Certain Doubt

How to Become a Millionaire.

Friday, April 29th, 2011

I am constantly amazed at the naiveté of people seeking financial advice about retirement. Advisors usually begin and end by telling us to save, save, and save again. Admonishments to save money are not a bad thing. However, the unfortunate fact is that the promise of fiscal independence in old age is largely illusory. Why?Most of us will simply not make enough money to last us till we die. Consider the following article:

Start With $10,000 and Retire a Millionaire

by Jonathan Burton
Wednesday, April 27, 2011 MarketWatch

The 7% solution: Let money and time work for you, no matter your age.
The millionaire next door could be you.
All it takes is money and time; it always does. But what this really means is you have to save money over time, and that’s where so many of us struggle.

The premise here, the hook in the con if you will, is that all you need to do to have a million dollars in the bank is be frugal and save money.

Reaching age 65 with $1 million saved requires strong discipline and sustained effort. You need to recognize the importance of starting early and putting money away regularly. But even if you don’t have as much time, you still have options other than a last-ditch Hail Mary pass.
It can be done — even if you start with just $10,000.

To my way of thinking this is a huge leap from the initial premise. First we are told that all we need do to reach age 65 with $1 million large is to save money. Now it appears that before you embark on this savings journey you must first scrape together a stake of $10,000. The authors’ rationale for this nice round figure?

“Whether you’re 25 or 45 or even 55, you’ve got to start somewhere,” said Nathan Dungan, founder of financial education firm Share Save Spend.

Okay, for the sake of argument, let’s assume I have a rich and generous uncle who has left me $10K. How am I to get from that to $1million?

Call it a 7% solution. Assume a 7% inflation-adjusted return from a portfolio of U.S. and international stocks, bonds and cash — not overly aggressive, but an expected return that requires taking some risk — and living well within your means.

Assume a 7% inflation adjusted return? From stocks, bonds and cash? This is a huge assumption. Grand Canyon huge. And what do the authors mean by “some risk?” The mere fact that the author introduces risk into the equation means that there is a chance that if the economy tanks your 7% return could just as easily become a 7% loss. The author conveniently leaves this possibility out.

“In order to save, you have to understand your spending,” said Eric Kies, a financial adviser with The Planning Center, an investment manager in Moline, Ill. “Build some awareness of where you are now, where do you want to be, and what are you willing to do to get there.”

Of course there will be bumps along the road — potholes, even, that challenge your resolve. The financial markets love to shake and stir individual investors; don’t give up, because it may be hard to get back in.

“It’s less about where the money is invested and more about your ability to be disciplined,” Dungan said. “Ask yourself, What is realistic? What can I achieve? The best savers don’t have magical thinking about money. They’re honest with themselves.”

If we’re really to be honest about our money, starting out with assumptions like: a.) I have $10,000 to throw around and b.) that I can manage to find investments that cumulatively total 7% is the very essence of magical thinking. My Chase bank savings account yields a whopping .10%! If I purchase a one year CD I can raise it to .20%! Where is this magical investment that yields a 7% return? The author doesn’t say.

25 Years Old: Starting Out
Forty years is a long time. So long, in fact, that it’s easy to put off saving for the future. There are bills to deal with, college debt to pay, stuff to buy, vacations to take, a career to build.
Savings — sure, but who has money for that? Indeed, one of every three Americans between the ages of 18 and 33 have no personal savings, according to a recent Harris Poll survey. What’s more, 53% of this age group has zero in the way of retirement savings.

They’re missing out, big time. If a 25-year old with $10,000 invested $320 a month at a 7% annual compound rate of return until they turned 65, they would wind up with $1 million.

Okay, freeze the frame here. The author quotes a Harris poll saying 30% of young Americans have no personal savings, yet he also states that for his roadmap to work, everyone somehow has to magically have access to $10K. This makes no sense. If I have no savings, if I’m living from paycheck to paycheck, where the hell am I going to find $10,000?

Moreover, $320 a month doesn’t sound too bad. But multiply it by twelve and it adds up to $3840a year. If I’m making 10 dollars an hour, I’m clearing $400 a week and 1600 a month. This translates to $19,200 a year. Take out the cost of food, rent, utilities, and health care and the chance of having enough left each month to put $320 into a personal retirement investment account is slim to none. And we haven’t even mentioned money taken out for social security and taxes.

“There’s a reason why Albert Einstein called compounding the most powerful force in the universe,” said Jonathan Guyton, a principal at investment manager Cornerstone Wealth Advisors in Minneapolis.

Whether or not Einstein really said this, the math speaks for itself. At 7%, your money doubles every 10 years.

Okay, assuming the math is correct, what about this 7% figure? Inflation is currently at 2.86%. In recent years it has been as high as 4%. Thus in order to wind up with a total 7% return I actually have to come up with one that is quite a bit larger than 7%. Depending on what the stock market does and how the economy is faring, it might be difficult to build a portfolio that nets a 7% after inflation return.

And what if you haven’t got forty productive years to start socking money away? If you are approaching retirement and have no savings, even coming in to a $10k lottery payout isn’t going to allow you to become a millionaire. As the author admits older workers are up the financial creek sans paddle.

At 55, the amount needed to reach $1 million with a $10,000 bankroll is both comical and sad: $5,700 a month for 10 years.

$5,700 a month? That’s over $58,000 a year. I know plenty of folks who don’t make half that in salary a year. Under this scenario there’s no way for them to achieve the magical million dollar mark.
The sad fact is that even if they start when they are 25 year old, most people will not earn enough salary to be able to sock away even a fraction of the money necessary to achieve the author’s rags to riches scenario.

And even if they did, when they retire, a $1,000,000 nest egg that nets even a 3% return will only provide a fixed income of $30,000 a year. That might seem like a lot. But take out income tax, property tax, food, gas, shelter, and nursing care and the likelihood that our 65 year old retiree will have to start tapping that $1 million nest egg every year to pay for his or her health, maintenance, and welfare is almost certain.
Furthermore, if our saver lives another twenty years, and if they are forced to spend their savings in order to survive, a million dollars may not even be enough to see them through. One major or catastrophic illness and they could be wiped out and just as broke as if they hadn’t saved a dime.

The sad unstated fact in this whole article is that most of us really don’t stand a chance of being able to save our way to financial independence. And if the author were honest with us – and with himself – he would say so and not keep touting some magical, mythical “American Dream” that all we have to do to be secure in our old age is exhibit fiscal discipline and good savings habits.

The only people who really stand a chance at socking away enough money for a comfortable retirement are those who start out with large inheritances or those who earn really large salaries and bonuses.

You can work your fingers to the bone, but unless you’re really fortunate, your chances of even being able to pay your bills at the end of your life are slim. Sorry to be the bearer of bad news but facts are facts.

Tags: economics, investment, Millionaire, nest egg, poor, retirement, rich, savings
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Believe

Thursday, April 14th, 2011

In every good presidential speech there is a theme, a meme, or a basic idea. Usually it is typified by a catchy phrase: From Gerald Ford’s lame “Whip inflation Now,” to JFK’s “Ask not what your country can do for you…,” to even Martin Luther King’s “I have a dream.”

In every one of his speeches President Obama has tried to emulate this. But I very much fear that his rhetorical efforts are starting to ring hollow. After rallying the electoral troops with his one word slogan “Hope” and the inspirational, “Change is coming to America,” Obama’s recent efforts such as the tepid “Win The Future,” make President Obama sound like a caricature of candidate Obama.

Now we have his latest speech. Given ostensibly to address the budget deficit, the national debt, and what to do about it it has been hailed by many as a “watershed moment in his presidency. If his choice of tagline was any indication, however, we are all in a lot of trouble.

Believe.

That’s it. That’s the whole speech. That’s what his whole economic plan comes down to.

Believe.

In the speech at George Washington University the President used the word twenty-seven times. I believe, you believe, we believe, most Americans believe. It’s almost as if he was lecturing on grammar and not economics.

The main thing wrong with Mr. Obama’s choice of catch phrase is it requires the American people to believe, not in their country, not in an ideal of freedom and justice, but rather in their President’s desire, strength, and toughness to defend those ideals from the greed of big business and multi-millionaires. Unfortunately, given his record since entering office I no longer believe he has the stuff necessary to stand up for the little guy and fight for the “kind of country that we believe in.”

It was bad enough that Mr. Obama use of the word “believe” to try and rally people to his cause. “But we do not have to sacrifice the America we believe in.” However, his application of the word to the very people he intends to ask for sacrifice is downright pitiful: “I believe reform should protect the middle class, promote economic growth, and build on the fiscal commission’s model of reducing tax expenditures so that there’s enough savings to both lower rates and lower the deficit…. I believe that most wealthy Americans would agree with me. They want to give back to their country, a country that’s done so much for them.”

My God, on the one hand he’s telling us that rich folk have made out like bandits due to tax breaks (which he admits he voted for) and on the other hand he’s trying to convince us that aw shucks, in their heart of hearts, corporate CEOs really “…want to give back to their country, a country that’s done so much for them.” Not to put too fine a point on it but if President Obama truly believes that the super wealthy want to give back to their country, I have some ocean front property in Death Valley to show him. ”

If Obama had any cajones at all, he wouldn’t be wheedling and cajoling and trying to convince us that the “American dream” is still alive and well, if only we believe. He wouldn’t be exhorting us all to believe that republicans and their wealthy overlords are really decent people at heart who want what’s best for the country.

Baloney!

The Koch Brothers could care less about America, democracy, or caring for the poor and indigent. Rupert Murdoch certainly does not believe in the vision of America that Obama tries to lay out in his speech. At times in his speech, Obama seems almost as if he’s trying to convince himself to believe that “… somewhere lost in this quagmire of petty bickering on every news station, the ‘American Dream’ is still alive…”

If Mr. Obama truly believed in the vision that he was trying to sell the American people, he could do much for his believability by choosing to surround himself with a different crew of advisors. As Glenn Greenwald so pithily put it: “…does anyone think that Bill Daley, Tim Geithner and his army of Rubin acolytes and former Goldman Sachs executives are sitting around in rooms desperately trying to prevent budget cuts and entitlement “reforms”?”

I make no excuses for the fact that I don’t believe the American Dream is alive and well. Sadly,judging from his economic team and his record of caving anytime the Republicans’ millionaire masters order up more tax breaks for themselves, I don’t really think Obama believes it himself.

The country is being screwed by the rich. Until such time as President Obama acknowledges this fact and institutes policies designed to prevent it, I’m afraid I have little hope that that anything he does will make average Americans’ lives better…

That’s what I believe… and I’m sticking to it.

Tags: believe, certaindoubt, deficit, doubt, economy, Ethics, Greenwald, Obama, poor, republican, rich, Ryan, Thomas Vincent, Vincent
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Joe Stiglitz Hits the Mark.

Thursday, April 7th, 2011

I have been trying to come up with a commentary on the current inequalities of wealth in this country. I can relax now. In his recent Vanity Fair article, Joseph Stiglitz has said everything I wanted to say and more.

Vanity Fair
Inequality
Of the 1%, by the 1%, for the 1%
Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.
By Joseph E. Stiglitz•
May 2011

THE FAT AND THE FURIOUS The top 1 percent may have the best houses, educations, and lifestyles, says the author, but “their fate is bound up with how the other 99 percent live.”

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth. During the savings-and-loan scandal of the 1980s—a scandal whose dimensions, by today’s standards, seem almost quaint—the banker Charles Keating was asked by a congressional committee whether the $1.5 million he had spread among a few key elected officials could actually buy influence. “I certainly hope so,” he replied. The Supreme Court, in its recent Citizens United case, has enshrined the right of corporations to buy government, by removing limitations on campaign spending. The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

America’s inequality distorts our society in every conceivable way. There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means. Trickle-down economics may be a chimera, but trickle-down behaviorism is very real. Inequality massively distorts our foreign policy. The top 1 percent rarely serve in the military—the reality is that the “all-volunteer” army does not pay enough to attract their sons and daughters, and patriotism goes only so far. Plus, the wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money will pay for all that. Foreign policy, by definition, is about the balancing of national interests and national resources. With the top 1 percent in charge, and paying no price, the notion of balance and restraint goes out the window. There is no limit to the adventures we can undertake; corporations and contractors stand only to gain. The rules of economic globalization are likewise designed to benefit the rich: they encourage competition among countries for business, which drives down taxes on corporations, weakens health and environmental protections, and undermines what used to be viewed as the “core” labor rights, which include the right to collective bargaining. Imagine what the world might look like if the rules were designed instead to encourage competition among countries for workers. Governments would compete in providing economic security, low taxes on ordinary wage earners, good education, and a clean environment—things workers care about. But the top 1 percent don’t need to care.

Or, more accurately, they think they don’t. Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them. It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling. With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? They are right to worry. These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general.

As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

Keywords
Society,
Wealth,
Inequality,
Joseph E. Stiglitz

Read More http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105?printable=true&currentPage=all#ixzz1IryuyBa6

Tags: Certain Doubt, certaindoubt, democracy, fairness, income, inequality, Stiglitz, Thomas Vincent, Vanity Fair, Vincent, wealth
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Re-election Memes

Tuesday, April 5th, 2011

SCOTUS thoughts.

The recent kick-off of President Barak Obama’s re-election campaign has unleashed a flood of pundits trying to drum up support – I fear it’s too late to hope for enthusiasm – about the idea of Obama getting another 4 years at the helm. One of the more prominent memes I’m hearing is: we have to re-elect Obama so that the next Supreme Court Justice that retires won’t be replaced by another right winger.

From a progressive’s standpoint I think this idea is silly for a number of reasons.

First of all, the most likely next candidate for retirement – or worse – is Justice Ginsberg. At 78 she is the oldest Justice on the court and her health has been an issue for some time. As she is considered one of the “liberal” judges, one of the four non-conservatives on the court, replacing her with even a moderate would not change the make-up of the court. There would still remain the five Justices responsible for the Citizen’s United ruling. The only way to redress that wrong would be for one of the five conservatives, Roberts, Alito, Thomas, Scalia, and Kennedy, (I consider Kennedy a conservative on this issue) to either retire or pop off. As none of these Justices have shown any sign of either condition anytime soon, the odds that Obama will be faced with a chance to replace a conservative during his next term don’t seem very likely. Or rather, it’s just as likely that one of the four moderates on the court will need to be replaced than one of the conservatives.

Even if the unimaginable happens and Obama does get a chance to appoint another Justice, what leads anyone to believe that he will replace a Thomas, a Scalia, or an Alito with anyone less onerous? Look at his record. Virtually every time Obama has had the opportunity to take a stand against corporatism he has demurred. Anytime bankers, or wealthy business tycoons have come calling, Obama has fallen all over himself to try and appease them. From naming GE chairman Jeffery Immelt as Chairman of the “competitiveness council, to appointing the business friendly William M. Daley as his chief of Staff Obama has shown no inclination to tackle big business on any important issue. What makes anyone think he’ll start growing a spine in his second term?

And even if he were to somehow be fortunate to get the opportunity to affect the make-up of the court and he somehow grew a pair, what makes anyone think that conservatives in the Senate would go along with any nominee who showed any signs of overturning Citizen’s United? Or affirming Roe vs Wade? Republicans have been obstructionists, sitting on Judicial confirmations ever since Obama came into office. What makes anyone think they’ll suddenly change their spots and start playing nice?

No, there may be other reasons to vote for Obama in 2012…. But I’m afraid appointing Supreme Court Justices is not one of them.

Tags: 2012, campaign, election, government, Obama, Politics, re-election, reelection, SCOTUS, supreme court, Thomas Vincent, Vincent, vote
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