Free Money Finance

A Film About the Retirement Crisis

Most people like movies where the main characters get into a world of hurt but then, somehow, escape at the last minute and all is well.

The movie I'm about to tell you about is not like that. At least not completely.

The first part is what you'd expect (the world of hurt part), but unfortunately there's no happy ending.

Yep, it's a film about the retirement crisis in America. Here's a video summary of the movie:



The film covers several people planning to retire with absolutely no financial plan to do so. As you might imagine, that plan isn't going well.

A few key quotes:

• "Twenty years from now I'll be 62. I will be $32,184 in debt." (I think that's her net worth. Yikes!)
• "I think a good retirement for the American public is pretty much a fairytale at this point."
• "My retirement plan right now? It's called a life insurance policy. (laughs) My retirement plan right now is Social Security."
• "It's (Social Security) supposed to be the first leg of the stool, not the whole stool."

The film's website says:

As a whole, American workers are estimated to be $6.6 trillion short of what they need to retire comfortably.

I'm not exactly sure where the filmmakers are coming from. They highlight a young guy who's running for congress. I'm not sure if this is part of his campaign or not, so they may have hidden motives. But I don't doubt the facts that most Americans are woefully unprepared for retirement.

What's the solution? Work longer? Never retire?

It's certainly not count on Social Security to pay for any sort of reasonable retirement.

It's not an issue for me personally, but one I'm aware of and watching from the sidelines. What do people think is going to happen when they plan to "retire" and yet haven't saved for it? Do they think the government will handle it all? I'm frustrated that so many people don't take the issue seriously and as a result it may put our nation in a tough position.

Ok, I'm rambling now. What do you think of this issue?

The Wealthy Look at Money Differently

The Business Insider says that the way millionaires view money is different from everyone else. Here are their thoughts and my comments on them:

1. The wealthy focus on earning.

I have to agree on this one. That's why I post so much about managing your career, growing your investments, and investing in real estate.

2. The wealthy use leverage.

I think this is true for the big business millionaires, but I think the millionaire next door types actually shy away from debt. I know I do.

3. The wealthy think about money in non-linear terms.

I'm not sure what they mean here other than "come up with a great idea that earns you a gazillion dollars." I like the thought, but not sure it's realistic for most people.

4. The wealthy see money through the eyes of logic.

Very true IMO. This is why the wealthy often say things like "spend less than you earn" and actually do it while most people say "that's common sense" and yet can't seem to pull it off.

5. The wealthy believe being rich is a right.

I don't think most wealthy people believe being rich is a right, but I do think they believe being wealthy (or at least significantly wealthier than you are now) is something attainable by almost everyone. They just need to take the right steps to get the results.

Anyway, that's my take on their views. What do you think?

Five Myths and Misconceptions about Indexing

Vanguard lists five myths and misconceptions about indexing as follows:

• Myth #1: Indexing only works in "efficient" markets
• Myth #2: Who wants to be "average"?
• Myth #3: You get what you pay for—Higher cost + Higher ratings = Higher returns
• Myth #4: Market-cap weighting overweights the overvalued
• Myth #5: Index funds underperform in bear markets

The myths I want to highlight are #2 and #3.

I've had many people say to me that they don't want to "settle" for average returns which are what they believe index investing provides. However, this is not the case. Indexing provides average gross (before expenses) returns, but once costs are deducted, indexing provides superior net returns (which are what you actually take to the bank). Here's how Vanguard puts it:

The reality is that index funds, in their attempts to deliver the average returns of all investors in a particular market, have delivered far-from-average performance.

An important reason for this is cost. Indexing has proven to be a low-cost way to implement an investment strategy, lending a significant tailwind in producing above-average returns over the long term relative to higher-cost active strategies. For example, 84% of active small-cap blend funds and 71% of active emerging-market funds underperformed low-cost index funds for the ten years through 2013.

Can some investors beat index investing? Yes. Can a very few do it again and again for decades? Yes, but only a handful. Does doing so require a good amount of skill, time, nerves of steel, and even luck? Yes. In other words, most people (even professional fund managers) can't beat indexing -- the odds are stacked against them. So why try? Instead, spend your time and effort working on growing your career -- something you can impact and which will yield much bigger dividends in the long term.

Closely tied to the net return is costs, which Vanguard addresses in myth #3. Their thoughts:

The "higher the price, the better the product" myth is another intuitive, everyday maxim. In investing, it would seem to be translated as: "We can expect to enjoy higher returns from expensive or highly rated managers."

However, the reality in investing is that this seemingly commonsense relationship is reversed—you often get what you don't pay for (that is, higher performance is frequently equated with lower cost). Perhaps even more unintuitive is that highly rated funds have actually underperformed their lower-rated peers.

They then show a couple of charts that illustrate these points of view.

I know Vanguard has a vested interest in promoting index investing so the arguments are far from biased. But that doesn't mean they aren't valid or true. The reasons above (plus others) are the reasons I have invested in index funds for over two decades now. And I don't plan on changing anytime soon.

How about you? What's your key financial investment these days?

It Takes $130k to Live the American Dream

We've seen how many Americans find it difficult to make it on much more than this, so I was surprised when USA Today said it takes $130,000 to live the American dream.

How did they arrive at this number? Here's the basic premise:

"It's not about getting rich and making a lot of money. It's about security," he said. It's also as much about hope for the next generation as it is about the success of this one. "They want to feel that their children are going to have a better life than they do," said Hirschl.

In their book, the authors write that besides economic security, the American dream includes "finding and pursuing a rewarding career, leading a healthy and personally fulfilling life, and being able to retire in comfort."

With that in mind, USA TODAY added up the estimated costs of living the American dream.

Here's what they got:

• Basics (food, clothing, shelter, etc.): $58,491
• Extras (vacations, entertainment, eating out, etc.): $17,009
• Taxes and Savings: $54,857
• Total: $130,357

A couple other quotes from the piece to round it out:

• It costs a lot less to live the American dream in, say, Indianapolis or Tulsa than it does in metro areas like New York and San Francisco, where housing prices and taxes are sky high.
• Only 16 million U.S. households — around 1 in 8 — earned that much ($130k) in 2013, according to the U.S. Census Bureau.

A few thoughts from me:

• I'm not sure I agree with their definition of the American dream, but if you ask 10 people about it you'll probably get 10 different answers. At least they took a stab at it.
• I'm not sure I'd call $130k a "dream" income, but it certainly is pretty good -- much more than most people make.
• A lot of the expenses seem high. For instance, they list food (not restaurants, those are separate) for a family of four as over $12,000. We spend about $650 a month including food for two teenagers -- not anywhere near the $1k a month they list. I think there may be as much as $20k in fluff costs, so the "real" number could be $110k.
• Got to agree with the "where you live" quote. Maybe that's why the costs look high to me -- I've always lived in relatively low cost areas of the country. It's been a key part of our family being able to save as much as we have.
• Taxes are a killer! Over $32k for them alone!!!

I'm sure many of you will have interesting thoughts on this subject, so I just wanted to get us started and let the conversation flow. I'm looking forward to your comments.

Podcasts that Provide Great Value

On my post titled Almost Infinite Investment Return, I had one reader ask me what podcasts I listened to (thinking that something we get for free could certainly have an infinite return). I responded there, but also thought it would be fun to post these for all to see and we could each share the podcasts we like. Here are my top podcasts:

• This is Your Life -- Great for both career and life. Ex-CEO Hyatt knows what he's talking about as he speaks on work, productivity, and developing a platform. I know him personally as well, so it makes listening to his podcast extra special.
• Smart Passive Income -- Pat Flynn knows blogging and I always leave his show with several ideas and insights -- not just for my blog but for my work-life as well.
• Freakonomics -- These guys always have a fun look at what we all consider to be "common knowledge."
• Entrepreneur on Fire -- This show has lost a bit of excitement for me as the first guests were much better than the ones these days (on average). But I love the monthly income updates. Anyone who can earn $100k a month from podcasting needs to be listened to!

I listen to a few others, but these are the main ones.

You might notice a glaring hole -- there are no personal finance podcasts on my list. It's because I've yet to find one with a format I like. I prefer something about 30 minutes long and is entertaining, interesting, and informative. I've yet to find that in personal finance podcasting, and believe me, I've tried.

How about you? Do you have any podcasts you absolutely love/recommend? Please let them in the comments below.

Average and Median Net Worths

Here's an interesting article from CNN Money. It has a bit of "down with the rich" tone that I dislike (they say the U.S. has the "top rank in one net worth measure -- wealth inequality") but it lists average and median net worths for Americans, two numbers I don't recall having seen together previously.

The facts:

• Average American Net Worth: $301,000
• Median American Net Worth: $44,900

As they point out, a few very wealthy individuals bring up the average and that's why there's a big difference in the two numbers.

A few other interesting facts:

• Americans' median wealth puts us in 19th place in the world, below Japan, Canada, Australia and much of Western Europe.
• The median wealth of American families was $77,300 in 2010, a nearly 40% drop from 2007, according to Federal Reserve statistics. (due to the economic crisis)
• Australians have the highest median net worth, coming in at $219,500.

The article notes that "those down under have a mandatory retirement savings program, where they must squirrel away more than 9% of their income for their Golden Years, and they carry relatively low credit card and student loan debt." No wonder they have higher net worths -- they spend less and save more!!!

The piece says it's easier to borrow in America which eats away at a person's net worth. Yes, yes it does, especially if it's uncontrolled.

I was taken aback by the low net worth number. If most people have net worths in the $30,000 to $60,000 range, that's pretty poor IMO. What are these people going to do in retirement? How are they going to make it?

Anyone else have thoughts on these numbers?

Real Estate "Profits" and How I Stack Up

Here's an article from CNN Money that hits a few buttons for me.

• First, it's about real estate investing.
• Second, it lists the "best" markets to become a landlord. I thought I'd compare my results with the best.
• Third, it highlights (again) how little the mainstream media understands financial terms, what they mean, how to use them, and so forth.

Let's begin with the financial terms.

The article talks about "profits" and "average returns" in real estate investing. Both of these terms are "net" amounts -- what you have left over after expenses. For instance, a profit is generated when you earn revenue and then subtract expenses. What's left over is "profit". The same goes for investment returns. You take your net gain (income less expenses) and divide it by the amount invested to get your return percentage.

But in this article the author does not take into account investing costs. He simply takes revenue, divides it by the selling price of a unit (amount invested), and calls that "profit" and calculates "average return."

In the real world, profit and average return are calculated after expenses. Yes, some mutual funds publish their "returns" before expenses (or at least they used to), but we all know those aren't real returns until costs are deducted. The case is the same here. I'm not sure if the author doesn't know the difference or is simply ignoring it. Whatever the case, it makes him look like he doesn't know what he's talking about (at least to an informed reader.)

That said, the chart gets one term correct in calling it "gross rental yield" (GRY). And I admit that there is some value in calculating GRY. But it's certainly not "profit" or "average return." Not even close. You MUST deduct expenses to get those numbers. Believe me, I wish GRY was the same as profit and that's what we all took home to the bank! :)

Ok, with that rant out of the way, let's look at their top markets. The list of cities, gross rental yield, average monthly rent, and average unit selling price are as follows:

• Anderson, S.C. -- 15.3% -- $893 -- $69,900
• Greenville, S.C. -- 13% -- $975 -- $90,000
• Sioux City, Iowa -- 13% -- $914 -- $84,250
• Gainesville, Fla. -- 12% -- $1,161 -- $115,950
• Washington, D.C./Arlington, Va. -- 11.9% -- $1,966 -- $199,000
• Columbia, S.C. -- 11.3% -- $1,046 -- $111,500
• Pittsburgh, Pa. -- 11.3% -- $991 -- $105,700
• Charleston, S.C. -- 10% -- $1,160 -- $139,900
• Columbus, Ohio -- 10% -- $1,039 -- $125,000
• Omaha, Neb. -- 9.9% -- $1,059 -- $128,000

Just so we're all on the same page, here’s how you read the numbers using Anderson, S.C. as an example:

• Anderson's average rental unit sells for $69,900
• The average unit there generates $893 per month in rent (gross, no expenses deducted)
• This means the average rental unit generates $10,716 each year in gross rents ($893 * 12 months)
• The gross rental yield is therefore $10,716/$69,900 or 15.3%

Now, here's how I stack up to that:

• The total costs of my units (includes both purchase price and remodeling costs): $579,342
• Gross monthly rents of these units: $10,890
• Gross annual rents of these units: $130,680
• Gross rental yield: 22.6%

A few comments on this:

• I wish I was earning 22.6% profit on these units. I'm going to be between 8% and 11% when it all shakes out (which should be this fall as my last unit is done with its remodel, it's filled, and I get to a point where I'm through investing big in remodeling).
• I paid for all my units in cash, but my return would be higher if I leveraged my places, as I noted on each property write up I've done on FMF.
• There's no accounting for appreciation in these numbers.
• One thing that helped me out big-time is that I bought my places near the bottom of the market (not at the bottom, but near it, just as they turned up a bit. If I had started two years earlier I'd probably have double the properties now and be looking at HUGE gains.) Unfortunately, those days are mostly over.
• My numbers are against the averages in a market, so it's not really a fair comparison. I'd like it better if I knew what the top 10% or top 25% were earning so I could compare myself with their results.

Well, that's it for now. I will give you a detailed update on my rental units once the smoke clears.

I'd be interested in hearing from those out there who own rental places. What do you think of the article? How do your results compare to those in the cities highlighted?

Why People Have Money Problems

I recently received a GREAT email from an FMF reader that went as follows:

For once a straight shooting article from the mainstream financial press. It basically says people have money problems because:

• They spend too much on housing
• They spend too much on cars
• They spend too much on college

There are other factors, of course, but I agree these are the big ones. The other two that I'd add that nobody wants to touch are:

• Having kids out of wedlock
• Divorce

I LOVE it!!!! :)

I mentioned several of these in my post on the ten worst money moves anyone can make: marrying the wrong person was #7, buying too much house was #5, and over-spending was #1.

The house, car, and college are especially dangerous because of the amounts involved. It's one thing to over-spend on comic books and quite another entirely to over-spend on a house.

A few more thoughts from me:

• Here's how to buy a house and pay it off in ten years.
• Here's how to save money on a new car (You can also buy used, as I'm sure some of you will point out.)
• As for college, the key is to make the payoff exceed the investment. In other words, it needs to be a "good deal." $50,000 invested in college for a job that pays $75,000 a year is a lot better investment than a $200,000 cost for a degree that gets you a $20,000 a year job.

Anyone else have thoughts?

When It's Wise to Delay Taking Social Security

We've discussed back and forth through the years about whether or not it's wise to delay Social Security payments (or, said another way, not take them early). Ultimately, it most depends on how long you'll live -- a question that no one knows the answer to. Ugh.

But the book The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions offers us a short list of when it's wise to delay payments. Their thoughts (based on an economic study) find that gains from delaying are greatest:

• When interest rates are low
• For married couples relative to singles
• For single women relative to single men
• For two-earner couples relative to one-earner couples
• For a married couple, deferring the primary earner's benefit as compared to the secondary earner's benefit

For me I think it's a no-brainer to delay. I won't need the money and I plan to live a long time. :)

Well, at least the first part is true, so it makes the decision easier for me.

How about you? Do you think you'll wait or take Social Security early? Why or why not?

Six Rookie Landlord Mistakes

Money magazine lists six rookie landlord mistakes as follows:

No. 1: Underestimating costs
No. 2: Breaking the law
No. 3: Skimping on vetting prospective tenants
No. 4: Ignoring renters insurance policies
No. 5: Failing to check out the property regularly
No. 6: Going DIY at tax time

My take on these:

• I always estimate high on costs and low on revenue whenever I look at a property. If it still works then, I try and buy the place. That said, it looks like I've estimated low on both costs and rents overall, so I've done just about what I've expected (I will get a rental real estate update out sometime in the future).
• Having a management firm takes care of #2, #3, and #5 for me.
• I'm not sure about #4 where they recommend requiring tenants to have insurance for their contents. Does anyone do this (or have it required of them as a renter)?
• I do NOT go DIY at tax time. As you know, I use a CPA to do my taxes.

Those are my thoughts on this list. Anyone else have something to add?

How Much Do You Need to be Rich?

This article from the NY Times is interesting for a few reasons:

1. It equates being "rich" with your annual income (at least in part), a frequent mistake by the mainstream media.

2. It verifies something we've addressed frequently here: the more you have, the more you think it takes to be rich.

3. It shows that even those who likely are rich (higher net worths), don't think they are.

It lists what people at various incomes think is needed (in net worth) to become rich as follows:

• Annual income under $25,000 -- Need $293,000 to be rich
• Annual income $25,000 to $60,000 -- Need $394,000 to be rich
• Annual income $60,001 to $120,000 -- Need $426,000 to be rich
• Annual income greater than $120,000 -- Need $501,000 to be rich

So, that's America's opinion. What's yours? If you had to list a net worth at which someone becomes "rich", what would that be?

Or can it even be done?

Sure, we can go by averages and the like and look at the top 5% or even the infamous top 1%, but do things like expenses come into play?

And "rich" is a tough word to define anyway, isn't it? Does it mean wealthy enough to care for yourself or wealthy enough to buy a small country?

Personally, I think if you have enough assets to provide for yourself and those you care for, then you are rich. That could be $200,000 or $200 million. But maybe that's too simplistic of a view.

What's your take?

What Outdoor Feature Would You Most Like for Your Home?

Money magazine asked its readers what outdoor feature they'd most like for their homes. Their responses:

• Pool -- 30%
• Deck -- 28%
• Screened-in porch -- 26%
• Kitchen -- 16%

It's funny to see this question since we're now debating this ourselves (given we have a new home). What do we want most? Not sure yet, but here are some thoughts:

• We considered a pool but feel like the cost and time (many friends who own one say it needs lots of maintenance) aren't worth it. And our kids will be out of the house soon, so it's not really worth it.
• I think we will get a grill (we left our old one in Michigan -- it had seen better days -- 8 years outside in Michigan winters) soon as we love to cook outside.
• We will probably get some nice landscaping, but it has to be low or no maintenance. For this reason I love...rocks. :)
• None of the four items above sounds good to me. We don't want a pool, have a ranch home with a patio (so a deck and screened-in porch seem useless), and I can't imagine a kitchen outside.

How about you? What outside feature would you want (or do you have that you really enjoy) for your home?

Unwanted Emails

I received a couple emails this morning from FMF readers saying that they are getting emails from me trying to sell all sorts of things. I am not sending these out.

I'm still trying to figure out exactly where the emails are coming from (neither of my email addresses have been hacked as far as I can tell). But at this point I wanted to get the word out: I am not sending these out.

If you receive an unwanted email claiming to be from me, plese send me as many details as you can about it -- what email address did it come from, what did it say, when did you get it, etc. I'll figure it out from there.

But in case anyone comes here wondering, I am not sending out any emails selling any products.

Help a Reader: Retirement Savings

Here's an email I recently received from a reader:

In an attempt to combine Dave's (Ramsey) 15% savings solution with an early retirement I'm stuck with a dilemma.  

If I put 15% into retirement accounts, then I will not be able to touch until I am 59.5 without penalty.  And that is presuming the government doesn't change the rules in the next 28 years.  Likewise, if I don't put anything into retirement accounts and do only investment accounts, I'll have a potentially inconvenient tax burden.  So the question is, how should I divide up my investments between traditional retirement accounts and early retirement accounts?

My employer matches 75 cents on the dollar for the first 8%, so into the 401K it goes.  Take the free money.  The next 2.5% would go to Roth IRAs.  The remaining 4.5% goes into my traditional investment account.  Is that prudent?

What's your advice for him?