Tag Archives: retirement plans

5 Dumbest Investing Bets

Social Security 3My Comments: There is a distinction between dumb and ignorant. The second you can fix with mental effort, but the first just happens. Sometimes I wonder if people are born this way or whether they have to work at it.

These five ‘bets’ happen often. Many times it’s because someone has “sold” them the idea, whether on TV or in person. Either way, the outcome can be avoided if you are willing to exercise some mental effort on your own behalf. Like reading this article by Allan Roth.

by Allan S. Roth JUN 15, 2015

When I look at professionally designed investment portfolios other advisors have assembled for clients or prospects, I nearly always find something that concerns me. Maybe it’s because of fees, or because they’re choosing active rather than passive strategies. I can even debate the validity of “core and explore.”

But roughly 80% of the time, I see one or more of these five really dumb investment strategies.

Absolutely none make sense. And they have virtually no chance of working for the client. Admittedly, many advisors don’t actually know that they are executing any of these five strategies, though that won’t console clients much.

Here are the five strategies I suggest you avoid.

1. GAMBLE IT AWAY
Clearly, it would be illegal to siphon off some of our clients’ money and gamble it away in Las Vegas. Anybody would see the obvious folly; after all, every Las Vegas game (from blackjack to craps) is staked in favor of the house.

Clients understand that an advisor needs to take some risk to get returns, but they want advisors to invest money in vehicles that at least have some expectation
of gains.

To be fair, I’ve never actually seen advisors literally take their clients’ money to Vegas. But that’s essentially what they are doing when they invest in certain alternative
investments.

For example, managed futures and options are zero-sum games — not a penny has ever been made with these strategies, in the aggregate, before costs. I’d even go as far as to say that, after the costs (both the funds’ and the advisor fee), the odds at the tables in Vegas look attractive by comparison.

Only slightly better are market-neutral funds, which have an expected return of the risk-free rate, which is currently about 0.01% — close to zero, for all practical
purposes.

The typical response from advisors is that they are making one of these investments because they are uncorrelated with the stock market. Well, taking a chunk of your clients’ money to Las Vegas isn’t correlated with the market either — but that doesn’t make it any less dumb.

Only 31% of financial advisors felt they understood alternative funds “very well,” according to a survey by Natixis Global Asset Management, yet 89% of them used alternatives. That’s not just dumb, but
irresponsible.

2. BET ON BOTH SIDES
If gambling away clients’ money in Vegas is dumb, the concept I’m going to describe is dumber. If you’d bet half of a client’s money on Seattle in this year’s Super Bowl and the other half on New England, you would have been sure to lose by paying the bookie twice.

No advisor would suggest that, of course. And yet planners do something equivalent when they buy an inverse or levered inverse market fund, which bets against the broader equity market (and in the case of the levered version, the fund borrows to bet against the market).

It might only be a strategy I disagree with if they didn’t also have the client long in stocks; often the advisor will have both a levered inverse S&P 500 fund and an S&P 500 fund.

Typically, advisors claim the inverse position is a hedge against the possibility of a declining market. They often say something like, “You’ll be glad you own the inverse fund if markets plunge.” OK, but why pay a management fee to be in on both an up and a down market?

You can’t win by having both a short and long S&P 500 fund. Wouldn’t it be far more cost-effective to hedge by keeping some cash on the sidelines? This is especially true now that cash can earn an FDIC-insured return of 1% annually, if you do a little research.

One might assume, at least, that one of the two bets must be right, since you can’t lose on both sides of a bet — but one would be wrong. In 2011, for instance, both the ProShares UltraPro S&P 500 (UPRO), a triple levered long fund, and the ProShares UltraPro Short S&P 500 (SPXU) lost double digits.

3. BORROW AT 4%, LEND AT 2%

This is pretty much the opposite of how a bank makes money. It’s a common mistake, and there is an enormous amount of money at stake when people get it wrong.

This error typically surfaces when a client comes to me with a mortgage at 4% and bonds paying 2%. Advisors typically argue that the mortgage is only costing the client 3% after taxes and that clients can get higher expected returns on their overall portfolio. When interest rates go up, they say, clients will be glad they have this cheap money.

Unfortunately, it’s still just as dumb for the client to be borrowing money at twice the rate they are earning on a comparable low-risk investment that also happens to be taxable. If rates do go up (and the top economists have a great track record of calling that wrong), then the clients’ bonds and bond funds go down. The client can’t win.
As far as taxes go, one must remember that the goal is not to pay less in taxes, but rather to make more money after taxes. As a CPA, I know that taxes matter — and in roughly 75% of the cases I’ve looked at, the tax argument makes it even more compelling to pay off the mortgage.

That’s because the clients either aren’t getting the full value of the mortgage interest deduction (due to phase-downs or part going to meet the standard deduction), or are getting hit with the extra 3.8% Medicare passive income tax on the investment income they have from not paying off the mortgage.

I’ve had more than a few advisors tell me how wrong I am on this point, but I’ve given everyone a chance to prove it by lending me money at 2% and borrowing it back from me at 4%. To date, no one has taken me up on this offer.

4. GUARANTEE A LAG
I’m not one to say that active management can’t ever beat the low-cost index equivalent — although research suggests that active funds do tend to lag the broader market.

I am, however, willing to go out on a limb and say that a high-cost index fund can’t beat the lower-cost one. For example, take the Rydex S&P 500 C fund (RYSYX) — which has an expense ratio of 2.32%, or more than 46 times the 0.05% expense ratio of the Vanguard S&P 500 Admiral (VFIAX). One would expect it to underperform by the differential of 2.27% annually — although, according to Morningstar, the five-year shortfall was actually a bit higher, at 2.74% annually as of the end of May.

I used the most extreme example I could find, but in general, when it comes to index funds, you actually get more by paying less. The larger, lower-cost funds tend to be far better at indexing, as smaller funds must buy more expensive derivatives.

In the true confessions category, I’m actually guilty of this mistake myself: I own the Dreyfus S&P 500 Index fund (PEOPX), which carries a 0.50% expense ratio — not as egregious as the Rydex, but well above the Vanguard option. Dumb as it is, the tax consequences of moving to a lower-cost fund are just too huge to make the switch.

5. LEAVE CASH UNINSURED

I have clients that come to me with as much as tens of millions of dollars earning 0.01% annually, which I round to nothing — although, in truth, that money will double in value in a mere 6,932 years.

In some cases, the advisor is even charging an AUM fee — so the money is actually losing value. And the money isn’t even federally insured.

If the client is going to keep cash, at least get it federally insured and earning 1% interest; as of early June, that was still possible with FDIC-insured savings accounts at banks such as Synchrony or Barclays. It’s fairly easy to get
millions of dollars in FDIC insurance by titling the accounts correctly.

Taking on more risk for a fraction of the return is just dumb. Really smart people sometimes do really dumb things. Sometimes what drives us is ignorance, while other times it’s the financial incentives.

For example, advisors who get compensated by a percentage of assets under management may be loath to tell clients to reduce those assets by paying down the mortgage or keeping cash outside the advisors’ custodian.

But being a fiduciary means advisors must constantly examine what they are doing for clients. That means taking a step back and looking at what admittedly might be some unpleasant facts.

If you find yourself using some of these strategies, at least examine the arguments being presented here. Then think of how you will answer your clients if they come to you with logic that’s similar to what I’ve presented.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for The Wall Street Journal and AARP the Magazine, and has taught investing at three universities. Follow him on Twitter at @Dull_Investing.

Why Poor People Vote for Republicans

My Comments: OK, that’s too simplistic, but there is a point to be made here.

Back in 2007, with the presidential election cycle in full swing, I recall seeing an old, bent and rusty pickup truck. In the front was mom, dad and 2 kids. The truck bed was full of odds and ends that that suggested they were moving somewhere with all their earthly possessions.

The truck, however, was emblazoned with every possible McCain/Palin sticker possible. I tried to imagine why someone, presumably on the lower end of the economic totem pole, would seriously promote and presumably vote for someone or an ideology that so clearly misrepresented their best interests. I still have no idea, but the same people are today flocking to join the clown car parade driven by the Republican Party.

By Chad R. MacDonald on July 19, 2014

Considering how Republicans constantly attack the poor, they shouldn’t have a chance with anyone who isn’t already rich. So why do they?

Republicans like to say they are all about personal responsibility. Then of course, they support the SCOTUS decision taking personal responsibility away from citizens and placing it in the hands of corporations. (TK: except for John McCain)  They lie about a war, have us believing in non-existent weapons of mass destruction, and then try to blame the situation in Iraq on the subsequent administration.

The GOP advocates slashing food stamps, denying unemployment assistance, opposing affordable healthcare, and cutting taxes for the wealthy. They constantly demonize poor people, and think the economically disadvantaged deserve only scorn and insults. If you’re poor, you’re just lazy. End of reasons. Yet they get heavy votes from lower income Americans. How are they doing this?

There are many factors as to why this is so, including gerrymandering districts, such as what just made news in Florida, and voter suppression. But these particular elements have been covered extensively, and they aren’t the only reasons for this phenomenon. Republicans rely on a myriad of tactics to keep their poorer constituents voting against their own economic interests.

One tactic is misdirection. They paint Democrats as irresponsible whenever they can. They call our President, a man graduating manga cum laude from Harvard Law School, a community organizer. In short, they use smear tactics.

Meanwhile President Obama has proven eminently effective as leader of the nation. He has made healthcare accessible to millions of Americans, kept the USA out of a handful of wars, boosted the economy, and fixed some of the mess left behind by the Bush administration. Yes, he has a long way to go and he’s far from perfect, but Obama has faced an uphill battle of Republicans refusing to work with him even before he took office.

Yet many conservatives who know better say that the President hasn’t done anything to help the country. Or, hilariously, that he’s some kind of tyrant, right after saying he’s weak on foreign policy for not starting enough wars.

You also can’t ignore the infiltration of conservative talking points into the faith of Red Staters. Evangelists, televised or not, spearhead the Religious Right and are awful for “us against them” sermons and mentality. Don’t believe me? Look to Pat Robertson and his hateful rhetoric against LGBT Americans, Chic-Fil-A, or, again, the recent Hobby Lobby ruling for just a few examples

These people believe that their God is conservative. The #ccot (Christian Conservative On Twitter) hashtag gets heavy use. There you will find Christians tweeting anti-Obama, anti-immigrant, anti-gay, and anti-Democrat statements. And all of them believe God is on their side. It is the very definition of zealotry.

Throw Fox News into the mix, which Politifact recently reported as disseminating more false information than truth. When you travel through Red States, Fox News is on in most gas stations, fast food restaurants, and public areas. An unabashedly conservative media outlet, Fox News continually broadcasts a right wing agenda to its viewers.

They blame The Other; immigrants, ethnic minorities, LGBT Americans, and women, while saying people need to “take America back” They repeatedly bash the President, give platforms to lobbyists and corporate shills, and constantly work to undermine progress and support obstructionists. They do all of this while telling the viewer that they are the chosen people of God and America.

Then they tell you the most important part, everyone else is lying to you. Don’t touch that dial. Fox News creates fake “wars” on Christmas, Easter, Thanksgiving, and whatever will shock their audience. This paranoia is sown to distract their viewers from voting from the GOP’s real war on poor people.

With Red State Education kept slashed, distrust against science and critical thinking is sown and everyone is highly encouraged to go to church for more political divisiveness and false moral superiority. And Fox News backs all of this up. That’s how you get voters opposing their own health care, supporting corporations poisoning their water, or advocating cutting taxes for the wealthy.

This is a pure definition of the French word ressentiment. Yes, it sounds like the English “resentment” and is somewhat similar in definition. But it defines the phenomenon of an electorate voting against their own economic interests. “A generalized feeling of resentment and often hostility harbored by one individual or group against another, especially chronically and with no means of direct expression.” It’s textbook population control.

This also plays into how many conservatives get made fun of as ignorant hicks, as they are manipulated to be this way. They swallow whatever story is spoon-fed to them, no matter how ridiculous. Birther crap. Benghazi mistruths. Even that Obama is the Anti-Christ. They cannot and will not accept that what they are saying is not true. They will not compromise or reason in debates, no matter how crazy their argument.

That gets seen by everyone else, correctly, as a willingly obstinate ignorance and even pure insanity, absolutely frustrating anybody dealing with them. This leads to insults, both sides of the debate dig in their heels, nothing gets accomplished, and the conservative thinks they have “won.” Meanwhile the political divide widens even more.

“Divide and conquer,” remember? Clear thinking Americans realize that their President is not a Kenyan/Muslim/Fascist/Socialist/Communist/Tyrant/Weakling/King/Coward/Anti-Christ/Whatever. But if you inject enough irrational fear and/or loathing into your base, they won’t question you when you say someone else is to blame for their troubles.

And there you have the roots of the majority of America’s divisive issues and why poor people continue to vote against their interests. This problem is so deeply ingrained it will take generations to die out. And by then, we’ll have a whole new set of problems if we haven’t been defeated by the current ones. But you tell that to the kids today and they won’t believe you.

Sine of the Times

200+year interest ratesMy Comments: Many of you have read my comments about interest rates lately. (Yesterday!) For many, many months, the Fed has used its powers to keep them low to encourage economic growth. Now that growth is again endemic, sooner rather than later, pressures will exist to cause interest rates to increase.

The chart at the top of this post shows interest rates in this country going back to the late 1700’s. You can expect the curve to start changing its direction soon. When that happens, you should not own many long term bonds, unless you’re happy watching your net worth decline.

Commentary by Scott Minerd, Guggenheim Partners, April 24, 2015

For the past 30 years, 10-year U.S. Treasury yields have shown a clear downward linear trend, falling from over 10 percent in 1985 to less than 2 percent today. Around this linear trend, yields have also exhibited a fairly consistent cyclical fluctuation, with the size of the fluctuation about 200 basis points from peak to trough, and with the cycle repeating every six years. This fluctuation can be thought of as a sine function, allowing us to model 10-year yields by combining the sine function with the linear trend:Chart-of-the-Week-04232015_600px

If we assume the secular, linear downward trend in yields will continue in the near term, we can predict the short-term outlook based on the model of cyclical fluctuations. This model currently shows that rates are just beginning to undershoot the linear trend, with the model predicting that rates will bottom at 0.82 percent in March 2016. What’s even more interesting is that the average actual bottom in rates has been 73 basis points lower than the model predicts, which would put rates at just 0.09 percent.

Now, I am not necessarily predicting that U.S. 10-year Treasury yields will test zero like its counterpart the German 10-year bund, which currently stands at around 16 basis points and I believe could provide negative yields at some point. What I am saying is that there are many powerful secular and fundamental forces at work that signal the risk to U.S. interest rates remains to the downside.

With Federal Reserve tightening drawing closer, the continuation of this downward trend could be called into question. However, a number of factors, including lower first quarter gross domestic product (GDP) growth, high demand from overseas investors (with yields approaching negative territory in much of Europe), and expectations of a slow liftoff by the Fed, are working to exert downward pressure on U.S. yields, thus limiting any upside in rates in the near term.

The prospect of a stronger dollar as a result of upcoming U.S. rate hikes only serves to heighten foreign demand for U.S. Treasuries. International investors are likely to seek to preempt Fed action and invest while their currency has greater relative strength. Betting against the downward trend in U.S. rates has proved to be a widow-maker trade for many years—and with fundamental and technical factors pointing to downside risks in rates in the near term, there appear to be few reasons to bet against the trend now.

 

Obama Welcomes Kissinger Realism

My Comments: Regular readers of these posts know I’m not a fan of the GOP and many of the people who call it home these days. I find them un-Christian, narrow minded, selfish, and living in the past instead of developing the future. They are not providing the leadership needed to secure the future for my grandchildren.

A generation or so ago, in the days of Nixon-Ford, a champion of the Republican Party was Henry Kissinger. While he’s now an old fart like me, he’s not drifted into dementia as have many of his cohorts, people like Dick Cheney.

I well remember the days when we became “friends” with China and the storm of derision it unleashed across the media. Today, people simply shrug as it has become a fact of life and normal. I believe this will happen with Cuba and possibly with Iran. As it should. Unless you plan to kill every last one of them, you might as well work for normal relations and let them become pseudo friends or enemies, take your pick.

By Edward Luce, April 19, 2015

The essence of diplomacy: when adversaries come to terms, neither gets everything they want.

The biggest rap against Barack Obama’s foreign policy is that he is naive. Yet, as his presidency matures, Mr Obama is showing qualities one would normally associate with Henry Kissinger — the arch-realist of US diplomacy. Neoconservatives and liberals alike care about the internal character of regimes with which the US does business. Mr Kissinger stands apart from that tradition. The less Mr Obama preaches morality to foreigners, the more he distances himself from the exceptionalists — the more opportunities he creates. It is a welcome sign of a president with a learning curve.

The chief example is Mr Obama’s evolution on the Middle East. In 2009, he went to Cairo to offer a new chapter in relations between the west and the Muslim world. His felicitous words went down well in the region but were quickly forgotten. Today Mr Obama gives fewer speeches but has a bigger appetite for deeds. The best measure is his recent framework nuclear deal with Iran. Much to the chagrin of his critics, the agreement is silent on Iran’s sponsorship of terrorism abroad and repression at home. Its focus is on curtailing Iran’s nuclear ambitions.

There is no mention of Iran cutting off its support for the Houthi rebels in Yemen, or recognising Israel’s right to exist. That is just as well. Had Mr Obama insisted on either, there would have been no deal (there is still a way to go before reaching a final agreement). In pushing ahead anyway, Mr Obama is grasping the essence of diplomacy — when adversaries come to terms, neither achieves everything they want. Much the same would apply to Mr Obama’s recent deal with Cuba’s dictatorship. Although Mr Kissinger has criticised Mr Obama’s Iran deal as too weak, it is very much in line with his school of diplomacy. The perfect should not be the enemy of the good.

But it goes heavily against the grain of the debate in Washington. In 1972, Mr Kissinger shocked the world — and the “red scare” hawks back home — by pulling off a rapprochement with Mao Zedong’s China. The Shanghai Communiqué was scandalously amoral. It made no mention of Chairman Mao’s gulags. Nor did it call for China to end its third-world adventurism. But by splitting Beijing from the Soviet orbit, it dramatically served US interests and laid the foundations for the west’s victory in the cold war. Had Richard Nixon — Mr Kissinger’s boss — been hamstrung by ethical concerns, it would never have ¬happened.

Without acknowledging it, Mr Obama is taking a leaf from Mr Kissinger’s book in the Middle East. At the same time as pursuing a deal with Iran’s unsavoury regime, Mr Obama is stepping up support for its equally dubious counterparts in the Sunni world. In the same week Mr Obama’s Iran deal was signed, he restored $1.3bn in annual military aid to Egypt’s army, increased US support for Saudi Arabia’s strikes on Yemen’s Houthi rebels and gave his backing to the creation of an Arab (read Sunni) force. Next month he will host Arab leaders at his presidential retreat in Camp David.

It is a classic balance-of-power approach to the Middle East. Mr Obama is simultaneously giving succour to both sides of the region’s gaping Sunni-Shia divide. Rather than trying to convert the Middle East to our values, it seeks to limit the region’s ability to export its pathologies. In 2008, Mr Obama campaigned to restore the US’s moral auth¬ority in the world. Yet George W Bush’s blunders in the Middle East were driven by moral zeal. Many of Mr Bush’s advisers believed they could implant Jeffersonian democracy on the banks of the Tigris and Euphrates. Should Mr Obama develop his deftness of touch, he could stake a claim to restoring America’s intellectual authority in the world.

It is an approach that will ultimately be tested in the battle with the Islamic State of Iraq and the Levant. In Mr Obama’s first year in office, there were 1,600 terrorist attacks in the Middle East and north Africa, according to the US state department. That had almost tripled to nearly 4,650 by 2013. Far from cutting off al-Qaeda’s head with the death of Osama bin Laden, the Salafist threat has grown a hundred new ones — and poses a far more complex challenge. Sending troops to fight Isis would be to risk another quagmire. Yet betting on the competency of US-trained Iraqi army units and moderate Syrian rebels would be a triumph of hope over experience. As has been said when US-trained Afghan forces are defeated: “Who trained the Taliban?” The answer is no one. No one trained Isis, either.

If Mr Obama wants to defeat Isis without allowing the US army to be sucked into another destructive war, local strongmen must do the job for him. In some places, such as Iraq, that means relying on Iran-sponsored local Shia militias, and the Kurdish peshmerga. In others, such as Syria, it means Bashar al-Assad. Such an approach will attract a great deal of opprobrium. Mr Kissinger received a lot of that — sometimes deservedly (there was no possible justification for the US carpet bombing of Cambodia). But what matters in the negotiating chamber is the end result. US values are both admirable and universally desirable. Sometimes the best way of realising them in practice is to put them on the backburner.

Time US Leadership Woke Up To New Economic Era

CharityMy Comments: As many of you know, my professional life has revolved around financial issues and economics. The world I’ve lived and worked in was largely shaped by the global forces at work following World War II. That era has ended.

We can shake our heads and whine about what might have been but it will serve little purpose to do so. The sooner we as a nation come to terms with all this and make the necessary adjustments, the sooner we, and here I imply ALL OF US, can get on with creating a framework that will allow our children and grandchildren an optimistic future.

Admittedly, Larry Summers is a Democrat with questionable management skills. But I can’t fault his analysis below and his thoughts about our collective future. And I will add that the aggressive stance of Israel re the Iran agreement underway, is a self-serving effort to maintain the post WWII status quo and avoid hard decisions about the future.

By Lawrence Summers, April 5, 2015

This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the US before, and times when American behaviour was hardly multilateralist, such as the 1971 Nixon shock, ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.

This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the US approach to global economics. With China’s economic size rivalling America’s and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the US have rendered it increasingly dysfunctional.

Largely because of resistance from the right, the US stands alone in the world in failing to approve the International Monetary Fund governance reforms that Washington itself pushed for in 2009. By supplementing IMF resources, this change would have bolstered confidence in the global economy. More important, it would come closer to giving countries such as China and India a share of IMF votes commensurate with their new economic heft.

Meanwhile, pressures from the left have led to pervasive restrictions on infrastructure projects financed through existing development banks, which consequently have receded as funders, even as many developing countries now see infrastructure finance as their principal external funding need.

With US commitments unhonoured and US-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank. There is room for argument about the tactical approach that should have been taken once the initiative was put forward. But the larger question now is one of strategy. Here are three precepts that US leaders should keep in mind.

First, American leadership must have a bipartisan foundation at home, be free from gross hypocrisy and be restrained in the pursuit of self-interest. As long as one of our major parties is opposed to essentially all trade agreements, and the other is resistant to funding international organisations, the US will not be in a position to shape the global economic system.

Other countries are legitimately frustrated when US officials ask them to adjust their policies — then insist that American state regulators, independent agencies and far-reaching judicial actions are beyond their control. This is especially true when many foreign businesses assert that US actions raise real rule of law problems.

The legitimacy of US leadership depends on our resisting the temptation to abuse it in pursuit of parochial interest, even when that interest appears compelling. We cannot expect to maintain the dollar’s primary role in the international system if we are too aggressive about limiting its use in pursuit of particular security objectives.

Second, in global as well as domestic politics, the middle class counts the most. It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonisation with moral concerns about global poverty and posterity, while offering little to those in the middle. Approaches that do not serve the working class in industrial countries (and rising urban populations in developing ones) are unlikely to work out well in the long run.

Third, we may be headed into a world where capital is abundant and deflationary pressures are substantial. Demand could be in short supply for some time. In no big industrialised country do markets expect real interest rates to be much above zero in 2020 or inflation targets to be achieved. In the future, the priority must be promoting investment, not imposing austerity. The present system places the onus of adjustment on “borrowing” countries. The world now requires a symmetric system, with pressure also placed on “surplus” countries.

These precepts are just a beginning, and many questions remain. There are questions about global public goods, about acting with the speed and clarity that the current era requires, about co-operation between governmental and non-governmental actors, and much more. What is crucial is that the events of the past month will be seen by future historians not as the end of an era, but as a salutary wake up call.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

To Lobby, or Not To Lobby, That is the Question

babel 2My Comments: I admit to perverting the title to this article (Lobbyists Pervert Politics And Earn Their Infamy) which appeared in the Financial Times recently. But it points to a problem that may have no solution, at least until the clowns who inhabit our Congress feel enough pain to find a solution. But it most likely won’t happen in my lifetime. But I will use my remaining years to try and inflict some pain along the way. Fascists be damned!

February 24, 2015, by John Kay

A contract to lobby government, like an agreement to sell sex, was unenforceable in the courts.

Even distinguished former foreign secretaries such as Jack Straw and Sir Malcolm Rifkind might be forgiven for having forgotten the treaty of Guadalupe-Hidalgo. It is a notable document, and not only because it determined that California would be part of the US, rather than a province of Mexico. Its signing triggered one of the lobbying industry’s earliest controversies — telling, perhaps, in the week two parliamentarians were caught in an undercover sting offering to help fictitious corporate interests in return for cash.

Nicholas Trist was America’s lead negotiator on the 19th century treaty, and he believed he had not been properly recompensed for his services — which do, in retrospect, seem to have been considerable. After a 20-year campaign, he hired a Boston lawyer, Linus Child, to lobby Congress on his behalf. Child’s efforts bore fruit. His son told Trist: “I find that my father has spoken to . . . members of the House. Every vote tells, and a simple request to a member may secure his vote, he not caring anything about it.” Congress eventually agreed to pay Trist $15,000, then a considerable sum.

Trist, a hard bargainer, refused to pay the contingency fee he had agreed. The case went to the Supreme Court, which dismissed Child’s claim. A contract to lobby government, it said, was contrary to public policy and hence, like an agreement to sell sex, unenforceable in the courts. Paid lobbying, said Mr Justice Swayne, was “pernicious in its character”. But this was only the beginning of his denunciation. “If any of the great corporations of the country were to hire adventurers to procure the passage of a general law with a view to the promotion of their private interests,” he thundered, right-minded men “would instinctively denounce the employer and employed as steeped in corruption and the employment as infamous”.

The 20th century eroded this austere view of the proprieties of political life. But the notion that politicians might themselves become professional lobbyists after leaving office remained unacceptable. When Harry S. Truman ceased to be US president in 1953, he determined, according to biographer David McCulloch, that “his name was not for sale. He would take no fees for commercial endorsements, or for lobbying or writing letters or making phone calls.”

Truman had little personal wealth and had earned only modest public salaries, and the embarrassment of his poverty led Congress to make financial provision for America’s former presidents.

But by the time of Bill Clinton’s retirement, this pension and contribution to office costs was hardly necessary. Prime ministers and presidents could expect to become millionaires on leaving office, and lesser politicians sold access to their contact books for sums far exceeding what they had earned in public service.

The Court of the 1870s had taken the view that free speech and honest speech were two sides of the same coin. “The theory of our government,” ruled Swayne, “is that all public stations are trusts.” There was a corresponding duty on the citizen. “In his intercourse with those in authority, he is bound to exhibit truth, frankness and integrity.”

But in Citizens United in 2010, the same court held that the expression of views you were paid to hold was no longer “an infamous employment, steeped in corruption”, but an activity deserving of the protection awarded to free speech under the First Amendment. That contentious decision probably did not, in the end, seal the outcome of the 2012 election — though the tide of political donations that it unleashed will surely decide a presidential contest before long. Americans may look back on Justice Swayne as the wiser judge. “If the instances (of paid lobbying) were numerous, open, and tolerated,” he predicted, “they would be regarded as measuring the decay of the public morals and the degeneracy of the times.”

Life Insurance and Retirement

rolling-diceMy Comments: This is not an easy idea to talk about. The article came from someone critical of Dave Ramsey and Suze Orman, who argue that premiums for life insurance in retirement are an extravagance.

Some of the assumptions made by the author can be questioned, but the overall theme is essentially correct. Personally, I’ve made a similar choice, as there is absolutely no way I can replicate the benefits to my wife and/or children, regardless of when I die. That’s assuming I die first, which is not a given. But it provides me with huge peace of mind, and the certain knowledge setting aside money today will contribute to the financial freedom of those I leave behind.

by Tom Martin on March 6, 2015

Dave Ramsey, Suze Orman and scores of other financial pundits in the media scorn the idea of having life insurance in retirement. Their rationale seems to make sense on the surface: Life insurance is designed to replace your earnings when you die. Once you retire (and have no earnings) you are living off your investments. When you die, your investments don’t die with you, so what is the purpose of using valuable funds to pay for unneeded coverage?

Life insurance clearly plays an important role for very wealthy clients to efficiently transfer their estate, but are the media pundits correct when they advise that the average family to dump their coverage in retirement? Probably not.

Let’s consider the following statistics:
• The average American approaching retirement has retirement assets to replace only 10 percent of his/her pre-retirement earnings.
• 55 percent of Americans over age 65 rely on Social Security to provide more than half of their income.
• The maximum monthly Social Security retirement benefit for a person reaching full retirement age in 2015 is $2,642.

These statistics clearly show that Social Security is a vital source of retirement income. When we view our Social Security benefits statements, we tend to discount the importance of this benefit, as benefits are expressed in “today’s dollars.” In reality, our actual benefits will be much larger due to inflation. By contrast, when we consider how much savings we will have at retirement, we often fail to consider that the values of those dollars will be similarly reduced due to inflation. Consider the following example.

John and Jane Doe, age 50 and 45 respectively, plan on working to John’s full retirement age of 67. John is making $150,000 per year and Mary earns $70,000 per year. John and Jane both contribute to a 401(k) plan and, based on their investment assumptions, they figure that they will have $1,000,000 in retirement funds by the time John reaches age 67. Assuming a 5 percent withdrawal rate, they will be able to withdraw about $50,000 per year.

John receives his Social Security statement and sees that his retirement benefit will be the maximum, which is $2,642 in today’s dollars. Jane’s benefit is projected to be $1,450 if she claims at age 62 (same year John retires). John and Jane incorrectly assume that Social Security will provide about half of their retirement income, which is $49,000 from Social Security and $50,000 from retirement accounts.

In reality, both will receive much larger Social Security checks, since these amounts will be indexed for inflation. If we assume 3 percent inflation, John’s actual benefit will be about $77,000 per year and Jane’s will be about $40,000 per year. In comparison, assuming a 5 percent withdrawal rate on their retirement assets, they will have $50,000 income from the retirement funds. In reality, despite a respectable retirement account balance, Social Security will actually provide about 70 percent of their income.

Since Social Security benefits continue to increase with inflation, by the time John is age 80, his Social Security benefit will have risen to $113,000, at which point Jane’s benefit will be about $59,000.

Let’s assume that John dies at age 80 and Jane lives to age 85. At John’s death, Jane will assume John’s benefit and lose her own benefit. The total Social Security benefit will drop by $59,000 per year. Since Jane will spend 10 years as a widow, this loss amounts to $590,000!

What’s more, consider if John dies at age 75 and Jane lives to age 90. John’s death would cost Jane well over $1,000,000 in lost Social Security benefits.

Even though they have a sizable retirement account, it only represents about 30 percent of their income. Such a substantial reduction in Social Security benefits is likely to cause a substantial reduction in Jane’s lifestyle.

The financial pundits would be quick to recommend that John purchases a term policy today to cover his “temporary” insurance need. They figure that once John retires, he has no earnings to protect. In reality, his death after retirement will cause a substantial reduction in household income. John should consider some form of permanent insurance for at least part of his insurance portfolio now in order to mitigate the eventual loss of the Social Security benefit. If Jane predeceases John, John would lose Jane’s benefit. Even if the permanent insurance was just on John’s life, he could still utilize his policy to replace the benefit he lost on Jane. He could use the policy to provide a tax-free income stream through withdrawals and loans. He could cash the policy in, replace it with an annuity, or even sell the policy as a life settlement. Either way, a permanent policy on John could create a useful cushion regardless of who dies first.

In summary, life insurance can play a critical role in helping couples meet their retirement goals, whether it is through utilization of the policy’s cash value or in having the death benefit replace the lost Social Security benefit.