You can be the Joneses of the future!
Henry K. Hebeler, 4/8/09
For more information see www.analyzenow.com
Unfortunately, too many people have been trying to keep up with the Joneses. The resultant consumerism temporarily boosted the economy to unsustainable levels, but left people with far too little savings and even more debt. Seventy percent of Americans have credit card debt, the absolute the worst kind of debt you can have—except perhaps for an option ARM. That’s an adjustable rate mortgage that lets you pay only as much as you want, continues to add any principal and interest shortfall to the debt, and then comes back with a vengeance and adjusts the interest rate to an intolerable value. So you lose your home. At least the credit card debt has no collateral so you may be able to keep your home. Credit card interest rates are so high that the lenders easily make back what people owe even if they get behind on the credit card payments.
Personal savings are far too low even to help in emergencies much less help in retirement. It takes between $150,000 and $200,000 for each $10,000 of annual pre tax retirement income. That’s if wisely invested and there is no recession early in retirement. If returns only equal inflation, it may take $300,000 savings to get that much retirement income. Those who are between 55 and 65 have an average of only about $50 thousand in their 401(k)s. At best, that will only provide about $3,000 a year (inflation adjusted) if none has to be used for emergencies.
People have a lot of savings shortfalls as a consequence of reduced savings rates that began in 1985 and gradually went down to zero almost twenty years later. To recoup the savings losses of the past 20 years and return to historical savings rates, it would take over 20% savings rate at 8% return for the next 20 years! Only in World War II did people save more than 20% of their disposable income. This was in large part because people had nothing to spend it on during the war, and it was patriotic to invest in Savings Bonds. Even school children saved their quarters for 25 cent savings stamps. But the last twenty years have been far different. The government and financial industry pushed people to spend saying that new savings weren’t necessary because of huge increase in stock values, home values and forthcoming large inheritances. (For more details, see Getting Started in a Financially Secure Retirement, John Wiley & Sons, 2007.)
Actually savings rates should be higher than the long-term historical saving rate of 9%. That’s because employers have been abandoning traditional pensions in favor of plans that require the employees to save for their retirement on their own. Instead employers are substituting 401(k)s, cash-balance plans, IRAs and the like for traditional pensions. It used to be that Social Security, a pension and personal savings provided the three legs that would support retirement. No more. Only 17% of firms in the private sector provide pensions now compared with 40% in 1975. The exceptions are government employees, almost all of which still get a pension and have a savings plan too. Further, most government employees have a cost-of-living adjustment for their pensions, something that’s unheard of in the private sector—but funded with our taxes—as are retirement health insurance benefits that are not available in the private sector.
We’ll have to return to some of the more frugal habits of the past. Unlike many children today, I worked in a factory in summers between high school years and in engineering related jobs between college years. Like all my college classmates, we were on very tight budgets. My transportation to school was a 24 hour train ride during which I often stood the last eight hours. I didn’t have a car until I earned my first college degree. I was in a college living group with 29 other people. We had only two phones in the house—each took a quarter to make a call—and the phones were seldom used. No television either. Early in my career, I taught after-hours classes in aerodynamics and aeroelasticity to Boeing workers to earn some extra cash for a down payment on our first house. And for most of my working career, I bought used automobiles until I retired after 33 years at Boeing.
My best automobile investment was an old car I bought when I was 39 years old. I paid $40 for it and got a case of oil, less one can, thrown into the deal. I drove the car five days a week for a year to classes in Boston. (Other Boston drivers gave it wide berth because it had a number of dents already.) Then I sold it for $50 and tossed in the remaining case of oil, less two cans. That’s more than a 25% return on my investment. Now we’re lucky if we don’t lose 25% of the value of a car in the first year.
My grandfather was a union organizer and lived in a Newark tenement. My father and his brother heard so many things about the high wages earned by capitalists that they decided being a capitalist must be better than being in a union employee. They left home to start their own business with very little money. They slept in the same bed in a boarding house for a couple of years to save the necessary funds. And they succeeded wonderfully. My father golfed till he was 95, got his driver’s license renewed at 95 for three more years (after the 3rd try), and lived to 96. My doctor says I may outlive him.
We have a friend now in her 90s who, twenty years ago, recognized that she did not have enough savings to support her very long if she kept spending at the same rate. She went to a second hand book store and found a book on how to make 365 kids of Jell-O—and made that a major element in her diet. She turned down the heat and wore sweaters to keep warm. She used a marking pen to make a line in the bath tub so that she would not use any more water for bathing than an amount below the line. She started a vegetable garden and began canning, just as her mother did seventy years earlier. The only lights in her house are in the particular room she occupies at the time. I think she’ll be financially all right even after she passes the 100 year mark—as I’m sure she will.
My barber married a man who had lots of credit card debt, so she cut up all of the cards and put him on a “credit card diet.” That meant eating only two meals a day until the debts were paid. They now lead a much more comfortable life. She wisely saves the money she will need for large ticket items before purchasing anything so she doesn’t have to buy things on credit.
There are lots of things we, as individuals, can do to protect ourselves from everything but complete collapse of the economy. You don’t have to try and be like the Joneses of the past. You can save money now and be the models that the debt laden people around you will envy in the future.
Here is a list of savings ideas that might be helpful. Hardly any are easy, and some take a really tough constitution—like turning down your adult children in need of financial support. Retirees chance of financial recovery is between slim and naught if they eat into savings prematurely, while younger people can suffer through some pretty awful financial situations and have time enough to save for many years.
So give some serious considerations to these money-savings possibilities:
· Reduce personal debts, especially credit card debts. Eliminating a 10% interest rate is equivalent to saving in an account earning 10%, and that’s extremely difficult to do, particularly on an after-tax basis.
· Buy items with cash, not with loans.
· Consider refinancing your mortgage if interest rates are now significantly lower.
· Agree on a lower family budget and stay within it.
· Increase savings contributions.
· Maximize employee savings plans contributions.
· Set up an automatic savings deposit plan with your bank.
· Sell things you don’t really need any more on the Net, garage sales or elsewhere.
· Use FDIC insured accounts for immediate cash needs.
· Buy bonds, not bond funds. (Increasing interest rates will destroy bond fund principal.)
· Consider Savings I bonds for the entire family. They are available from local banks and treasurydirect.gov.
· Invest in certificates of deposits (CDs). (Available from many sources. See bankrate.com)
· Buy Treasury Inflation Protected Securities (TIPS) in self-directed IRAs or from treasurydirect.gov.
· Change to low-turnover mutual funds with low upfront costs, low management fees and no kickbacks to advisors. Major index funds are good candidates.
· Use financial advisors with low fees and no commissions.
· Reduce taxes using Roths, media tax savings ideas or suggestions from your financial advisor.
· Use tax-exempt funds or tax managed funds if in higher tax brackets.
· Downsize your home. If you occasionally need room for extra guests, reserve a room for them at a local motel.
· Rent instead of buying a home. It’s often the best financial solution and provides mobility to move to jobs elsewhere in the country.
· Rent out a room in your house, or stay with relatives or friends.
· Paint your house rather than hiring a painter.
· Adult children staying with you? Charge them for room and board.
· Grow your own vegetables.
· Buy food in bulk if you can use it all before it spoils.
· Stop eating at restaurants.
· Get a second career as backup. Broaden skills. Perhaps teach, start delivery service, tutor, etc.
· Rule out cars, cell phones or IPods for children--or even for yourselves.
· Make do with old computers, and software. Use no downloads requiring payments.
· May be able to get lower cost TV, internet and telephone services.
· Turn down the thermostat and wear sweaters.
· Turn off lights when not needed and use lower wattage bulbs where reasonable.
· Mend old clothes, or even take on sewing jobs for a little extra cash.
· Buy clothes from thrift and consignment-sales stores.
· See about part or full time employment for an unemployed spouse.
· Play in a band or teach music in addition to your regular job.
· Encourage teenagers to work on weekends.
· Younger children can earn money by offering to weed, shine shoes, wash cars, dog sitting, etc.
· Buy used economical small cars and rent a larger vehicle for the few days a year that may be necessary.
· Rent little used tools instead of buying them.
· Use your capabilities to exchange with someone who can help you do some particular task such as help your barber with her computer in exchange for haircuts.
· Older people may not need life insurance or long-term-care insurance.
· And comparison shop for any kind of insurance. You may find much lower rates elsewhere.
One of the most important personal items: Eat only healthy foods, exercise and keep weight under control. Take care of your teeth, eyes and ears. Neither Medicare nor most Medigap insurance policies cover teeth, sight and hearing. Good health is the best medical and long-term-care insurance you can buy.