life RIGHT NOW and over the ensuing years, and not just obsess about what we’re going to do when we actually get old.

And I have a strategy that makes all of this relatively simple and definitively painless.  Beginning in 2018, this website will be dedicated to detailing this approach and its various advantages on a regular basis.  Yep… I’m going to make you wait for it.

But, if you’ve been reading this blog for any length of time, you already know what I’m talking about.  DPWLI… to know what this acronym stands for, refer to earlier posts, and let me know your reaction to the suspense.

Yes, admittedly, I’m messing with my audience a little here.  But teasers are good, and it won’t be long now before the info will be at your fingertips.

In the meantime…  thanks, as always, for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Some clarification is warranted on the importance of giving, and how to give

By BOB CUNNINGHAM

Wishing you a wondrous and fruitful Thanksgiving holiday from surprisingly scenic Palm Springs, Calif.  My wife and I are here on a brief get-away, and please accept my apologies for being tardy with this post.

As we enter the holidays, I thought it would be prudent to briefly discuss the ‘giving thanks’ aspect of the season.  I believe it’s an important subject to touch on, because many so-called personal finance ‘gurus’ talk about the importance of charitable giving as part of a savvy overall money management strategy.

I support the notion of giving to those in need 100 percent, but I am skeptical of the implications by some that you can tangibly benefit from donating to causes, worthy and otherwise.

The great thing about giving is the intangible positives you derive not only from doing so, but from being in a position when doing so generously makes sense.

Here’s the deal from my standpoint:  You should always give if you want to give.  You should give to whomever you wish, for whatever cause you deem just and appropriate.  But it’s naive to believe that all giving is the same, and for me, getting the most out of each donation – and having the right people benefit from it – is the name of the game.

I know a great many well-meaning folks who give something to everyone, just for the asking.  And I mean everybody.   From the charitable trust that saves two turkeys from slaughter each Thanksgiving, instead of one, to handing a buck or two to that guy named Chuck who frequents the corner gas station in his dented-up ’93 Honda Accord, always in need of “enough gas to get home” without having even once bought so much as a dram of unleaded with what he’s given.

These people who give are generous souls, and of course it is absolutely their right to give any time they damn well please.  But is it the best use of their charitable dollars and cents?  Not really.

I’m not saying some charities are more worthwhile than others… well, OK, I confess I am sort of implying exactly that.  You may very well disagree, and I respect that.  My point is that $10 or $20 sent to, say, St. Jude Children’s Hospital (my favorite charity) or the Wounded Warrior Project (second favorite) is likely to benefit more genuinely deserving people than giving a dollar each to ten folks who are “down on their luck” and working freeway off-ramps.

For one thing, the donations to official charities are much more likely to be used toward the cause they represent.  Secondly, those donations are tax deductible if you make enough of them.  Helping Willie get a burger… and a beer or, worse, a fix in many cases unfortunately… simply isn’t as wise a choice.

Now, obviously, there are exceptions.  There’s a gentleman not far from where I live who is a double-amputee.  I see him a lot at the same intersection, and if the light is red when I arrive there, I often give him something.  Yes, this contradicts what I just wrote in the preceding paragraph, but the guy has no legs from just above the knees.  I figure he needs a break, and the government assistance he is getting is probably far shy of what he realistically needs to live a basic quality of life.

And, truth be told, I made sure his wheelchair doesn’t have curtains to hide underneath the seat.  There are con-artists in all forms out there.

Generally, it is savvier and more helpful overall to focus on legitimate organizations.  In addition to the two I named above, I like the American Red Cross, American Cancer Society, and the Salvation Army, as well as numerous others.

Before I wrap this up, I have one more point to make:  If you’re young and just getting a foothold financially… the type of reader this website is geared towards… I would like to offer the following suggestion:

Don’t give to any charities – not yet, anyway.

Huh?

What I mean is, in the long run you will be able to do a lot more good and assist a great many more worthy causes if you first take care of your own situation the best you can.  It’s like the oxygen mask that falls from overhead during emergencies on commercial flights.  Regardless of the airline or the type of plane, the instructions for its use are always the same for folks who have children with them:

Please secure your own mask first, then assist your child with theirs.

Why?  Because the effort to help the child first could result in suffocation for both, if the adult passes out and the child panics.

With charitable giving, put on your own financial mask first.  Make sure it is snug and secure… that way, you might be in the position to not only help the child (or other worthy benefactor) in the seat next to you, but any needy individuals on the entire airplane…

… So to speak, of course.  Thank you for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Do you have to take risks to make a return on your money? Emphatically… No!

By BOB CUNNINGHAM

Greetings, all.  I’m tapping out this post from the Rio Hotel & Suites in Las Vegas.  I’m here to attend a convention – so it seems appropriate to discuss what some call the “Wall Street Casino.”

Essentially, what we’re talking about is the subject of risk.  More specifically, we want to ascertain why it has become common “knowledge,” that in order to get good returns, you have to be willing to take some risk.

There is some truth to that notion when you look at it from the risk perspective.  There are investments out there that are highly speculative. No one knows what’s going to happen, and folks don’t even have a decent idea of what’s going to happen even if they pretend they do.

And I’m not talking about investments that have a reputation as being risky, such as options trading, day trading, commodities, or even collectibles.  No, sir, I’m referring to that mainstream investment called the S&P 500 Index.

You may have heard of it.

Obnoxiousness aside, financial experts of all kinds will have you believe that investing in the stock market is the only legitimate way to earn good returns, and that if you do it right by conducting proper due diligence, diversify your portfolio, consult a professional, etc., you will most certainly be fine in the long run.

These know-it-alls love to cite that the S&P, which stands for Standard & Poor, has returned an average of about 10% annually since The Great Depression.  I’ve read multiple articles on-line and in print magazines, of late, suggesting you shouldn’t be wary of the potential for a sharp decline in the market such as what we experienced in 2008 and 2009 – even though we’re nearing a record-duration bull market as I write this – because even if it does drop sharply at some point, the market inevitably comes back and then some…

Pish posh.

Folks who saw their investment account balances drop 40% or more nearly a decade ago are just now catching up.  A few are showing a slight gain from pre-2008 levels, but projected as an annual return most would have been better off keeping their money under their Serta Perfect Sleeper.

And with retired people who are counting on taking an income from their investment assets, a volatile market can literally make them queasy because they’re not sure if they’re going to have enough money to do the things they want to do in their golden years.

By the way, that aforementioned 10 percent annual S&P growth is before taxes and fees, and your actual return isn’t 10% because you can only earn that if the market were to return exactly that percentage every year.  We’ve demonstrated multiple times on this site how average returns are a far cry from actual returns.  Here’s another quick example:

(Start with $1,000 account balance.  Earn 60% the first year, lose 50% the second. Your average annual return would be 5% (60 – 50 = 10, divided by 2 years), but your actual return is a 10% annual LOSS ($600 gain first year = $1,600 in account, 50% loss the second year = $800 loss – net result is $1,000 + $600 – $800 = $800 balance in account after the second year.  $1,000 – $800 = $200 loss is 20%, divided by 2 years = 10% loss per year).

Wouldn’t it be nice if there was a financial instrument in which you could store money safely, and still earn a respectable annual rate of return with virtually zero risk?  How sweet to fund it and forget it, knowing that you have a better chance of being struck by lightning – twice – than of losing with that account!

Dividend-paying whole life insurance.  Yes, we have introduced this product on this site, and I’ve written on it numerous times.  And in the coming weeks and months, this blog will adjust its focus from a general personal finance educational approach to a site dedicated to teach as many folks as will take the time to learn, the numerous benefits of utilizing life insurance “living benefits.”

It has to be the right kind of insurance, set up by properly trained agents representing carriers who have been established for more than a century.  But when you use this tool to hold your nest-egg, you will get the following:  Safety of principal and gains, a guaranteed rate of return that can be even higher depending on annual dividends, a structure that legally allows you to access your funds tax-free whenever you want, and a system available by some companies (but not all) that allows you to borrow funds from your cash value – without qualifying – and yet your full cash value continues to earn returns and grow as if you never took a loan at all.

It’s all about educating people.  Our public school system falls far short of any legitimate teaching about money or investments or retirement savings, so it’s up to citizens like myself who are passionate about people of all ages succeeding financially, for the short- and long-term.

Keep reading this space every week, friends.  We will continue to shed light on what is not only a desirable alternative to the gambling that investing in Wall Street and the money markets is, but also a critical undertaking we need to be aware of… NOW.

Thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

It may seem as if buying with cash is best, but don’t forget about opportunity cost

By BOB CUNNINGHAM

It is a common misconception that you should always pay cash on purchases.  Old-school thought on this is simple and straight-forward:  If you don’t have enough money on hand to pay the price, you can’t afford it and should save until you do.

Well, I’m here to tell ya that cash isn’t always king.  In fact, many times it is detrimental to your personal finances to pay cash for purchases.  And few people are as old-school as I am… or at least, as I like to think I am.

When you pay cash, there is this frequently overlooked factor called “opportunity cost.”  On small purchases, like a combo meal at Wendy’s, the opportunity cost is pretty doggone small.  But there is still an opportunity cost.

How does that work? Well, what if you use a cash-back credit card to buy your burger and fries? If the card pays 1% cash back, doling out a five and two ones instead of using the card just cost you about seven cents.

That’s $.07.  Not much, of course.  But if you buy lunch using the cash-back card five days a week, in a month you would have earned yourself $1.40, assuming you pay the credit card balance in full before the grace period of roughly three weeks expires.  That adds up over a year to nearly $17 – enough for two free lunches, super-sized.

It should be obvious by now that I’m not calling your attention to this for such small fried potatoes.  Instead, I’d like you to consider your next car purchase.  Let’s say the ride you want costs $25,000.  And for the sake of this discussion, let’s suppose you happen to have $25,000 saved and available.  It’s invested in a stock market index fund inside at an online brokerage account and has earned about 7% since you’ve had it.

Very smart of you to put that money to work, by the way.

Meanwhile, the car dealership is offering 2.9% financing on that sweet-looking sedan.  You have enough money to just pay cash for the car.   Your parents have always told you to pay cash.

Listen to your folks?  Or go into debt?

In my opinion, it’s a no-brainer… with all due respect to Mom and Dad.

If you opt to pay cash, you will have no car payments.  And that is, of course, a good thing.  It merits consideration, to be sure.  But that $25,000 is now tied up, and thus can’t be used for anything else unless you immediately turn around and sell the car (which if you did, you’d be lucky to get $20,000 because new cars depreciate as much as 30% the minute you drive them off the lot according to KBB.com).  So you’ve not only tied up the cash, but done so in a depreciating asset.

On the other hand, if you qualify for and accept the financing, and keep the $25K in the investment account, it would earn about $1,750 if it maintains a 7% rare of return (ROR) annually.  The spread of a 7% return over a 2.9% interest debt is a net positive 4.1%.  Mathematically, when the new car is paid off in five years, you will have netted a positive 20.5% (4.1% multiplied by 5 years).

Plus, you will still have the $25,000-plus if you need it for something else. It won’t be tied up in the formerly new wheels.

But hold on, you say.  What if we need to make the $449 per month car payment from that same $25,000 account?  OK… $449 times 12 = $5,388 in payments each year, with $388 of that being interest (we arrive at that by knowing the $25,000 cost of the car divided by five years equals $5,000 to principal per year, with the remainder being interest).  So in the first year, and the subsequent four years, you pay $388 in interest every 12 months.

But how much did the index fund money earn you?  The answer,  considering the dwindling balance as we make those monthly car payments, ends up at about $1,400.  That’s better than $1,000 more (the first year) to keep the cash and use it to make the payments as we go.  We aren’t considering income taxes in our figures, because you’d have to pay taxes on the gains of the $25K at withdrawal, whether all at once or a little at a time.

The major key to the comparison is the 4.1% separation between the interest rate being paid on the car loan and the ROR on the investment account.  Whether it’s the first year or the fifth, or anywhere in between, that spread is going to average out the same.*

*I’m not saying you can count on your cash to make a 7% return precisely, each and every year.  Of course that isn’t the case.  It might lose one year, but it also might make 30 percent gains the next.  Determining which strategy is the best requires us to use constants (averages) where they don’t typically exist.  If the investments in the account lose money in every one of the five years, then paying cash would have been better because we’ve lost that aforementioned spread.  But five straight losing years is extremely unlikely. Historically, four of the five will be gains with two of those being at least 10 percent. (source – Morningstar.com)

Finishing with our example utilizing a 7% annual return on the investment account, in five years using the auto financing to pay off the car in full, we would still have about $1,900 remaining in the account (according to BankRate.com calculators) to go with a paid-off car that is now worth roughly 10-12 grand.  Paying cash, you would still have a $10,000-$12,000 car… but the investment account would be fully depleted – immediately.

Look, nineteen hundred bucks versus zilch is a huge difference.   So remember – opportunity cost is a big factor to look at when considering whether or not to pay cash for a purchase.  For fast-food lunches, go ahead and use cash or your debit card.  But on the larger purchases, be sure to take advantage of credit IF the rate of return on your saved money exceeds what the creditor charges to loan you the funds.

As always, thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Small savings here and there can add up to surprisingly significant amounts

By BOB CUNNINGHAM

My family and friends often give me a hard time about being frugal.  When I first revealed to them that I had a personal finance blog, they asked if I had written a post yet on cheap eats or the wonderful world of coupon clipping.

It’s not that I don’t enjoy spending money, or that I’m not willing to splurge on occasion.  I am, and my wife and I do.  What I don’t like is feeling as if I have wasted money.  Spending $500 or more on the latest cellphone, for instance, just seems like a bad investment when I can go out and obtain a perfectly functional phone – for talking, texting, and taking basic photos – for less than $100.

My adult kids, ages 27 and 24, want the fancy phones.  Like the old fart in those Consumer Cellular ads, I’m happy with my basic phone.

Either way, there are numerous ways to save small amounts of money on a consistent basis… and when you do these consistently, I believe you will be genuinely surprised by how the little discounts, rebates, and cash back add up.

I do clip coupons, but I’m not obsessed.  Mainly, I look for discounts on grocery brands I buy, and restaurants we frequent.  I also constantly am asking for discounts.  When I recently had the oil changed in my car, I requested “the best deal you can give me. Been a customer here a long time,” and got a discount for a coupon I didn’t have and was afforded an additional  10% senior discount despite being ‘only’ age 53.  If I hadn’t asked, I’d have never received either courtesy,

Also, I’m a big believer in taking advantage of cash-back credit cards.  The process is really quite simple – apply for and (hopefully) get approved for a credit card that offers either a flat cash-back rate for all purchases, or quarterly “specials” with as high as 5% back on certain categories, or both.  The categories, usually featured for three months at a time, include restaurants, grocery stores, gas stations, or department stores among others.

The idea is to use the card each and every time you shop – for virtually all of your weekly purchases.  Concentrate solely on what you would spend anyway.  Don’t spend more just to utilize the card.  Defeats the purpose.

Then at the end of the month, you use your checking account funds to pay off the card.  You never want to carry a balance on the credit card, because you will then be wickedly guilty of stepping over dollars for dimes.  After all, how much sense does it make to get 5% back on groceries, but pay 20% or more interest monthly to carry a balance for those very same trips to the store.

None, of course.

Do this right, by using credit cards as the point-of-sale tool and your bank account to pay the credit card balance in full each and every month, and those 5% purchases here, and 1.5% there (and elsewhere) start to add up nicely.

Although it certainly isn’t recommended for younger adults who are trying to establish themselves as financially healthy long-term, my wife and I like to eat out.  We rarely do fancy dining, but we like Applebee’s, El Torito, Panera Bread, and the like several times a month.  Currently, our Chase credit card pays 3% cash back on all our restaurant purchases (including fast food, although we don’t do much of that).  Generally, in two months we have accrued enough cash that we get a dinner on Chase courtesy of a gift card to most any chain eatery we choose.

Over time, you can acquire a few cards, each of which might be dedicated to a different part of your overall budget – one for dining, one for groceries, one for gas, and one for miscellaneous.  The common denominator among all of them remains paying the balances in full each month, thereby NEVER paying interest on these purchases.

It’s like earning a rate of return on your expenditures, rather than just your investments.  Best of both worlds.

Thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.