Sunday, March 27, 2011

Zombie Economics, is that like Voodoo Economics? No.

For the first time, I understand why the notion of a zombie apocalypse is so popular. In an irrational world, when everything we know has turned upside down and constants are suddenly variables, zombies make as much sense as anything else. I got this message by reading a new personal finance book called Zombie Economics*. By Lisa Desjardins and Rick Emerson, names familiar from CNN and other broadcasting, this primer is a mixture of fiction and nonfiction. The fiction is the gripping tale of a lone survivor of the zombie apocalypse who, chapter by chapter, is seen desperately seeking ammunition, supplies, medical care, and most of all, safety from the lifeless attacking hordes. The nonfiction is money advice taking off on the concept of a zombie invasion, such as the prologue, entitled “No One is Coming to Save You.”

The beauty of likening protective personal finance to self-defense during a zombie apocalypse is we completely skip over the concept of blame. A lot of us get hung up over blame, either blaming Wall Street, the banks, or the credit card companies. Closer to home, we tend to blame ourselves, our untrustworthy family members, or our lousy employers. Or ex-employers. But blaming entangles us in unprofitable historical research or quarrels. Does it matter if our financial boat started taking on water with that $50,000 entertainment center we had installed, or the fifty pairs of designer shoes we bought at $1,000 a pop? In a zombie apocalypse, there’s no time for blame. We’ve got to lock the doors and protect ourselves from the onslaught. Right now.

Desjardins and Emerson hand out straightforward advice skewed to the age range 18-35 (or perhaps older), people who don’t have children demanding their own cell phones or college tuition. The target of the authors’ admonitions are people who have jobs, have bills, and who need to act defensively to make sure inattention, poor choices, and sheer bad luck don’t destroy their world.

Sure, the authors are stretching it a bit with their zombie similes. The action scenes of shooting or whacking zombies and the descriptions of squishy zombie parts are a little gruesome, too. But this is the era in which personal finance counselors often throw people into homeless shelters for a week in order to get them to wake up to how dire their financial situation is. What’s a few scenes of zombie guts by comparison? Something has to mobilize us to fight to save ourselves, because no one is coming to save us. The younger we are, the truer that is. A lot of unemployed Baby Boomers are currently thinking if they can just hold out until Social Security kicks in, maybe they can make a dignified exit from the world of fruitless job hunting. Maybe they can even keep the house, or sell it and move somewhere cheap. For the young, the future may have more potential, because unemployed young people will probably find jobs eventually. But there is no lifelong pension about to come due. Instead, there are zombies.

If you’ve avoided personal finance books before, or are sick of their typical clich├ęs, try this one. Go for the advice, and enjoy the blood and guts.

*Not to be confused with the book of the same name by John Quiggin, which is about dead economic ideas that walk among us.

Monday, March 21, 2011

We Don’t Need Money for Retirement, We Need People

Here’s an important side issue to the big question of do we have enough money to retire in comfort: Do we have enough relatives and friends so we can decline or be ill in comfort? Some public discussion has arisen lately about which ethnic or class groups of Americans have fewer dollars set aside for retirement, with tut-tutting over which have more cash. I don’t think dollars are the only capital we can build up in our lives. When it comes down to it, dollars might not be as important as human capital. If I am part of a large family who lives near me, or deeply involved in a local social group like a church or a fire department or even a book club, then I may need less money for retirement or during an illness than if I am a loner whose only human contacts are via the Internet. Families and social groups often pull together to help people struck down by illness or old age. They create drives to buy needed medical equipment for one of their own, or medical treatment, for instance.

In my family, a daughter and a grandson provided most of the eldercare for our aged parent. Although we eventually did hire nurses to help, we also supplemented with friends who came over as unpaid sitters. Thus an elderly person did not have to go into a nursing home and become indigent to get government aid, and so on. If that parent had been completely alone, all the care would have been a cash transaction. Eldercare usually can’t be rendered in extremis by the friends of the person; very often the person has outlived all her contemporaries or they are too feeble themselves to help. Which is not to say that old friends don’t try to give whatever assistance they can. I know of more than one case in which people in their high eighties are giving care to friends in their nineties. But when the last person in a group has to stop driving, some help from a younger individual is necessary, or else cash must be available. Yet many aid programs only kick in when a person meets a needs test, that is, has no money. The assumption our governments make is that family and friends will provide most of the care.

Sometimes they do. When a person is ill, friends or family can pull together and trade off chores related to the person’s care: one friend takes her to doctors, another is the mediator with insurance companies, a third provides meals, others clean her home or sit with her on specified days, etc. Not everybody has friends or family like these, and some illnesses drag on or get complex, exhausting their abilities or expertise. Money again becomes a necessary substitute. But money ideally should be a third leg to the stool, a means of support after families and communities have done their share.

A statistician can quantify the services rendered by relatives and friends and give them a dollar value. We can investigate the cost of assisted living and nursing home living versus the cost of home health care, too. But the bottom line here is that some help can and should be unpaid. It makes a huge difference in how a serious illness goes or our declining years play out. We don’t all need $5 million in our retirement savings, because some of us will have people instead of money. On the whole, the people are the more valuable. Not because they give services free, but because they render them with a variety and often with a love and respect that few paid services can emulate.

Thursday, March 17, 2011

Newsflash: Unemployment is the Fault of the Unemployed

Of all the things that people without jobs dislike, it’s being told they aren’t doing enough to find work. Recently the Washington Post published yet another article blaming the victim. This time the Post came up with a new angle. Instead of honestly citing the real reasons people don’t find new jobs, the article describes a man who has decided to sit out the recession and let his wife and his savings support him. The article then goes on to say that when the economy recovers, this selfish man will skew the jobless rate by daring to look for work again---and thus increasing the total number of the unemployed again. Guess that’s what all the rest of us are doing, right? Not so fast, Washington Post. Over 200 angry comments later, here’s part of one that sums up the true situation:

We all know the unemployment rate is worse than stated, that older workers can't get hired, that recent college grads are doing menial jobs, and that contract and part time is becoming the gold standard of hiring for the HR stooges. [by veerle1]

It’s a cheap shot for an employed journalist to tell the rest of us we ought to try a lot harder to find a job. There aren’t enough jobs for all the people who want to work. I see people all the time who have tried everything they can think of to find a job. These are the ones at the bottom of the economic spectrum, people who are not too overeducated to work at Wal-Mart or at a Target distribution center, people who have lost their factory jobs to outsourcing. Clever resumes, smart business attire, and classy answers to trick interview questions have nothing to do with the kinds of jobs they’re seeking. They can’t get hired because there are no jobs available, not because they don’t know how to wow an HR rep. So they live on their savings and on the kindness of family members, plus the odd short-term gig and some government handouts. Are these people comfortably sitting out the recession? No. Do they get counted as unemployed? Only if they still get unemployment benefits. If they don’t, they aren’t counted. This method of counting the unemployed has never made sense, but short of going door-to-door, economists have few ways of measuring unemployment. Even so, this article posits a large potential workforce that lost jobs and isn’t trying to find jobs.

I am not a statistician, but even I know that if you intend to find the people who don’t want a job and are not looking for one, you investigate categories of people such as those aging out of the workforce, those voluntarily leaving it to stay at home and raise a family, those whose medical conditions force them out of the workforce permanently, and so on. Not by citing anecdotal evidence that some guys are letting their wives support them. Which BTW there is nothing wrong with doing, other than trusting that his wife will still have a job by this time next year.

I also don’t agree with the idea that “discouraged” workers have stopped looking for jobs. The reality is that many people have knocked on every door, exhausted all their contacts, imposed enough on the goodwill of their former coworkers, and used up all help from other sources. So they've moved on as a matter of daily life. They may no longer spend forty hours per week trying to find a job, but they’re still interested and still looking. Any hint of an open position is followed up. To blame people who don’t keep beating their heads against the wall of a bad economy is both silly and cruel.

Monday, March 14, 2011

Debt Collectors are Scum

But you knew that, right? Here's a story of just how outrageous they have become lately, from our friends at Cracked.

This story leaves me speechless. Really. You've got to check it out.

Tuesday, March 8, 2011

Self-managing Retirement Money

Someone I know self-manages his IRA. He directs his (discount) broker to buy certain stocks and to sell them based on his knowledge of a specific industry. Over the years, he has grown a nice nest egg from very little cash investment through this method. I applaud him, even while I know that I do not have similar expertise about an industry that would allow me to replicate his hands-on management style. The publishing industry, my field, is in utter flux right now over ebooks. The dust won’t settle for a while. Possibly this is the moment to invest in some epublishing start-ups. Possibly not. I don’t have the instinct to guess right about them, so I’m not going to try. I'm not unusual in wanting my retirement money to be managed by someone else so I don’t have to think about it. By allowing that situation, though, I am potentially setting myself up to be a victim of some fund manager’s folly. Do you have intimate knowledge of an industry that would give you a more-than-fighting chance of picking individual stocks on the rise? If so, perhaps active management of your portfolio, or a piece of it, would benefit you.

My friend who self-manages does not have the goal of amassing a huge amount of principal and then pulling it out as cash, which is the typical IRA or 401k plan. He has a far different goal. Although he buys and sells some of his stocks based on how the stocks are valued so he can make a quick profit, his purpose is to amass more cash to buy more stocks. He looks for stocks that pay dividends. We don’t usually think about dividends with IRAs and 401ks, because we usually arrange for all dividends to be reinvested automatically in the very same products. This is advantageous during our highly taxed years when we are earning our maximum. Later, however, this is not necessarily the best strategy. My friend, who is at retirement age even though still working, now allows the dividends to be paid to him directly. That money supplements his income from other sources. Meanwhile, he has not reduced his principal.

Hearing about this, I realized that the common way of thinking about IRAs and 401ks is all or nothing. Either we keep it all in various funds, locked up and not paying out a dime, to rise and fall according to the whim of the stock market, or we take it out as cash and spend it. Moreover, we are told that there is a formula for taking it out, usually around 3% or 4%, by which we can sell out on a yearly basis and keep our principal intact. This isn’t exactly true, though, if the stock market is not doing well. (We’ve certainly seen that situation in the last few years.) Meanwhile the federal government wants us to sell out of these funds on a regular basis, starting at age 70 1/2, whether we want to sell or not. At that time, we have to start converting our tax-deferred savings into taxable income, or face stiff penalties. We can do that, but we don’t have to let it all be cash. We can convert the required amount of principal (less the government automatic withholding of 20%) to the very same or different financial instruments as simple investments. Investments that pay us dividends or interest.

This strategy does not reduce principal dramatically. Most people expect to cash out their principal, and so they worry about it running out. If we create an income stream rather than sell off the principal that doesn’t happen. This method harks back to the old-fashioned concept of living on cutting coupons. Coupons were the quarterly dividends that bonds paid, and rich people bought the bonds and then cut the coupons and redeemed them for cash. Organized correctly, these became a constant flow of income, income not affected by the ups and downs of stocks. Also, if we don't spend down our principal but live on dividends or interest instead, we can leave an estate for our children, which an important consideration for some people.

It’s very daring to self-manage one’s retirement money, but at some point we all do have to make decisions about it anyway. Why not think about this method?