April 30, 2010

Best of blog posts for week of April 16th

JD at Get Rich Slowly talks about  Money Myths and the Importance of Thinking for Yourself  In one point he challenges the idea that money can't make you happy.   He also found out a study about credit card spending often sited by Dave Ramsey doesn't actually exist.

fivecentnickel has a creative idea to Reset Your Investment Cost Basis With Charitable Donations
Donating appreciated stock to a charity to avoid the taxes is a trick I've heard of before.  But this idea is a little different that uses the charity donation trick to reset your cost basis.

Some notable news articles:

US autos top Asians
Best Places for Business and Careers

Remodel or Buy A Different House

My wife and myself have discussed doing various interior and exterior improvements to our home.   I bought our current home close to 11 years ago.   The house is big enough for my wife and myself and it has room to grow when we have children.   But the house is now 25 years old and the interior design and fixtures are starting to get dated.   (Remember the 80's?)   The kitchen and bathrooms could definitely use some updating.   Some of the other trim and fixtures in the home could be replaced as well to better suit our tastes. While our home is certainly livable as it is, improving the home is a priority for us over spending on things like new cars or expensive vacations.



We could do inexpensive improvements like repainting our kitchen cabinets and relatively cheaper floor options.  This would let us improve things for a reasonable expense.  But it would be surface improvements and still leave us with 25 year old drawers and hardware.   If we were on a tighter budget and wanted to make our home look nicer then this would be a good option.

If we want to stay in the home for a long time and want things to be nice then it would make sense to go ahead and spend the money up front and do a full remodel to give us the quality and style we want.  This would mean replacing kitchen cabinetry entirely and possibly knocking down a wall here and there.

This is what leads me to the question:   Should we spend the money to do complete remodeling or should we maybe just buy a completely different house that already has features to our liking?  

This was an interesting idea we came across and I'm not sure why we didn't think of this option before.  I'm going to examine it from at least a theoretical viewpoint.   I'm going to set aside the idea of saving money on remodeling in various ways like DIY and look at hiring professional contractors.  I also don't really know what remodeling would actually cost us so I'm just talking theoretical ballpark estimate at this point.   I also don't really know what kind of home we could buy that would have the features we'd want and what exactly it would cost.   A cursory look through homes for sale in our city on Realtor.com makes me think finding a home with the features we'd want wouldn't be very easy.   But I wanted to look at the idea of comparing the finances of major interior remodeling versus simply buying a different house as a concept.   It could turn out that remodeling is usually the best option or not. 

If we remodel the kitchen and both bathrooms then it could easily cost $20,000.   I'll go ahead and multiply that by 2 since I seem to underestimate home improvement projects by half so we might end up spending something like $40,000 to do all the remodeling we'd want.    The house is currently worth something around $210,000 to $220,000.   That would mean spending about 20% of the value of the home in remodeling the kitchen and bathrooms.   This is a very rough estimate without high accuracy.  I honestly don't know if fully remodeling would cost $20,000 or $60,000.   But I'm picking a number for estimating purposes.

When you remodel a house you don't retain 100% of the money you spent on remodeling in the value of the home.  If you remodel a house properly then you will see some of that money spent on improvements increase your equity but generally only a fraction.  Remodeling magazine does a cost versus value report on how much of your remodeling expenses you retain in home value.   Generally you're likely to see 70% of your remodeling spending retained in equity.     If I use that 70% number as a rough gauge then if we were to spend $40,000 on our home we'd retain about $28,000 of that in home value.   I could guesstimate that spending $40,000 in remodeling would raise the value of our home to something around $238,000 to $248,000.   The 70% figure is also a rough general estimate.   That return rate could vary considerably.

So lets look at theoretical comparison of two feasible options:

Option 1: Start with our home worth $220,000, a bankroll of $40,000 in cash and a $70,000 mortgage.  Spend $40,000 on remodeling.   Retain 70% of spending for $28,000 increase.  Home now worth  $248,000.   Equity of $178,000 and a mortgage of about $70,000

Option 2 : Start with our home worth $220,000, a bankroll of $40,000 in cash and a $70,000 mortgage.  Sell current home for $220,000 and pay Realtor 5% or $11,000 in commission and cash out equity of $139,000.  Leaving us now with $179,000 in cash.   Buy another home for $241,000 and pay closing costs of 3% or $7,200.  Take out a $70,000 mortgage.   We'd end up with equity of $171,000 and a mortgage of $70,000.

Looking at it this way, financially option 2 doesn't seem like a good idea at all.  Since you're having to pay the Realtor commission and the closing costs to buy the new home and finance a new loan that adds up to quite a bit of money.   But we've got some variables that are mostly guesswork.   If it costs $60,000 to remodel instead of $40,000 then that changes the picture.  If the remodeling cost is $40,000 but had a 50% return then the equity would be $170,000 at the end about the same as buying a different house.    On the other hand I don't know if I can get a house that has everything we want for $220,000.   Buying a different house that is in the condition and style we'd want for the right price might be hard.   There are a lot of unknown variables so how it works out exactly is very undetermined.

Option 1 has benefits of giving us exactly the stuff we want.  So if we want cherry wood cabinets in the kitchen and quartz counter tops then we can get that and get exactly the colors and options we want.   Option 1 has a lot of hassle involved in shopping for stuff, finding good contractors, getting quotes and getting the work done.   We also don't have the opportunity to find a bigger house or move to a better school district.

Option 2 has the benefit of possibly getting more for our money and completely avoiding hassle of remodeling work.   Option 2 has the downside of having to sell a home and buy another then move from our home to another house. 

Overall I think remodeling our home a bit is probably the better option financially assuming that is the only goal in mind.   It doesn't seem we'd be able to find another house with the features we want very easily and the transaction costs of selling our existing home and buying another home would not make that option very feasible.

April 29, 2010

Quick Look at Franchises

Little while ago I ran across this article Most Popular Franchises. Its an interesting piece and talks about the popular franchises and gives some financial data on their franchise fee rates and the default rates.   It got me thinking about opening a franchises as a business.


I've often thought a franchise might be a good way to start up a business.   A franchise has some strong pluses.   Just off the top of my head : There is an established national brand name.   The franchise company will help you with training and developed processes.   Basically someone else has already made the business as a whole successful and your part is simply running a new location for the business and sharing the profits from doing so.   I like the franchise model in a lot of ways.  

The down sides of a franchise are there as well though.  You have to pay someone else a fee to start the business.   You have to run the business according to their rules and policies.  The franchise may be required to buy supplies from the company only and pay relatively higher prices for them.

There is a ton of information on franchises on the Entrepreneur magazine website.   They have a whole section related to franchisees.

In 10 reasons to buy a franchise  they talk about the franchise business being a proven formula, giving better access to financing from the franchisor and SBA and having higher rates of success.

They also have articles with the pros of franchises and the cons of franchises.  For the pros they list collective buying power, sales and marketing assistance and national and local advertising.   For the cons they talk about things like loss of control, being locked into a contract and extra costs.

I think another good starting point would be the article Are you suited to be a Franchisee?

I've only just touched on the topic of franchises here and there is a lot more information out there.

April 28, 2010

Broken Down Lawnmower & Hassle Free Black and Decker service

The bad news:  My lawnmower up and stopped working all the sudden recently.  It is a cordless electric mower (Black & Decker model CMM1200) and it simply stopped working abruptly.  I first thought that the battery might have just died, so I connected the charger to it for a long while but that didn't help.

The good news: Luckily for me the 2 year warranty still had a few days in it so I was able to get it repaired entirely free of charge.  YAY.

The warranty and repair process with Black and Decker was very easy and hassle free.   My wife took the mower to the repair center and dropped it off.   They didn't require a receipt or give us any hassle about the repair.   They called us a few days later to tell us the mower was fixed and ready for pick up.   Simple as that. 

Newer versions of the cordless mower from B&D can be had for about $350 nowadays and I was afraid that it would be entirely dead and I'd have to replace it.   I could get a normal electric mower with a cord for much less, probably around $150 to $200.   But I really enjoy having a cordless electric lawnmower since I don't have to fight the electric cord while mowing the lawn.  I figure that not having to deal with the extension cord saves me 10-20 minutes and quite a bit of annoying hassle while mowing my fairly small lawn.   That is absolutely worth the extra cost of a cordless model to me.   I also generally like electrics since they save money on gas and don't spew out as much pollution.

My previous electric lawnmower had lived around 10 years and was still working fine when I gave it to a relative.    This one worked perfectly for nearly 2 years without any issues.   Overall I've had much less problems with the electric mowers that I've owned than the gas powered mowers that I used growing up.   The gas powered mowers have many more moving parts that could potentially fail.   The electric mowers are essentially little more than a basic electric motor which is not as prone to failure.   Of course this is more my opinion based more on personal experiences.   I'm not sure what the exact failure rates are for electric versus gas mowers but my opinion is electrics are more reliable.

So while I was momentarily annoyed that my mower broke down I ended up with a very positive experience with the Black and Decker warranty & repair service.   I give Black and Decker a thumbs up.

April 27, 2010

April 26, 2010

Our New 4 Legged Money Pit

Recently my wife and I adopted a dog.    She is an older small dog whos owner was no longer able to care for her.  So far we've fairly quickly spent north of $2000 on the dog in the first few weeks.      I jokingly call the dog a "money pit" but I don't have that kind of negative feeling about it nor do I feel that the money we spent is wasted.  A large part of the expense has been vet bills.   I talked a while ago about what pets cost.   So it shouldn't have come as any surprise to me that the dog might end up being expensive.  

Here is what we've spent thus far...

Vet Bills
We've had vet bills $160, $350 and another for over $1100.    The first bill was just a routine checkup when we first got the dog.   But then she got sick and we had to get her tested and then some minor surgery done.  No need to worry, it wasn't anything too serious (teeth problems) and she seems to have recovered fine.   Hopefully the dog's major health problems are over both for her comfort and for our financial well being.  

Dog house & "stuff"
We spent $250 on a carrier and dog house.   We also spent about $100 on other miscellaneous dog stuff.   We have a couple bills from Petco and Petsmart on dog stuff.   I know we bought leashes, dishes, dog bed, a dog toy, and I'm sure some other stuff.  Somehow that all added up to $100.   I think when we talked about getting the dog I somehow just discarded thoughts of having to buy much "stuff". Maybe I assumed we woulnd't really need any of it.   But then when we got the dog I found out we did actually end up having a need for a bunch of "stuff".

Boarding
Then there is the $150 we spent on boarding her when we went out of town for a long weekend.   Boarding the dog is one of the expenses that I actually thought about before we adopted her.   We can generally leave our cat at home without worrying about her since she has a litter box. But the dog has to be taken outside so we're looking at dog sitter or boarding. Then every time we go on vacation or are out of town we will have to pay for boarding or find a friend/relative to dog sit.

Food
We're spending about $15-$20 a month for food.   The food for the dog is actually not very expensive though it will add up.   She is a fairly small toy size dog so she doesn't eat all that much.   But we do have to buy her canned ground food since she is pretty old and has fairly bad teeth and can't handle dry dog food very well.

Expenses thus far total $2,130:
Vet = $1,610
Stuff = $350
Boarding = $150
Food = $20

Now over half of that is vet bills due to the dog getting sick and needing surgery.  If she hadn't gotten sick then we'd have spent only about $700.

A good chunk of our spending thus far is not ongoing costs and so our future expenses shouldn't be as bad.
Future annual expenses will probably run us around $750 to $900
Vet $200
Boarding $350-$500
Food $200

My wife and I had not really budgeted for the dog.   I don't know why we didn't think it through, but we didn't.   When I wrote about what pets cost I clearly recommended that people properly budget for a pet and I then totally failed to use my own advice.   I had in my mind a clear expectation that the dog would cost us a chunk of money but we didn't sit down and talk about the likely or potential costs. On the day we decided to adopt her I would have probably given a ballpark guess that she would end up costing us "a few hundred dollars a year" based on nothing more than my basic perception of the cost of animals.   I wouldn't say that getting the dog was a 'financial mistake' since we're able to handle the additional cost and we would have gotten the dog in any case.

The cost of a pet can easily add up and you really should make sure you budget for the expense before you get the pet.   I didn't take my own advice in this matter but we really should have.

April 25, 2010

Mortgage Rates by State or Metro from 1987 to 2010

HSH website has a Mortgage rate Trends and analysis tool which has lots of data on historical mortgage rates.  The data covers monthly data points from 1987 to 2010. They have info on 30 year fixed, 15 year fixed and ARM mortgage rates.   You can also look at the rates for individual states and even drill down to individual metro areas as well.   The data doesn't go back to 1987 for all areas.

So if you want to see how a 30 year fixed FHA mortgage compares to a 30 year 7/1 ARM in the Houston, Texas metro area from 1990 to 2000 then this tool will give you all the figures and plot a nice graph.

April 23, 2010

Best of blog posts for week of April 23rd

Bargaineering gives a tip for How to Read The Wall Street Journal for Free

Money Crashers discusses How To Get A Mortgage When You’re Self-Employed

Our 2009 Household Spending Summary

Here is a summary of our 2009 spending for various categories:


Home mortgage $14,864
Home improvement $10,437
Grocery / drugstore $8,551
Eating out $7,742
Utilities $3,432
Car, gas + insurance $3,131
Entertainment $2,943
Travel $2,206
Phone/net $2,118
Misc $1,833
Gifts $1,503
Clothes $927
TOTAL $59,686


Mortgage: The home mortgage figure includes the principal and interest payment as well as escrow account for property tax and home insurance.  This does not include extra principal payments we make above our mortgage payment.
Home improvement : was fairly high since we had our front lawn redone.

Grocery / drugstore: This is kind of a catch all for household spending including groceries and household items.  I put anything from the major department stores in there like Target or similar.   That category undoubtedly includes stray spending on clothing and other items.
Eating out : Fairly self explanatory and includes any restaurant bills.
Utilities: This includes electricity, water, garbage and home security bills.  The electricity is the biggest expense in this category.
Automotive expenses: This is auto insurance about $1600, gasoline about $1200 and any other car bills like repair or maintenance.
Entertainment:  This includes cable TV and any shows or sporting events we go to.
Travel: Any cost for travel including airfare, hotel and entertainment specific to travel.
Phone / net: This is our home phone bill, internet bill and cell phone bill. 
Misc: This is generally individual spending of myself or my wife that isn't in a our other major categories. 
Gifts: Money given to charities or friends.
Clothing: Most of our clothing costs.

I do not include spending specific to our rental properties in our household budget.  Those expenses are our rental expenses and I keep that stuff separate.

Here is how the spending looks graphically :


Most of our spending is by choice and conscious.   We are spending much less than we earn so I do not feel there is any problem with our spending level.    We could cut back on spending in most areas if we choose to.   Our home mortgage, utilities and auto expenses are generally fixed and we wouldn't be able to cut those areas much at all.   Our eating out, entertainment and travel are all luxury spending that we choose to spend on.  The grocery, drugstore, and misc. are a mixture of some required spending and some extra spending. We could cut back on grocery spending if we needed too but currently choose to spend how we do.

While I don't think we have over spending problems we should continue to watch our spending and make sure we aren't wasting money.   We should also do a better job of accounting for our general 'grocery / drugstore' category of spending.   That category is the third largest but I don't track the specifics of that spending very well at all.

April 22, 2010

Deciding When To Exercise Stock Options

I work at a high tech company and like many tech companies my employer has granted me stock options over the years.   With the stock market crashing in 2008 many of my options have been worthless for some time.  But now that the market has recovered significantly I find my options are "above water" again.

One of the toughest things about stock options for myself and many others is deciding when to exercise them.  In the past I've simply held on to the options until they expired and then I would exercise them shortly before that or let them expire if they were worthless.   This hasn't been a very good strategy for me thus far.

Right now my options are worth about $12,000.   If I had cashed in my options several years ago I would have pocketed about $20,000 more than they are worth today.   But I got greedy or simply timed it poorly and I hung on to the options and rode the tide of the stock market until it crashed again.   Hindsight is 20/20 and I don't expect to sell at the exact perfect moment to maximize my profit.

I need to have a plan to exercise the options once the price hits certain levels and try and ensure a certain amount of gain.   If I don't have a plan to exercise then I may miss peaks in the stock value or I may be tempted to wait too long for the stock to go up in value. 

Figure out realistic expectations for what the stock value may be over time. 

If the stock is trading at $10 today then it is probably not very realistic to think it will be $20 in a year.  But its relatively realistic to think it will hit $10.50 or $11.00 within 12 months.   I shouldn't sit around waiting for the stock value to double but should instead set a target price that is more realistic and settle for that profit level.   One simple way to estimate future value is to project a 10% annual growth.  With a $10 price today that would look like this:

2010 = $10.00
2011 = $11.00
2012 = $12.10
2013 = $13.31

If you have 1000 options that are at a grant price of $9 and they expire in 2012 then its not unrealistic for the stock to hit $12 before the options expire.   The options would be worth $1,000 if you exercised them today and if the stock did hit $12 then you could cash in for $3,000.   Based on this kind of expectation of the future stock value I could set an order to exercise the options at $12 and settle for that.   If the stock hits $12 before they expire in 2012 then I'll profit $3000.  If the stock never hits $12 then I can always sell them for market value shortly before they expire.

Cash in Higher value options sooner

I've got some options at a higher price and some at a lower price.   Using the example of the stock value at $10, say you've got some shares at $8 and another option at $9.   If the stock goes up to $12 then your shares at $8 are worth $4 each and the shares at $9 are worth $3 each.   You might be inclined to cash in the $8 shares first since they are worth more.  Instead I would prefer to hang on to the $8 shares since they are going to be "above water" longer in case the stock value happens to go down again.  If you're at $12 then the stock can either go up or down or stay the same.   If the stock goes up then both your $8 and $9 shares are going to go up equally.  If the stock stays at $12 then theres no difference..   But if the stock goes down then you could potentially hit the point that the stock goes to $9 and the $9 shares are effectively worthless, however your $8 shares would still be worth $1 each.

Exercise shares that expire soonest first

I've got shares that expire in 2012 and some others that expire in 2013.  It makes sense generally to exercise the older shares that expire in 2012 first.   If I exercise the 2013 shares first then that leaves me with the 2012 shares and only 2 years timeframe for the stock to potentially go up.   If you instead exercise the 2012 shares first then you're left with the 2013 shares that will last 3 years.   Thats another year of potential growth of the stock that you could stand to profit from.

Bottom line:   The key strategy that I think I'll use for deciding when to exercise my stock options is to set a target price based on a reasonable expectation of the stock price and then exercise once I hit that price.

April 21, 2010

Estimating my Pension Benefits from Work

My work has a pension fund that is based on cash contributions.   Its not the traditional style of pension but its not a 401k either.   Basically it works almost like a 401k that my employer runs for me.   They throw around 6% of my pay into an account every year and when I retire I get the money.    If I want I can take the money as a IRA rollover or I can get monthly payments.   I also do have a 401k that I can put my own money into but there is no match for the 401k since they have the cash pension fund.   Right now I have about ~$115,000 between the cash pension and the 401k.

The website for our retirement funds plan has a calculator that will let you project and estimate your benefits if you take monthly payments instead of a lump sum.   If I were to roll my 401k and cash pension into an annuity at retirement then I'd end up with monthly payments for life.  You can use the calculator to figure your income based on single life (just you) or joint and survivor (you plus spouse) benefits.

Assuming 3% annual pay increases, 6% contribution from work and 7% growth of investments then if I retire at age various and take benefits at various ages then the estimator says my monthly pension would be as follows:

Retire at age 51 and take benefits immediately:

 100% life and joint survivor  = $1,430
50% life and joint survivor = $1,554 ($777)

single life = $1,702

Retire at age 51 and take benefits age 55:

 100% life and joint survivor  = $1,998
50% life and joint survivor = $2,194 ($1,097)

single life = $2,432


Quit work at age 51 and take payment age 60:

100% life and joint survivor  = $3,081
50% life and joint survivor = $3,435 ($1,717)

single life = $3,881


Quit work at age 51 and take payment age 65:

100% life and joint survivor  = $4,853
50% life and joint survivor = $5,507 ($2,753)

single life = $6,366


Quit work at age 55 and take payment at 55:
 100% life and joint survivor  = $2,162
50% life and joint survivor = $2,374 ($1,187)

single life = $2,632


Quit work at age 55 and take payment at 60:
 100% life and joint survivor  = $3,335
50% life and joint survivor = $3,718 ($1,859)

single life = $4,200

Quit work at age 55 and take payment at 65:
 100% life and joint survivor  = $5,251
50% life and joint survivor = $5,960 ($2,980)

single life = $6,889

 Quit work at age 60 and take payment age 60:

100% life and joint survivor  = $3,601
50% life and joint survivor = $4,015 ($2,007)

single life = $4,536


Quit work at age 60 and take payment age 65:

100% life and joint survivor  = $5,671
50% life and joint survivor = $6,436 ($3,218)

single life = $7,440

I'm married and we'd probably want 100% survivor benefits.  If I focus on that amount then the estimated pension payout would be as follows: Age I retire on the left rows versus age I take benefits on the columns.



51 55 60 65
51 $1,430 $1,998 $3,081 $4,853
55 - $2,162 $3,335 $5,251
60 - - $3,601 $5,671


So for example if I were to retire at age 55 and take benefits at age 60 then I'd get $3,335 a month.  Of course the longer I work and the longer I wait to take benefits then the larger my pension payment will be.  

Bear in mind that these are just estimates and are assuming 3% pay growth, 6% employer contribution and 7% rate of return.  If I change any of those variables then the numbers will differ.   And the dollar values are not inflation adjusted so in 10, 15 or 20 years those payments will not have the buying power they do today.


Another option would be to take 15 or 10 year certain and continuous annuity payments.    That would basically mean they'd pay me equal monthly payments for 10 or 15 years and then stop.   This could be used as a strategy to bridge my income between early retirement and when I qualify for social security and IRA distributions.  If I quit work at 51 and immediately take 15 year continuous payments: $1,664  This would only be marginally more than taking 100% joint survivor payments for life so its not a very good options.

April 20, 2010

Undercover Boss is a 60 Minute Long Commercial

After the Super Bowl this year CBS premiered their new show Undercover Boss.   The show has had enough success that it has been renewed for a second season.   I'm not above admitting that I watch reality TV on occasion.  Undercover Boss looked pretty interesting so I decided to watch some episodes.   I quickly grew tired of it for a number of reasons.

First off, the show is a giant advertising billboard for the company featured each week.  They seem to say the name of the company a million times and show their company logo about 20 times a minute.   I wonder if the companies shown on the program pay them for 60 minutes of advertising time?   It should be worth a lot of money to get their company name and logo that much air time in front of millions of viewers.

The show has a formula that seemed pretty consistent for the episodes I saw.  Basically they show hard working employees who we are meant to identify with, they feature the CEO rewarding employees who deserve it and fixing things that need fixing, the CEO is made to look like a good guy who is down to earth and feels he must do the right things and they sprinkle in tons of positive comments about the company and their history.

There are  a couple scenes at the start of each episode.   First they show the boss at his home which is a nice house but not a giant mansion.   Or if it is a giant mansion then they may film it to down play how giant it is by showing a tight shot of the front door and parking the Lamborghini in back.  They also make a point of how the boss stays in a low budget hotel. Why do we need to know that he is staying in a low budget motel?   We don't really, it has nothing to do with anything.  But they need to point this out to us every show in order to underline how the CEO is not above staying in a Motel 6 or equivalent and emphasize how the CEO is not staying in the Ritz.   Staying in a low budget motel demonstrates that the CEO is just a regular guy at heart and not a 'Wall street fat cat'.

The bulk of the show is the part where the CEO goes into disguise to live among the average employees and find out what his actual employees actually do for the company.   They make the boss do a few different entry level style jobs.  Most of the work he does OK at, but its his first day so nobody can be really good.    The boss will fail to perform properly on at least one of the jobs.  Usually you'll have at least one of the people supervising the CEO will fire them or otherwise criticize their poor performance.   I guess this shows how the CEO humbles himself and learns how hard real work really is.  Regular people do hard jobs and the show is telling us all this fact. 

While the CEO is doing the jobs you get to meet all the regular people who work at the company.   The regular people seem to include someone with either cancer or kidney failure.   They include hard working average Joes who toil away at hard labor to support their families and might be an immigrant.   The workers also include talented people with special gifts.   When we meet all these people we get to identify with them and see how nice they are.   This tells us that the employees of the company in question are hard working and nice people that we can root for.    When the CEO meets these people he gets to reward them cause the CEO is a benevolent person.  All it took was a TV show for the CEO to grant boons on the common folk.

The CEO should find something wrong that they "just have to" fix.   This shows that the CEO isn't really aware of how things can be done wrong.   But of course if the CEO discovers something wrong then he will fix it cause he's a good guy at heart and wants to fix the wrongs of the world.  He often fixes this by calling someone on his cell phone while sitting in his SUV in the parking lot.  This shows us just how urgently he decides to treat the thing that has probably been broken for years and neglected by his entire organization until a film crew showed up.

At the end of the show have a staged little event where the CEO and a few dozen employees have a meeting.   The CEO makes a speech, they show clips from the show, employees cheer and laugh and a good time is had by all.

I have to give some credit to the ad wizards that came up with this one.   Wrapping corporate propaganda in a the guise of a television show and tricking us into thinking it is entertainment was a great idea.

April 19, 2010

Is UPS Driver a Good Job?

The article UPS Thinks Out of the Box on Driver Training from Wall Street Journal via Yahoo talks about UPS needing to hire 25,000 new drivers in the next few years.    The article says that their average annual pay for UPS drivers is $74,000.

I'm sure that some people are thinking to themselves that $74,000 to drive a brown truck sounds like a great wage.   I don't disagree with that but there are some things to take into consideration.

First of all that  $74,000 annual average figure is adding in overtime pay.   A little older article I found said that pay is $55,000 and can rise to $70,000 with overtime.   Given that I would estimate they are making about $27/hr and working 9-10 hr days to log around 400 overtime hours per year.  

Second the work can be heavily demanding.   UPS drivers have to carry heavy packages and must be in good physical shape.  Plus you have to be pretty skillful driver.  Driving a big truck around town all day is much harder than it looks.

Third point that is probably the biggest is that UPS drivers usually* don't walk into delivery truck jobs on day one.  You have to work your way up the ladder at UPS before you become a driver.   Generally people start as package handlers in UPS hub and then work their way up to driver.   Working as a package handler is a part time job for 3-5 hrs a day with pay rates around $8-10 per hour.   You may have to work as a handler for years before you get a shot at driving as a temporary driver during the busy Christmas season.   Working your way up to a good job isn't a bad thing.  But the real problem with this is that part time pay for $8-10/hr is not much to support yourself on initially.   And whats more, working as a package handler is extremely hard work.  The job consists of basically moving heavy boxes non stop for several hours.   The UPS.com site says: "This is a physical, fast-paced position that involves continual lifting, lowering and sliding packages that typically weigh 25 - 35 lbs. and may weigh up to 70 lbs."   Thats all they do is lift and move boxes.  Most people can not handle it.

If you are ok with working your way up for a few years, working very hard and putting in overtime during the busy season then working as a UPS driver could potentially be a very good job.

* edit : I added the word 'usually' there after comments from several readers.   My personal experience  at the UPS where I worked was that drivers had to work their way up from sorting jobs.  But that is not the case everywhere and other drivers are hired straight into driving positions.

April 18, 2010

Social Security Retirement Benefits Compared to Earning Levels

The other day I talked about how to do the full calculations to estimate your Social Security retirement benefits.  The retirement benefit amounts from SS are not a direct % of your income levels.  The benefit amount as a percent of your pre retirement earnings is higher for low income and lower for higher incomes.  In other words lower income people get a higher % of their income in benefits than do higher income earners.   The SS benefit is not a direct 1-to-1 slope of your wages, but you get 90% of your first bit of wages, 32% of the medium chunk and 15% of the top.   That creates a graph of varying slope.

Someone who made $24,000 before retirement may get a $867 monthly benefit which equates to 43% of pre-retirement earnings but someone who makes $72,000 a year before retiring may get about $1,752 in SS benefits which is 29% of their pre-retirement income.

I ran a bunch of trial numbers and made some charts below to demonstrate the rough relationship between wage levels and expected Social Security retirement benefits.  Note:  These figures are pretty rough and only based on estimates.   Your exact SS earnings will differ depending on your work history. 


Below is a chart of the estimated Social Security retirement benefit that you might earn given an average inflation adjusted lifetime monthly income level.



Note that this is not exactly the same things as estimating your SS benefit based on your current monthly income.   If you use the social security quick calculator to estimate the benefits then it will give you a bit different benefit estimate.   Generally the quick calculator seems to result in benefits around 20% less than I'm showing.

Below I show the results from plugging various income levels into the quick calculator.


The amount you get in benefits as a percentage of your pre-retirement wages goes down as your wages increase.  As I pointed out before someone making $24,000 gets about 43% and someone making $72,000 gets about 29%. 

The percentage of your pre-retirement monthly wages that you get in SS benefits looks like this:



If you make a relatively low income level of less than $12000 a year then your SS benefits will replace close to 60% of your income.   If you have a much higher income level of over $100,000 then SS will give you around 24% of your pre-retirement income.

April 16, 2010

Best of blog posts for week of April 16th

Bargaineering gives a run down of  How Much is Minimum Wage?

Pop Economics asks Why do we work so much?

Sun's Financial Diary tells us How to Check Your Tax Refund

The Simple Dollar investigates the question  Does Rewashing Ziploc Bags Really Save You Money?

How Are Social Security Retirement Benefits Figured?

Once a year I get a Social Security Statement (like this) in the mail from the Social Security administration stating the earnings I've paid taxes on thus far and what my estimated benefits would be when I retire.  If you are a worker over 25 you should be getting one too.  My earnings is pretty straight forward and the amount of wages that I paid SS tax on.   How they obtain the estimate the social security retirement benefit is more of a mystery to me.  I know they figure your benefits somehow proportional to your taxed income but I don't know the formula.  I decided I'd find out how they calculate Social Security retirement benefits and it turns out its not too complicated.

The details of the benefit calculations are covered in Your Retirement Benefit: How it is Figured on the Social Security website. You could read that website and it does a pretty good job of explaining how they calculate the benefits.   I'll give my explanation and summary of the process below.

Before you even start to calculate your benefits you have to make sure you even qualify.   To qualify for SS you have to work 10 years at a minimum income level and contribute to SS to qualify for retirement benefits.   They track your qualifying work in quarters of 3 months so you can build up that 10 year total in 3+ month chunks rather than having to work full years.   The minimum income level to qualify for a quarter credit changes every year but currently for 2010 its at $1,120

Once you've qualified with the minimum 10 years of taxed work earnings then here is how they figure your benefits based on your earnings:


Income considered is capped at maximum SS contribution: If you make more than the maximum SS contribution in a given year than its capped at the maximum.   So for example if you did very well last year and made $130,000 then that is well above the $106,800 cap on income for SS.   So they would just use the $106,800 figure.

Older years Inflation adjusted: The income levels are adjusted for inflation using a table of index factors per year.   The older years are multiplied by higher numbers.  If you made $60,000 in 1995 then it would be multiplied by the index factor of 1.67 and count like $100,200 in todays dollars.  Therefore it would count higher than making $60,000 in 2009. 


Use your best 35 years of income: Your 35 highest years of income (after inflation adjustment) are used to figure your SS benefits.   If you contributed to SS for more than 35 years then the additional years are simply ignored.   They only consider your 35 years of highest income levels.   If you contribute for less than 35 years then the years you do contribute are averaged and the fewer years will lower your benefits.   For SS benefit purposes its better to work 35 years for 5% higher wages than work 45 years for 5% lower wages.

Averaged out to Monthly rate: Your average income level from your 35 highest income years is averaged to an average monthly income figure.  The incomes from your 35 highest years is divided by 420 to find the monthly figure. 

Benefits portion of monthly rate:  Your average monthly figure is used to figure your benefit rate.    The benefits are based on a portion of your monthly average. You get 90% of the first $761, 32% of the the amount between $761 and $4,586 and  15% of anything over $4,586.

Short summary of how to calculate benefits
1) Take your actual income per year and cap it at the maximum level.    
2) Adjust for inflation.  
3) Pick your 35 best years and add them up.
4) Divide that total by 420 to get an average monthly figure.    
5) Then you get 90% of the first  $761, 32% of the next $3,825 and 15% of the rest.

 
So those are the basics of how they figure your social security benefit.   Now keep in mind that this is the amount you get when you retire at the full retirement age (currently 66 years old).   If you retire at age 62 then you get 75% of the maximum benefit.   Your spouse may also be eligible for spousal benefits if they don't qualify for their own SS.






Lets look at some examples of how this all works.

Consider inflation.  

Lets say that you had these income levels for the given years:
1965 : $4,000
1970 : $4,000
1980 : $15,000
1990 : $15,000

The inflation adjustment factors are as follows 1965 : 8.87, 1970 : 6.68, 1980 : 3.3, 1990 : 1.97

So if you adjust your income for inflation you end up with :

1965 : $35,480
1970 : $26,720
1980 : $49,500
1990 : $29,550

While your actual income level in 1965 was only $4,000 and your 1990 income was $15,000 if you adjust these for inflation then your 1965 income is worth more.

Maximum earnings

Lets say you were on a fixed salary contract and made $85,000 every year from 2000 to 2005.   This would put you above the cap on maximum earnings for 2000 to 2002.  So for those 3 years you would only count the income up to the maximum cause thats all you actually paid SS tax on :



Max Actual Used
2000  $     76,200  $     85,000  $ 76,200
2001  $     80,400  $     85,000  $ 80,400
2002  $     84,900  $     85,000  $ 84,900
2003  $     87,000  $     85,000  $ 85,000
2004  $     87,900  $     85,000  $ 85,000
2005  $     90,000  $     85,000  $ 85,000



Implication of using top 35 years

The fact that they only consider the highest 35 years of income can mean a lot of different things to you. 

  • If you work most of your life at put in over 35 years then occasional down years due to unemployment or illness won't significantly impact your SS benefit.
  • You only have to work 35 years to max out your benefits.    But working more years at higher income will increase your benefit rates.
  • Once you've worked 35 years then adding additional years at lower income level won't change your SS benefit at all.  i.e. if you work 35 years and retire early then don't work extra for low wage just to keep SS higher.
  • If you work fewer than 35 years then the non working years will lower your average but as long as you work the 10 years minimum to qualify you'll get benefits.  Generally the more years you work from 10 to 35 then the more benefit you will get, but after 35 you get no further increase to benefits.

April 15, 2010

Tax Day FREEbies

Totally free stuff today April 15th tax day:

Starbucks : Free brewed coffee all day if you bring your own mug.

Cinnabon : 2 free bite sized cupcakes from 6pm to 8pm

Taco Del Mar:  Offering a free taco via a coupon they will send you if you register at their website

Maggie Moo's : Free icecream pizza slice from 3pm to 7pm

Taco, cup of coffee and 2 bite sized cupcakes sounds like a free meal to me.

Other discount offers :

Boston Market : Buy 1 Get 1 free coupon good April 15 Thursday to April 18 Sunday

P.F. Changs :  get 15% off food purchases

McCormick & Schmick's : $10.40 specials in the bar, plus a $10.40 gift certficate for future visit

About $4000 tax refund

Tax day is upon us.  Our tax refund is about $4,000 this year.   Thats combined refund between federal and state taxes.   Our effective federal tax rate is 13.9% which is a bit less than the 14.9% rate last year.   But I think this years rate includes the approximately $1200 we received in tax credit from air sealing and insulating our home.   We don't have any special goal for the tax refund in mind at this point.  It will go into our savings.

April 14, 2010

Money Can Buy You Happiness

"Money can't buy happiness"

I'm not sure who originally said it but that quote is pretty widely known.   It is presented and accepted like a straight forward truth.  In many ways it is.  Money alone certainly can't ensure your happiness and you can't go to the happiness store and purchase a box of joy with your cash.   Money can complicate your life and leave you less happy.   There are a lot of very rich and unhappy people in the world and many happy people with little money.  But if you have more money and are less happy because of it then thats not really money doing this to you its due to your reaction to and use of money.  Money is purely a tool which can be used for both positive and negative results.

Lets look at some more quotes that also seem like straight forward simple common sense.


Money can’t buy happiness, but neither can poverty.”
-- Leo Rosten

In response to money can't buy happiness: "Well, sure it can. That's just a lie we tell poor people to keep 'em from rioting."

-- Eva Longoria Parker as Gabrielle on Desperate Housewives

"Whoever said money can't buy happiness simply didn't know where to go shopping."
- Bo Derek

I can quite honestly say that if I had an extra million dollars today that I'm confident that this would lead to more happiness.  If anyone with a million dollars thinks money doesn't make them happy then I'd happily take the burden off their hands and test out my theory.    To me, money is about what you do with it.  

If I handed you $1,000 today how would that make you feel? :
A)  angry
B) no emotional reaction
C) happy

Most of us would answer C to this question right?   Extra money itself won't make you unhappy.   Doesn't it seem straight forward that extra money will increase your happiness?

If you are homeless and having trouble feeding yourself then you are undoubtedly going to be more happy if you had a $1,000,000 windfall.   If you are a working middle class family barely making ends meet in a cramped home you can barely afford with credit card debts then a $1,000,000 windfall should bring you increased happiness.    But both of these scenarios really depend on what you do with the money.   If the homeless person blows all their money on drugs or then they may not improve their happiness.   If the middle class family buys a big house and fancy cars and ends up simply increasing their lifestyle, working harder to maintain it and ultimately ending up in debt then this may not improve their overall happiness level.    The difference is all about what you do with your money.   If you make poor decisions with your money then this will not improve your life.   If you make good decisions with money then it should lead to higher quality of life and therefore higher happiness level.

If used properly, more money can buy you happiness.   The homeless person can buy himself food and get them a home to live in.   In that situation money when properly used will directly result in higher happiness.   Fed and sheltered people are happier than hungry people exposed to the elements.  Properly used the middle class family should be happier with more money.   They can pay off debts and afford a larger home.   A family without debt should be happier than a family with debt.   Large amounts of money can improve your happiness if you don't waste it.

Smaller incremental increases of money can also improve your happiness if used right.   An extra $100 a month could be used to buy you lawn maintenance service which will free an extra hour a week that can be used in the pursuit of something fun or relaxing.   You could use that $100 a month for a massage that might reduce your stress level and undoubtedly leave you more happy. 

I'm confident that money can bring increased happiness in a variety of ways as long as the money is used properly.   However the happiness from money is not permanent, is not guaranteed, depends on your individual priorities and has diminishing returns.   The amount of happiness you can buy is limited.


Happiness improvements aren't permanent.   Once you are used to having something it gets taken for granted.  If you never get massages then having an extra $100 for a monthly massage will make you happy, but after 20 years of monthly massages it will start to feel mundane.  

Money has diminishing returns.   The more money you get the less it matters.    Once you get past a certain standard of living then piling extra money on top of that really won't improve your happiness level much.  Giving $1,000,000 to a homeless person will impact their happiness significantly more than giving $1,000,000 to someone who is already a millionaire.  


Its what you DO with money that matters.   Simply having a pile of money in the bank won't automatically make you happy.  If all you do is sit on your money or use it to buy things you think you should buy cause your neighbors have them then this will not lead to happiness.  Wasting your money or spending it on the wrong things will not bring you happiness.

What makes YOU happy matters.   Simply having a pile of money in the bank actually might make you happy if thats the kind of thing that makes you happy.    A $16 soccer ball might make you happier than $16,000,000 in the bank if you really enjoy kicking around a soccer ball.    What makes YOU happy really matters.   Various things make people happy.  Some people might will a million dollar lottery and quit their job only to end up unhappy because they actually derived much joy in their life from working.  Other people may work 60 hours a week to get lots of money and end up very unhappy because the 60 hours of work is making them miserable.

Your expectations determine what you'll be happy with. If you're the spoiled child of a billionaire then your expectations are great, but if you spend your life in a mud hut in the jungle of a third world country then you will expect very little.   Your happiness level will be related to your expectations.

More money (or what you did to get it) can come with negative side effects.   We may make poor choices with extra money that cause us more headache than joy.   Often when we have more money it is due to working harder.   The extra  money won't make our life better enough to compensate for the extra work.   If a kid grows up only carrying about soccer and becomes a professional athlete with a multi-million dollar annual pay contract then that extra money may complicate their life and cause all sorts of hassle.  Having large sums of money can lead to lifestyle inflation which perpetuates over spending which returns someone to having the same financial problems due to lack of money they had in the first place.

If you aren't happy with what you have then having more likely won't make you happier.   If someone is not content or happy then having more won't make them happier.  It is possible that no amount of money will make some people any happier.   If you are never content with what you have then no matter what you have you'll never be content.

Many of our money mistakes are self inflicted.   More money won't magically make you good at handling your money.   Many lottery winners end up bankrupt.   This is not because the money itself caused them problems but because they make poor choices with the money.  If we keep making mistakes with money then extra money won't change anything.

Our expectations from money may be too high.   Most of our happiness is not about money or things.   For most people our happiness is from basic experiences like spending time with loved ones or accomplishing positive things in our lives.    If you are to list the top 5 things that make you happy in your life then I'd bet that most of those things are not particularly expensive.   If you focus your life on those 5 things then it is unlikely to cost a considerable amount of money.

Money can buy you happiness.   But happiness does not automatically come with money.  Improperly applied money, money wasted on things of little value to you, extra complications with money, mistakes made with money, and unrealistic expectations from money can all lead to decreased happiness.
 

April 13, 2010

How Much Do Mortgage Interest Rates Change Year to Year?

A while back I did a plot of the historical interest rates on 30 year mortgages from 1971 to 2008.   We can take that data to see how much the interest rates change from year to year.



Out of the 37 years the interest rate changed by less than 1% (plus or minus) 27 times.   The rate changed from 1% to 2% a total of 6 times.    Rates changed by over 2% only 4 times.   The majority of years rates grew or dropped by less than 1%.   Taking a little closer look at the data we see that most of the changes in the 1-2% range were 1.1%.    In 5 years there was less than 0.1% change in the interest rate or virtually no change.

You can notice a particularly bad stretch from 1977 to 1981 when interest rates went up considerably every year.   That 4 year period saw rates climb almost 8%.     The largest drop was in 1985 to 1987 when rates dropped 3.7%. 

Bottom Line :  Most of the time rates change less than 1% a year.   However some years rates went up or down almost as much as 3% in a single year.   Rates can climb as much as 8% over a 4 year period.

April 12, 2010

Repair or Replace? That is the Question

The air conditioning went out at one of our rentals the other day.   The AC unit is apparently around 15 years old now so it isn't going to last forever.    The bill to repair the AC is around $400.   We asked how much it would cost to replace the entire unit and they gave us a ballpark estimate of $4,000.  To repair the unit or replace it is a tough decision to make.   If we repair it we're gambling that it will last longer and not just break down again in 2 months with a bigger repair bill.   If we replace it we're shoveling out piles of money that may not be necessary. 

If it were a kitchen appliance or a cheaper item then I wouldn't even think of paying any sizable repair bill and we'd simply buy a new replacement.   Consumer Reports looked at the question for such things as kitchen appliances and their general advice is : "Replace any for which you paid less than $150 and nix any repair that costs more than half the price of a comparable new product"  That sounds like good advice and probably about how I'd handle something.   I'd also add that I'd replace any appliance that has broken down and already hit its expected life span.  If you add in potential energy savings costs of getting a more efficient modern appliance then that makes the decision to replace an old broken unit much easier.   For kitchen appliances the choice to repair or replace is fairly easy decision.


For a major system like AC or a furnace the question gets more difficult.   I'm hoping (fingers crossed) that the AC at the rental will be fine for a few more years.  Its difficult to bite the bullet and lay out $4,000 for a new unit.   That is a lot of money to spend up front.   Logically part of my mind is telling me that we should just go ahead and eat the cost and get a replacement.   We'll have to wait and see.



April 11, 2010

Airline Baggage Fees

My wife and I recently took a trip to visit relatives and we had our first introduction to airline baggage fees.   I knew in advance that airlines were charging fees but we decided to check bags anyway.  I understood that the airlines charge around $20 for a bag so I figured that wasn't a big deal.   Course for some reason I didn't realize they charge the fee both directions on a two way flight, for two people its twice as much and the actual fee was $25 so it ended up being $100 for the both of us round trip.    I really don't know why I didn't expect they'd charge the fee both directions, but they do.    That made my expected $50 actually $100.   A $100 fee for bags seems like a lot.  But if the tickets had been $50 extra each then I wouldn't have balked at that.

Generally I think if the airlines charge fees for ala carte extras then that is fine with me.  Checking bags is not necessary for everyone and I see no problem with the airline charging extra for it.   If you use it you pay and if you don't you save the money.   If you want to save the money then pack light, its really as simple as that with few exceptions.

It seems that almost all of the airlines are now charging fees for checked bags.    The site Airfarewatchdog has a summary list of arline bag fees.   Its a couple months out of date so it is probably best to check the airline directly for current fee rates.

The only thing I really don't like about this policy is that is if you do decide you want to check bags then it makes price comparison when shopping for airfare a little more difficult.   You can't just search for fares and compare the prices you also then have to find out the bag fees and add that on top to get the real price.

April 9, 2010

Best of blog posts for week of April 9th

A couple blogs caught on to a Wallet Pop article on costly bad habits.  Free Money Finance wrote 10 Bad Habits and What They Cost You and  Bad Money Finance has a different view and instead thinks Most Bad Habits are a Bargain

Bargaineering looks at the 2009 Richest Counties in America

At least a couple blogs discussed the topic of Spirit airlines charging for carry on bags.  Consumerism Commentary's take Spirit Airlines Now Charges for Carry-On Luggage  and Lazy Man and Money guest post Airline Ticket Pricing Flap: Extra Fees For Carry On Baggage?

FREE ream of paper at Staples good till April 10th

This coupon is good for a FREE ream of paper at Staples.   But hurry its only good through April 10th.

Found this one via Wisebread.

Safely Build Your Own Pension with Bonds and Annuities

After the recent plummet of the stock market many people close to retirement age found themselves without nearly enough money to retire as they had planned.   Most employees today have only a 401k and no traditional pension plan.   So their retirement is left primarily in their hands and depends on their investment choices.  There is no guarantee that your 401k will perform well enough to give you the money you need at retirement.  Personally I think it would be nice if every worker had a safe pension plan.  But you can effectively build your own pension using your 401k or IRA investments.   If you combine bonds and annuities then you can create a retirement savings plan that models a pension and is very safe with little risk of loss.   

Investing in Bonds

The bond investment is quite safe.  High credit rating AAA bonds only rarely default and investing in bond funds reduces the risk of loss from defaults considerably.   Historically AAA rated bonds returned 6% annually.   You don't have to worry about a recession or economic 'bubble' bursting and wiping out half of your retirement.   On the other hand the returns from bonds are lower than what you might expect from investing in stock market equities.

There are some downsides to investing in bonds that we should be aware of.   The return rates from bonds are not as high as stocks.   This is part of the trade off.  You won't have as much potential for gains but of course you won't have the high risks of losses from stocks.   Bond investments are not guaranteed and there is a chance a bond fund could be mismanaged or that direct bond investments can be defaulted on.  However the risk of loss in bonds is lower than the risk of loss in the stock market.

Save 15% of Your Income

In order for this strategy to work you will have to put away around 15% of your pre-tax income.  If you get 6% annual return on bonds and save 15% of your income then over 40 year working career it should add up to enough to replace around 50% of your working income.   Saving 15% of your income may sound like a lot.   Your employer 401k matching funds can help get you to the 15% mark.  For example if your employer matches up to 3% of your contribution then only 12% of the savings comes out of your own pocket.   Investing in a 401k also means this is pre-tax funds so it is less out of pocket than if you had paid taxes on it.


Buying Annuity at Retirement

A fixed immediate annuity is a contract between yourself and an insurance company.  You pay them a lump sum of money and they in turn agree to pay you fixed monthly payments for a given time period.   Traditional pensions work in a similar way.   By buying an annuity at retirement you take away the risk that you may outlive your retirement nest egg.

The major down side to annuities is that you end up with no money at the end of your life.   While your retirement income will be secure you will not retain any wealth to pass to heirs.  I would also be careful to research your annuity purchase to make sure you are not paying excessive fees and that the insurer is sound.

Hopefully Add some Social Security

The future of Social Security is uncertain for sure.   I for one do not think that SS is going away any time soon.   But it would be far too optimistic to assume it won't change to some degree in the future decades.  I would not depend on SS benefits to be unchanged in future years. 


Here is the basic outline of the plan: 

1. Save 15% of your take home pay in a tax sheltered account.
2. Invest your retirement funds in bond funds with an expected return of 6% annually.
3. When you retire use your retirement savings to purchase a lifetime annuity for guaranteed retirement income.

Following these 3 simple steps  should get you a retirement income of around 50-60% of your pre-retirement earning level.    If you add today's Social Security payment rates on top of that then you could expect it to contribute another 25-30% to get you up to 75-90% total.
 
Example :
Lets take a look at a family that has made median income level for the past 40 years and is about to retire.   If they had made median income and saved 15% of it in bonds and you made 6% annual average return on your money.   If you had done this for the past 40 years then you would have approximately $500,000 in your retirement account.   I got some quotes on annuities at Immediate Annuities.com.  A couple in their mid 60's could buy an annuity with that $500,000 to give them approximately $2,600 monthly income for the rest of their lives.   You can use the Quick Calculator at the Social Security benefit calculator page to estimate your SS income at retirement.   If your income is $58,000 at retirement then you would get a SS check of around $1,400 a month.  Between the annuity and the SS income you would be getting monthly income of $4,000.   This is 82% of your pre-retirement income.   That is a very health post retirement income level considering that SS portion is mostly untaxed and that you are not paying SS/medicare taxes.


Note:  The numbers I use are based on several variables and most of them are not set in stone.   I'm assuming you save starting in your 20's and many people don't get such an early start on retirement.  I'm assuming that bonds average 6% long term in the future based on historic trends but theres no guarantee on that. I'm also working with current annuity pay out rates which are also likely to vary in the future. 

Safety Comes at a Cost

The safety of this strategy comes at the cost of settling for a lower return on your investment.   Buying bonds has a much lower historical return than investing in the stock market.   If you have a low risk tolerance or want to ensure that you have at least a minimum level of retirement income then using bonds and annuities is one way to go.   But if you want to take on some risk then buying stocks or a mixture of bonds and stocks will very likely result in higher returns over a long period.

April 8, 2010

Illustration of Relationship Between Bond Rates and Bond Fund Values

A while back I talked about a Potential Trap in Bond Funds which is that if prevailing interest rates go up then the market value of a bond fund will go down.   This isn't exactly a secret but I don't know if its widely understood.   In the past couple of years a lot of money has flowed into bond funds as people fled the scary stock market into security of fixed investments.  Many of the people putting their investments into bond funds may assume their principal is safe, but they may be in for a shock.

To illustrate this phenomenon I figured I'd look at the history of the price of a bond fund and compare it to the history of bond yields.  I got historical data for The Bond Fund of America (ABNDX) from the American Funds website.    They have the NAV price there dating back to the 1970's.   Now keep in mind that this is not looking at the dividend payments from the fund, but just the market price of the fund shares.   I had researched historical yield rates for AAA bonds previously so I used that data.

Here is the chart showing how the change in AAA bond yields and the market value of the Bond Fund NAV change from year to year.  


As you can see the two generally move in opposite directions, when the blue line goes up the the pink lines goes down and vice versa.   As bond yields go up the market value of the bond fund goes down. 

Looking at a specific year, in 1999 AAA bonds yielded 6.2% average.   Then in 2000 the rates went up to 7.8%.   The Bond fund was selling for 13.65 in 1999 and then went down to 12.90 in 2000.

You might notice that the market value of the bond fund goes up or down a bit more even when bond interest rates don't change drastically.    I'm not certain of the cause for that but I might guess that it is due to other market conditions causing bond fund values to change.

April 7, 2010

Restaurant Email Club Example Savings

I was digging through my inbox lately to delete old emails and generally clean it up.    I came across a whole bunch of emails from Red Lobster.   I signed up for their emails a while back to see what kind of deals you can get from them.   I haven't actually taken advantage of any off their offers as the Red Lobster here is a ways away from our house.   But since I had a bunch of the emails dating back several months I decided to skim through them.   This serves as an example of how signing up for a restaurant email club can save you money.

Here is an example of the coupons & discount offers that I got from Red Lobster via their emails:

March 23: $4 off any two adult dinner entrees or $3 off any two adult lunch entrees
Jan 19th:  $4 off any two adult dinner entrees or $3 off any two adult lunch entrees
Jan 5 : 3 course meal for 2 for $29.99
Dec 10th : $4 off any two adult dinner entrees or $3 off any two adult lunch entrees
Nov 30th :  $5 off any two adult dinner entrees
Oct 6th :  $4 off any two adult dinner entrees or $3 off any two adult lunch entrees

The coupon deals generally last about 1 month.   If you signup for Red Lobster's email newsletter then  you will probably have a coupon sitting in your inbox at any given time good for $4-$5 off of a dinner.

Of course Red Lobster is not a very cheap place to eat.   Most of their entrees are in the $20-$30 range.  But if you're a fan of Red Lobster and or wanting to treat yourself to a nice dinner out then signing up for their emails would be a good way to cut $4-$5 off the bill.

How much you save at a restaurant will depend on the restaurant in question of course.  

April 6, 2010

Restaurant.com $25 certificate for $2 thru April 6th

Save 80% Off Restaurant.com $25 Gift Cert. orders. Use code CHOW and Pay $2 thru 4/6/10.


Info on Restaurant.com certificates:

I have used these at my steak house in the past and they worked great. Unfortunately though the steak house stopped taking the certificates. If you're interested in getting a certificate then first check the Restaurant.com site and see what restaurants in your area take the certificates. Second be sure to check out the rules and limitations for the gift certificates. For example a restaurant may require a minimum purchase of $50 to use the $25 certificate and a mandatory 18% gratuity. The rules differ for each restaurant so pay close attention to them. Lastly I wouldn't recommend buying them unless you plan to use them shortly. The restaurants that accept the certificates can change over time.


For more on saving money at restaurants see my older posts:

Inflation Around the World

Right now inflation in the USA is about 0%.    The BLS site says that for February 2010 the CPI (Consumer Price Index) which is our measure for inflation was "unchanged".  I was curious how inflation was looking in other nations around the world so I chose to find the inflation rates for the G20 nations.    
The G20 nations represents 80-85% of the world economy so looking at those 20 countries gives a quick picture of most of the world. 

I got inflation figures off of the site IndexMundi.   They have nations ranked by inflation  levels.   The inflation figures are rounded to whole percent numbers and are at least a month dated based on the source.  So this isn't meant to be a perfect, up to the minute measure of inflation but a general picture of inflationary trend this year versus last year for most of the worlds economy.

Here is the table showing the inflation rate for 2010 and 2009:



2010 2009
South Africa 7% 11%
Argentina* 6% 8%
Brazil 4% 6%
Mexico 5% 5%
Canada 0% 2%
United States -1% 4%
China -1% 6%
Japan -1% 1%
South Korea 3% 5%
India 11% 8%
Indonesia 5% 10%
Saudi Arabia 5% 10%
France 0% 3%
Germany 0% 3%
Italy 1% 3%
Russia 12% 14%
Turkey 7% 10%
United Kingdom 2% 4%
Australia 2% 4%


* Argentina's inflation rate is considered to "lack credibility".  An unofficial estimate of inflation rate is at 22%

As you can see a few countries have negative inflation or in other words they are seeing deflation. 

Almost every nation on the list has lower inflation in 2010 than 2009.   Only India has seen inflation increase.  Average inflation rate is 3.5% in 2010 and it was 6.2% in 2009.    Median rate is 3.0% in 2010 versus a 5.0% median in 2009.

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