Archives For June 2007

Okay, here’s my report on tonight’s episode of The Millionaire Inside: Debt Free. I missed the first segment of the show because I was outside. Anyway, I turned the TV on to hear Larry Winget talking about how responsible people pay their bills and honor their contracts. I don’t know what that was in reference to but I LIKED WHAT I HEARD!

Robert Kiyosaki was surprisingly quiet during most of the show, which probably was a good thing. One of the things Kiyosaki said when he did talk was something to the effect that all debt is bad debt if you have to pay it back yourself. Huh? Of course he didn’t elaborate on that so I really don’t know what he was talking about unless he was referring to becoming a land lord and having renters pay your mortgage for you.

David Bach and Jennifer Openshaw did most of the talking. No one really offered anything earth-shattering or new. It was pretty much all the standard stuff like:

  • Pay off your credit cards
  • When paying off your credit cards (or any debt for that matter), call to get your interest rate reduced.
  • You have no business buying lattes if you don’t have health insurance.

The award for one of the dumbest pieces of advice went to Jennifer when she said:

She would rather see you buy ONE pair of $200 jeans (if they’ll make you happy and you’ll wear them) instead of buying 10 $20 pairs that you won’t wear. Dumb!

One guy in the audience asked about debt consolidation and Robert Kiyosaki didn’t answer his question. He basically told him that he needed to figure that out for himself. Jennifer finally said that she would rather see the guy double up on his payments rather than go with a debt consolidation loan. Again, I agree with that. For the most part debt consolidation will do nothing but move debt around and make you feel like you are doing something when you actually aren’t. David reminded the audience to watch out for debt consolidation rip-offs, of which there are many.

Overall, I suppose if you knew ABSOLUTELY NOTHING about debt, the show might be useful to you. For everyone else it was a waste of time. That said, i t wasn’t nearly as silly as the last episode.

You probably already know that I’m not exactly a fan of CNBC’s “The Millionaire Inside.” So far the show has been a lot of fluff and not much substance. That said, it has also been humorous. Tomorrow night’s show on becoming debt-free shouldn’t be any different. Here’s the five “experts” who will appear on the show:

Robert Kiyosaki – See, I’m laughing already.

Jennifer Openshaw

Sharon Epperson

David Bach

Larry Winget

I had seen Larry Winget’s books in the book store but never paid attention to them until my father-in-law sent me a link to Larry’s blog. It looked interesting so I went out and picked up a copy of SHUT UP, STOP WHINING & GET A LIFE, which I hope to review as soon as I am finished with it. If Larry acts the way he writes, tomorrow night’s show should be entertaining. So, if you find yourself with nothing to do on a Saturday night at 9:00 PM Eastern, check out the show. I’m going to watch. I can’t pass up an opportunity to get some blogging material.

Here’s a question for everyone:

Is it a good idea to spend down principal during retirement?

I realize that most of my readers probably aren’t retired so this topic may seem a little silly to talk about. However, I ask this question because Jonathan Clements mentioned it in his column yesterday (the same column I talked about in my last post). There’s something about spending down principal that just doesn’t sit well with me. It seems risky. After you’re retired, once your principal is gone, it’s gone.

Of course the other side to the equation is that some people may not want to leave a lot of money behind and feel it is their right to spend it. I can understand that. My main concern is running out of money, not necessarily leaving lots of money behind.

Personally, I think the ONLY way I would recommend spending down principal is through a fixed immediate annuity. This type of annuity can even be structured to offer lifetime income no matter how long you live. More on this at a later time. Meanwhile,…

What do you guys think about this?

UPDATE – Reading through the comments and rereading my post, I figured out that I didn’t write clearly. There are low-expense fixed immediate annuities. Vanguard sells them. You’ll have to buy them yourself, but they do sell them and they are quite reasonable. Anyway, as I said, I’ll do a follow-up on this sometime in the future.

Check out today’s Jonathan Clements’ Getting Going column titled A Cool Million No Longer Buys You a Luxe Retirement. I think most of us already know this. However, it amazes me how many magazines write about becoming a millionaire. I guess it’s because the word “millionaire” still has a nice ring to it. All I can say is that if you are in your 20s, 30s, or 40s and $1 million is your goal for retirement, you’re not going to be happy.



Take a look at the graphic below which shows the future purchasing power of $1,000,000 based on three modest inflation rates. Continue Reading…

This morning Best Buy announced that it will buy back as much as $5.5 billion of its stock. Share buybacks are not uncommon but are they a good deal for shareholders? It depends. If the company is really intent on reducing the number of shares of stock outstanding, then it can be a good deal. Why? Because if earnings stay the same but there’s less shares outstanding, it means earnings per share will be greater. To see what I mean, take a look at this very simple example:

Share Buy Back Example

So, based on this example, a 20% decrease in the number of shares outstanding increased the earnings per share by 25% even though the earnings as a whole didn’t change. Notice how if the stock price stays the same, the P/E ratio goes decreases to 16 from 20. However, if the P/E ratio were to remain at 20, the stock price would move to $25.00 ($1.25 × 20 = $25.00).

NOTE: Remember that the P/E ratio is Stock Price ÷ Earnings Per Share.

From this example, a buy back seems like a pretty good deal. However, it’s important to note that a buy back isn’t always the best use of the company’s money. For instance, what is the stock price is high? It doesn’t make sense to use company money to buy something that might be overvalued. Also, many investors might prefer dividends instead (Best Buy did announce they were increasing their quarterly dividend to $.13 from $.10). At the new dividend rate, Best Buy will yield a little over 1.10% based on today’s stock price. That’s a pretty stingy dividend yield in my opinion.

In a lot of cases, I think it is a control issue. When a company pays a divdend, those dollars are gone. A buy back is different because companies might allocate money for a buy back but there’s no guarantee they’ll actually follow through. As a shareholder, I think I would prefer a dividend payment.

I have just touched on the very basics here. For more on stock buy backs, see this article on Investopedia.

I’m busy today but I wanted to share this article that I found in the June issue of Financial Planning with you. It’s titled The Greatest Benefit and it is about how planners can help people understand and plan for Social Security benefits. It’s a very complex issue (much more complex than it should be) since the benefit amounts are based on several factors:

  • The income you received during your lifetime and the social security taxes you paid in.
  • The age at which you begin taking benefits. The longer you put it off, the bigger your benefit is up to a point.
  • Your marital status at the time you take benefits. Do you want your spouse included in your benefits or do they want to take their own benefit?
  • Whether or not you work during retirement. If you work and make too much money, you’ll have to give up some of your social security benefits.
  • Taxation of benefits. If you have too much income from other sources during retirement, some of your social security benefits will become taxable.

So there’s a lot to consider. The article does a decent job of explaining some of these decisions from a planner’s point of view.

Personally, I don’t like social security. When I look at the amount of money that my wife and I are paying in, we could EASILY have an additional $1 to $2 million at age 70 if we were allowed to invest the money on our own (and that’s not including the employer’s portion of the contribution). Something tells me that we’ll never see benefits that good. The government is a poor money-manager.

Chris, a Dave Ramsey employee and blogger from PourOut blog, sent me an email this afternoon regarding an announcement. To celebrate his 15th anniversary of being on the air, Dave Ramsey is giving away an iPod every hour of every show this week. Click on the link to find out the details and how to enter to win an iPod.

I don’t always agree with ol’ Dave but I have to respect the fact that he has been on the air for 15 years. That’s pretty amazing. Anyway, head over to PourOut for more information if you’re interested.