Combs Spouts Off

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Posts Tagged ‘saving’

The war against savers escalates

Posted by Richard on March 17, 2013

A while back, people who worry about the growing mountains of sovereign debt pointed to Greece as the canary in the coal mine. We have a new canary, and he’s got a bad cough: Cyprus. The Eurocrats are funding a bailout of Cyprus by doing what debt-laden governments with no respect for the rule of law or the sanctity of contracts usually end up doing eventually: seizing the assets of savers.

I’m not shedding any tears for the Russian klepto-billionaires who parked their ill-gotten riches in Cyprus. And maybe only a few for the Cypriots who until now believed they could get something for nothing through the miracle of endless government borrowing. But prudent and frugal folks throughout the heavily-indebted nations of Europe must be wondering when the EU will come after their savings. Under the mattress or in a hole in the back yard must be starting to look like better options than a bank account.

Think it can’t happen in the good old USA? It already has. In April 1933, a month after taking office, FDR issued an executive order (under the “Trading with the Enemy Act of 1917”) outlawing the private ownership of gold coins, bullion, and gold certificates. Owners had a month to turn it all in or face 10 years in prison. They were reimbursed at face value — the owner of a $20 gold double eagle (which contained gold worth $19.99 at the time) was given $20 in currency. But once all the gold had been turned in, FDR quickly devalued the dollar by 59%. That double eagle, had the owner been allowed to keep it, would have been worth $35. Essentially, this was a confiscation of wealth that makes the Cyprus “haircut” look picayune.

More recently and on a smaller scale, when the Obama administration turned GM into Government Motors, they abrogated contracts and confiscated the assets of bondholders in order to turn them over to their friends in the UAW.

And for some time now, left-wing activists and Obama administration officials (but I repeat myself) have been talking about how “unfair to poor people” 401k and IRA accounts are and suggesting that the government should do for retirement accounts what it’s doing for health care: take over.

Fiat money allows governments to confiscate wealth slowly and stealthily by inflating the currency, thus shrinking both your savings and their debt. But if (when) things start to go out of control and panic sets in, they’ll come after your savings more directly and immediately. You might want to be prepared.

HT: Instapundit (via email from David Aitken)

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Eating our seed corn

Posted by Richard on March 31, 2012

The economic recovery isn’t going well in a number of respects, according to Reason’s Tim Cavanaugh. Americans are earning less (after taxes and inflation) and spending more. So borrowing has increased and saving has collapsed. The cheerleaders for the Obama administration and the Bernanke Fed at CNN think this is good news.

Of course it is. Any farmer will tell you that the way to ensure bigger harvests in the future is to eat some of your seed corn.

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How to retire as a millionaire

Posted by Richard on February 16, 2012

Denver’s 7NEWS wants to encourage you to save with what might seem to be an ambitious goal in mind: to retire as a millionaire. But if you start young enough, it’s not difficult at all:

It might help if you knew when you could be a millionaire. 7NEWS found a “Millionaire Calculator” that can predict that golden age.

We took the millionaire calculator to Rooster & Moon Coffee Pub in Denver to run the calculation, using current investments, monthly contributions, and a conservative 6 percent expected rate of return. The result revealed when $1 million would be saved.

Some patrons told 7NEWS reporter Amanda Kost that they were surprised by the results.

“This is how much you can put away, and this is where it can get you,” Laura Mulvey mused.

When Mulvey calculated her millionaire age of 88, she made some adjustments and found what saving more money could buy for her future. Her projected millionaire age went from 88 to 58.

“I love it. I love it. It definitely surprises me,” Mulvey said.

Check out the “millionaire calculator” links they’ve posted. But the real secret, and the reason this message is directed especially to the young, is the “miracle of compounding.” Richard Russell, author of Rich Man, Poor Man, explained it with this example decades ago:

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions — he’s finished.

A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.

Specifically, investor B, who invests $2,000 a year for seven years and then stops after age 26 has about $945,000 at age 65. Investor A, who starts saving seven years later and continues to invest $2,000 a year until age 65 has about $974,000. But investor A has put in $80,000 versus investor B’s $14,000, and his investment has grown 11-fold while investor B’s investment has grown 66-fold.

Take it from someone who didn’t know this or heed it, who only started seriously saving after age 40, and who’s been saving 30-40% of his income to try to make up for lost time: start saving early. Max out your 401k and/or IRA starting with your first job. Keep it up for at least a decade, preferably two or more. You’ll be a millionaire or maybe a multimillionaire by the time you retire. If you don’t spend it all before you die, your kids will thank you. 😉

To put this in simple terms, how early in your life you start saving/investing is much more important than what you save/invest in. Time is what will make you rich.

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How to live like a millionaire

Posted by Richard on March 8, 2010

So you want to live like a millionaire? OK, but if you're living the typical upper-middle-class lifestyle, you'll have to give up some things. Like that big house and fancy car.

Thomas J. Stanley, Ph.D., is a former business professor who's been researching the wealthy for 30 years and has written numerous articles and best-selling books on the subject. He's conducted studies, surveys, and focus groups of millionaires. His latest book, Stop Acting Rich: And Start Living like a Real Millionaire, contains some interesting findings about millionaires (which he defines as people with investments worth at least $1 million, not including their home, personal property, etc.):

  • Three times as many millionaires live in a home worth less than $300,000 than one worth $1 million or more.
  • The most popular car brand among millionaires is Toyota. Almost 9 out of 10 owners of luxury cars aren't millionaires.
  • Almost two-thirds of millionaires have never owned a second (vacation) home. Even more have never owned a boat. Among those who at some point bought a boat, most sold it and never bought another one.
  • Millionaires are much more likely to wear a Seiko watch than a Rolex. If they're wearing a Rolex, they probably got it as a gift.
  • A millionaire's clothes typically come from J.C. Penney and the like. If it's from Saks or Brooks Brothers, it was probably purchased at 60% off. One exception: millionaires buy good-quality shoes (Cole Hahn, Allen Edmonds, etc.) and then have them resoled when needed.
  • The median price that millionaires pay for a bottle of wine is $13.

None of this should be shocking or surprising. The way to accumulate wealth is to accumulate — that means spend much less than you earn. But the people who think that the rich are the "winners of life's lottery" don't get it. They spend all they can. And then they buy a bunch of lottery tickets and hope for the best. 

It's not just a problem of the poor (although it's especially a problem of the poor, in particular the lottery tickets). That's why the country's full of people with $80,000 incomes facing foreclosure on their $500,000 homes.

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Making a virtue out of a vice

Posted by Richard on May 18, 2006

Alex Tabarrok at Marginal Revolution endorsed a suggestion by Ian Ayres and Barry Nalebuff in Forbes (registration required; use BugMeNot) to channel some of the short-sighted, get-rich-quick thinking that’s so prevalent among poor people into long-term retirement planning: lottery savings tickets. They’d work just like today’s scratch lottery tickets, except that 50% of the purchase price would go into the purchaser’s personal retirement savings account. The benefits are not trivial:

Some 20 million Americans spend at least $1,000 a year on lottery tickets. For these heavy purchasers the new tickets would increase their personal savings by $500 a year. Invested over 40 years, these savings tickets would generate an expected retirement nest egg of $200,000. This is a lot of money for the mostly not very prosperous crowd who buy lottery tickets every week.

I can’t help but note that, if these folks gave up this foolish habit completely and put the entire $1,000 a year into savings, they’d have a $400,000 nest egg.

But, hey — if I’d saved what I’ve spent over the years on cigarettes, beer, Dish Network, CDs, DVDs … not to mention single malt Scotch …

It’s pointless to speculate on how much better off people would be if human nature were different (and it’s downright dangerous, too; just look at the history of communism). Most of us have our little vices, weaknesses, and guilty pleasures, and we’re often willing to trade a large reward in the future for a smaller one today. So why not work with human nature instead of rail against it? As Tabarrok noted:

It is incredible that many poor people spend more on lottery tickets than on retirement.  My non-bleeding heart libertarian friend would point out that this shows how much poverty is due to irresponsibility and he would probably be right.

Nevertheless, Adam Smith said the goal of social policy is to create institutions like the market that channel self-interest in ways that redound to the social interest.  Call me a libertarian paternalist, if you must, but I like how lottery savings tickets channel failures of reason and prudence in ways that redound to the individual’s self-interest.

I like the idea, too. In fact, I’d buy some lottery savings tickets, and I haven’t bought a lottery ticket in years.
 

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