Archives For March 2010

Going back to 1926, the average monthly total return for the S&P is .78%. When you factor in inflation, that number drops to .53% per month*.

To put that in perspective, had you been able to invest $1 in the S&P at the beginning of 1926, it would have been worth $2,424.82 at the end of 2009 for an average annual growth rate of 9.72%. The math looks like this:

[(2424.82 ÷ 1)1/84] – 1

NOTE: Obviously, a number divided by one stays the same. I just wanted you to see the math.

The numbers look quite different when we factor in inflation, using the CPI (not seasonly adjusted). A $1 investment made at the beginning of 1926, would have been worth $200.23 at the end of 2009! So, although on paper, your account value if $2,424.82, it’s purchasing power is only worth about 8.3% of what it was in 1926. That’s what inflation will do your hopes and dreams.

So, if your goal is to become a millionaire in the future, you better factor in inflation. You can do that by using an inflation-adjusted expected rate of return when running your calculations. Anyone can become a millionaire. You just have to 1) start young; 2) save a lot; or 3) a combination of both 1 and 2. The following graphic illustrates what I mean:

One thing I need to point out is that my monthly savings numbers do not increase with inflation. Most likely, a person would be able to increase their monthly savings as they get older. Like I said, these are REAL returns. On paper, your account values would appear much larger.

So, what can you do with this information? Share it with young people who don’t think saving money and investing is important because they have time to worry about that later. The only way to take advantage of time is to use it wisely.

*I’m using returns for the S&P index, which do not reflect fees. However, a low cost index fund would track the performance of the index fairly closely.

As several people pointed out, there was a flaw to the information source in my last post. I went back and found plan balances by age range. The only problem is, these balances are as of the close of 2008. Most likely, these numbers would be significantly higher (or at least I hope they would be).

Source: 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008, page 55

It’s important to note that these are 401(k) plan balances and not savings and investments, which were used in the last post. Although these numbers are somewhat more optimistic than my last post, they still seem too low to me.

Regardless of which numbers you use or which report you look at, the bottom line is: we need to save more!

I spent some time this weekend reading over the Employee Benefits Research Institute’s 2010 Retirement Confidence Survey (PDF). This graphic found on page 16 of the report worries me:

Seventy-seven percent of American workers have less than $100,000 in savings and investments. Only 11% have more than $250,000 in savings and investments.

Even more troubling is that 27% of those surveyed had less than $1,000 in savings and investments.

Here are the reasons in the report for people not saving (emphasis mine):

Three in 10 Americans age 25 and over report they have not saved any money for retirement (29 percent of workers and retirees). Of these, 79 percent of workers and 60 percent of retirees say this is because they cannot or could not afford to save. Less than 10 percent mention each of these other reasons for not saving:

• Having other saving priorities (6 percent of both workers and retirees).

• Never getting around to it (5 percent of workers, 6 percent of retirees).

• Thinking they had plenty of time to save (4 percent of workers, 8 percent of retirees).

• Being ignorant and not informed about retirement planning (3 percent of workers, 6 percent of retirees).

• Retirement seeming too far away (2 percent of workers, 5 percent of retirees).

Thirty-one percent of workers who have not saved are nevertheless very or somewhat confident that they will have enough money for a comfortable retirement. However, this percentage has steadily declined from 47 percent in 2004, suggesting that workers are increasingly recognizing the need to save at least some money themselves if they would
like to achieve a financially secure retirement.

I would like to challenge those people who say they cannot save to try and find $3.30 per day ($6.60 would be even better) out of their budget to put towards their retirement. Making a habit of saving a small amount of money can really build a nest egg over a lifetime. Saving just $3.30 per day over 40 years would net a portfolio worth over $500,000 (not factoring in inflation)*. No, it’s not a lot BUT who’s to say that the amount saved couldn’t increase over time?

As a nation, we aren’t doing enough to educate and encourage people to take care of themselves. Rather, it seems we have become very good at telling people what they can’t do.

* Using the historical monthly total return average of .78% for the S&P 500 Index.

From Bloomberg:

More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.

The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.

U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth. About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors.

Is this a surprise to anyone?

Now the administration is looking at requiring lenders to cut mortgage payments for the unemployed to no more than 31% of income. I googled and found that the average unemployment check is $293 per week (rounds to $1,270 per month). That works out to a mortgage payment of less than $400 per month. It’s a temporary measure but wow. If you lent someone $200,000 to buy a house, the payment would be about $1,200 per month (assuming a 6% interest rate for 30 years). Had the bank lent the money WITH NO INTEREST, the payment would have still been over $555 per month.

I wish the administration would concentrate on CREATING JOBS rather than trying to dictate private matters. You create jobs and all the rest of this stuff will take care of itself.

There’s a good message in these lyrics and one of the reasons why I love Rush:

Waiting for the winds of change
To sweep the clouds away
Waiting for the rainbow’s end
To cast its gold your way
Countless ways
You pass the days

Waiting for someone to call
And turn your world around
Looking for an answer
To the question you have found
Looking for
An open door

You don’t get something for nothing
You can’t have freedom for free
You won’t get wise
With the sleep still in your eyes
No matter what your dreams might be

What you own is your own kingdom
What you do is your own glory
What you love is your own power
What you live is your own story
In your head is the answer
Let it guide you along
Let your heart be the anchor
And the beat of your own song

You don’t get something for nothing
You can’t have freedom for free
You won’t get wise
With the sleep still in your eyes
No matter what your dreams might be

I was out of town for the first part of the week. I went to San Antonio for a few days with the family. I was there when the health care bill passed. I picked up a copy of the NY Times (the official paper of the left) on Monday, which contained an editorial praising the bill’s passage.

Although the entire editorial made me angry, this particular part really made me scratch my head:

Just as Social Security grew from a modest start in 1935 to become a bedrock of the nation’s retirement system, this is a start on health care reform, not the end.

The NY Times makes it sound as if social security has been a success. It’s a real shame when social security is considered a “bedrock of the nation’s retirement system.”

Lastly, I want someone to explain to me how this bill is going to cut costs? I see it mentioned time and time again and have yet to see HOW this is supposed to cut costs. I’m telling you right now: this bill WILL NOT cut health care costs.

This is a follow up to the guest post from two weeks ago, which you can read here. Thanks, Don, for your work on this.

When your medical bills go to collection.

As a rule, you do not want you medical accounts to go to collection. However, it is my experience that even if you are an honest person who pays your bills, you will sometimes have accounts that get sent/sold to bill collectors.

Collection is a pain, and it is unpleasant. But the threat of collection is no reason to pay a bill that is not genuinely your responsibility.

Two kinds of collectors.

There may be more than two kinds of debt collection, but I do know that there are at least two different kinds of collectors.

Our local hospital once sent one of our accounts to collection, and I was bracing for all of the headaches that that may entail. But apparently the hospital system simply has a centralized collection branch. So although they called it “collections,” I was effectively still working with the hospital, and they were working with me to get my insurance claims appealed and paid (and eventually my claims were).

The other kind of debt collection that we have experienced is what I would call the external collection agency. This is the kind of company people think of when they use the word “collections.” In my experience, these people are less fun to work with, and dealing with them takes more skill. You can easily make mistakes. I did.

Collections is a new game.

I usually describe the insurance game as having three players, the provider (i.e. the doctor or hospital), you, and the insurance company. I recommend forming a coalition with the provider, against the insurance company, to get your bills paid.

When your account is sold to an external collector, this no longer works, or at least it becomes more difficult. By law, there are very few people that a debt collector can legally talk to. This keeps them from harassing you by calling family members, coworkers, etc. It also means they can’t help you with your insurance claims. They won’t even have the relevant information.
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