Strategic default is in the news because it is gaining popularity, and possibly may account for as much as 35% of all mortgage defaults. Strategic default happens when someone who can afford to pay the mortgage decides that it’s not worthwhile to keep doing so, and walks away. This is happening all over the country in situations where the value of homes has dropped substantially below the mortgage amount owed. It’s a daring strategy, not one usually employed by the meek middle classes. Financial writers tut-tut about this practice when individuals do it but strategic defaulters are simply taking a page from the behavior of large corporations. Corporations in our country are beyond feeling shame, but individuals until recently have not been.
Is strategic default an act of moral turpitude? Issues of right and wrong about money are very slippery. Historically, most of our ideas about money have been simple:
Pay cash.
Don’t incur debts, but if you do, pay them back.
That approach to money is now nearly obsolete. It’s in direct contradiction to the way we all have recently been trained to use money. Instead of waiting and saving up for something, we are pressed to buy now and pay later. We have been using capital leverage, i.e., credit, to do this. Just as the concept of paper money only works if everybody agrees that paper money actually is worth goods or services, so also the moral rules of money only work if everybody plays by them. Recently, we have seen egregious examples of companies that arrogantly refuse to be bound by even the most elemental moral rules, or even by regulatory laws. This creates an atmosphere of moral hazard. If the banking system is crooked and yet the banks don't have to pay and no one goes to jail, then why should individuals keep paying? Some people believe the only way to beat a rigged game is to stop playing the sucker. Walk away from a mortgage and the bank gets the house; that's what a secured loan is all about. End of obligation, both financial and moral. Yes, there’s a back-end income tax issue, and in some states the bank can come after you for what’s called the deficiency, but it’s still less hassle than the futile efforts people have been making to pay or modify mortgages they can’t afford.
The real hazard with strategic default is not moral, and it's not that the banks will go broke owning all these houses. It’s that if individuals feel free to act the way corporate crooks do, the entire financial system could grind to a halt. This system does not just depend on the Federal Reserve. It depends on every individual who accepts a paper dollar or a contract as worth something. Most people don’t believe that what they do has such potential for a far-reaching effect. We don’t know at what level strategic or other individual defaults will destroy the U.S. housing market entirely, but maybe we’re on the road to finding out. Meanwhile, the banks are not hurting, not when they seize homes worth $75,000 and sell them to investors for $30,000, while sticking the foreclosed owner with a tax liability for the “forgiven” $94,000 difference still owed on the mortgage. If it’s all a game, say the strategic defaulters, why shouldn’t they play to win?
It is not illegal to default on a mortgage. Right now is probably the best time to use the strategy, when so many others are doing it that one more default won't stand out from the crowd. Sure, your credit score takes a hit, but who says high credit scores are a moral imperative? Only FICO, which is in the business of collecting and selling credit scores, and therefore has a strong interest in making us all care terribly about scores. We have been brainwashed into believing we must behave in a certain way, or we will be punished by the Great God FICO. If substantial numbers of people have lowered scores, then the curve is lower, and who cares? A landlord will rent to someone with a low FICO score rather than let an apartment be vacant. A car dealer will make a deal with someone who has a low FICO score, because the dealer wants to make the sale. And so on.
Would I default on a mortgage? Probably I should have 20 years ago, when the country had a real estate crisis and housing values dropped precipitously. They stayed low for some years, but then they recovered big time. Will this current miserable part of the cycle ever end? I think so, but I hope you enjoy the house you’re living in right now, because rather than strategic default, there’s an even better plan: Just live in your house.
Thursday, April 28, 2011
Tuesday, April 12, 2011
Record-keeping Tips
Some people hate record-keeping and others love it, but here’s a dirty little secret: there is no right way or wrong way. Just pick or create the one that suits you best. Here are some popular ones:
1. Shoebox
2. File folder
3. Multiple file folders
4. Expanding file box
5. Ring binder
6. Software program
7. Physical ledger
8. Hybrid
For some of you, record-keeping will consist of throwing receipts in a shoebox. This is perfectly acceptable as long as it doesn’t drive you (or your spouse) crazy. Just don’t attempt to deliver that shoebox to a volunteer tax preparer. And don’t expect that a paid accountant will sort the contents of your shoebox for free. Or in April. Still, if everything is in one place, you have won more than half the battle of record-keeping. Really.
One step up from the shoebox method is the file folder. Same principle: it’s all in one place. Maybe you bothered to sort the items inside the folder into categories; maybe you didn’t. If sorting is not your thing, pay someone else to do it. Again, a tax professional will be pleased to find all your records in one folder, even if jumbled up.
Then there’s the multiple folder method, or the expanding file box method. Of the two, the file box method is best, because it keeps the records in one place. (Notice a theme here?) Multiple file folders have a way of wandering off and becoming invisible just when you need them.
I recently met someone who kept tax records in a three-ring binder. The binder was impressive but incomplete; she had failed to gather all the documents relating to her taxes. One of my co-volunteers complimented her on her record-keeping method, but I was not so inclined. The time she had spent getting the binder, punching the holes, and placing the papers inside would have been better used finding her pertinent documents. The binder made this person look organized, but that was an illusion.
Then there’s the “entering it into a software program” method. Unfortunately, many people I know have been suckered into thinking this is easier than just sorting the actual physical receipts. They usually confess (with surprise) to being behind on entering the data. They have a pile of papers next to their computer, and other piles elsewhere. They are convinced that this is the easiest method, but somehow, they’re never caught up. Record-keeping methods only work if you follow through and use them.
Some people keep ledgers. My mother recorded every single household expense. Reading her old ledgers is like reading the story of my family’s life, since every purchase is entered down to a candy bar. Most of us aren’t that careful. I used to keep a kind of ledger but nowhere near as complete. Mine consisted of two photocopied pages per month with each possible business expense being given a column. After a while I realized that most of the columns were empty most of the year. When I did have entries for them, there wasn’t enough space for the details. Travel was the problem. I didn’t travel often on business, but when I did, of course there were numerous tax deductible events during each trip. My one box per day per category record didn’t work for those. On the plus side, I could see at a glance exactly what my most frequent business expenses were, and adding them up was a mere matter of totaling each column.
I now do a combination method. I keep four file folders, labeled Bills, Tax Deductible, Banking, and Medical. Receipts are tossed into these files as I get them. Every few months, I sort the two biggest and messiest folders, Bills and Tax Deductible. (I never sort the Medical or Banking folders unless there’s a problem requiring research.) Sorting the contents of the folders takes maybe half an hour if I’m really stretching it out. Some other day I enter the items from the Tax Deductible folder into a computer spreadsheet. This takes another half an hour or so, depending on whether I have pre-sorted each category of expense and done it by date. If not, more time is consumed, but not much. This hybrid method works for me. I can be messy with my receipts when that’s my mood. And I can be precise with them when I’m feeling like handling details. I also let the computer do the addition.
Consider whether your current method of record-keeping is a good fit. Are you always losing papers, or behind on entering data, or finding that you have no place to put some category of receipt? These problems can be solved by choosing or creating the right record-keeping method. Just make sure you get a large enough shoebox.
1. Shoebox
2. File folder
3. Multiple file folders
4. Expanding file box
5. Ring binder
6. Software program
7. Physical ledger
8. Hybrid
For some of you, record-keeping will consist of throwing receipts in a shoebox. This is perfectly acceptable as long as it doesn’t drive you (or your spouse) crazy. Just don’t attempt to deliver that shoebox to a volunteer tax preparer. And don’t expect that a paid accountant will sort the contents of your shoebox for free. Or in April. Still, if everything is in one place, you have won more than half the battle of record-keeping. Really.
One step up from the shoebox method is the file folder. Same principle: it’s all in one place. Maybe you bothered to sort the items inside the folder into categories; maybe you didn’t. If sorting is not your thing, pay someone else to do it. Again, a tax professional will be pleased to find all your records in one folder, even if jumbled up.
Then there’s the multiple folder method, or the expanding file box method. Of the two, the file box method is best, because it keeps the records in one place. (Notice a theme here?) Multiple file folders have a way of wandering off and becoming invisible just when you need them.
I recently met someone who kept tax records in a three-ring binder. The binder was impressive but incomplete; she had failed to gather all the documents relating to her taxes. One of my co-volunteers complimented her on her record-keeping method, but I was not so inclined. The time she had spent getting the binder, punching the holes, and placing the papers inside would have been better used finding her pertinent documents. The binder made this person look organized, but that was an illusion.
Then there’s the “entering it into a software program” method. Unfortunately, many people I know have been suckered into thinking this is easier than just sorting the actual physical receipts. They usually confess (with surprise) to being behind on entering the data. They have a pile of papers next to their computer, and other piles elsewhere. They are convinced that this is the easiest method, but somehow, they’re never caught up. Record-keeping methods only work if you follow through and use them.
Some people keep ledgers. My mother recorded every single household expense. Reading her old ledgers is like reading the story of my family’s life, since every purchase is entered down to a candy bar. Most of us aren’t that careful. I used to keep a kind of ledger but nowhere near as complete. Mine consisted of two photocopied pages per month with each possible business expense being given a column. After a while I realized that most of the columns were empty most of the year. When I did have entries for them, there wasn’t enough space for the details. Travel was the problem. I didn’t travel often on business, but when I did, of course there were numerous tax deductible events during each trip. My one box per day per category record didn’t work for those. On the plus side, I could see at a glance exactly what my most frequent business expenses were, and adding them up was a mere matter of totaling each column.
I now do a combination method. I keep four file folders, labeled Bills, Tax Deductible, Banking, and Medical. Receipts are tossed into these files as I get them. Every few months, I sort the two biggest and messiest folders, Bills and Tax Deductible. (I never sort the Medical or Banking folders unless there’s a problem requiring research.) Sorting the contents of the folders takes maybe half an hour if I’m really stretching it out. Some other day I enter the items from the Tax Deductible folder into a computer spreadsheet. This takes another half an hour or so, depending on whether I have pre-sorted each category of expense and done it by date. If not, more time is consumed, but not much. This hybrid method works for me. I can be messy with my receipts when that’s my mood. And I can be precise with them when I’m feeling like handling details. I also let the computer do the addition.
Consider whether your current method of record-keeping is a good fit. Are you always losing papers, or behind on entering data, or finding that you have no place to put some category of receipt? These problems can be solved by choosing or creating the right record-keeping method. Just make sure you get a large enough shoebox.
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 clichés, 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.
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 clichés, 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.
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.
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.
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?
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?
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