Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, February 27, 2011

Words of Wisdom for the Young

As your children and grandchildren go off to college to start their careers, perhaps the best advice you could give them would be to seek their passion. Tell them not to focus on how much money they can make. Seek out a career doing what interests them the most.

John D. Rockefeller (1874-1960), an American oil magnate, once said: “I had no ambition to make a fortune. Mere money-making has never been my goal. I had an ambition to build.” And build he did. He founded Standard Oil Company and became the first American to be worth more than a billion dollars.

At a young age, Rockefeller tithed 10% of his earnings to his church. When he retired he founded a number of foundations focused on education, medicine and scientific research. He was the founder of the University of Chicago and Rockefeller University.

Those whose careers are in line with their passions, often seem to excel beyond their expectations. Even if they don’t make a lot of money, they are rewarded with the satisfaction they get from doing what they love.

And, they don’t necessarily have to accumulate a huge sum of money so that they can retire at age 65. Since they love what they do, they can continue on into “semi-retirement”, supplementing their savings, Social Security and pension earnings with income from the work they enjoy.

Surely other benefits abound from doing what you love. We have no evidence but expect that such careers are less stressful, more rewarding and likely promote better health.

And how often do we hear of someone who retires and turns their favorite hobby into a business that becomes successful beyond their wildest imagination?

Sure, money is great, but it’s only one means to achieving other goals. Those goals surely include doing things you enjoy, so why not choose a career focused on your passion?

Friday, February 25, 2011

Will Inflation Soon Be Rearing Its Ugly Head?

Senior citizens have been complaining that they haven’t received an increase in their Social Security checks for two years now. The good news is that it may not be too long before they will see an increase. The bad news is it may not be too long before they’ll receive an increase. Keep reading to see why it’s also bad news.

As most people know, Social Security increases are tied to the rate of inflation. Inflation has been very low the last two years, so there haven’t been any bumps in Social Security benefits. However, many feel that the way inflation is calculated for Social Security purposes, doesn’t accurately reflect the true impact of inflation. For example, used car prices are used instead of new car prices. Rental costs are used for housing instead of actual house prices. Therefore, Social Security increases may well not be in line with the actual increase in prices.

If inflation goes up enough in the near future, seniors may again see an increase in their Social Security Benefits. At the same time however, the cost of living may go up more than the increased benefits.

With all the money the government has been dumping into the economy, we’ve been worried that inflation would soon begin to take off. The unrest in the Middle East has caused turmoil in the stock market and we are reading every day about rising food prices.

Yet even with these signs of renewed inflation, there are some who are saying that inflation will be modest going forward. At the time of this writing (February 24, 2011), an article by David Wessel was published in the Wall Street Journal titled ‘Tinker Bell’ Economics Colors Inflation Predictions . The article discussed the theory that inflation is caused in part by the expectations people have about inflation. The article stated that Ben Bernanke, Federal Reserve Chairman, ”says that it’s hard to sustain inflation with so many people out of work and so many offices, stores and factories empty.” It went on to say that Mr. Bernanke sees no big rise in inflation expectations.

We hope Mr. Bernanke is right. If not, you might want to consider including Treasury Inflation Protected Securities (TIPS) and some commodities in your portfolio.

Wednesday, February 23, 2011

Aim To Be a Creator

We are hopefully coming out of one of the worst economic periods of all time. You’re feeling good. The stock market has rallied from its horrible lows. Your Social Security payments have been reduced by 2%. You’ve paid off your credit card debt and you’ve kept up on your house payments. What’s more, you didn’t get laid off during the crisis and you’ve even been working some overtime. You are confident your job is safe. After all, if you kept your job through the “Great Recession”, it must be safe. Right? Perhaps not.

A recent article in the Wall Street Journal provides reason for many to be concerned about the long-term viability of their jobs. The article, titled “Is Your Job an Endangered Species” by Andy Kessler (Thursday February 17, 2011) says that part of the reason we aren’t seeing the unemployment rate go down is a result of technology. He states: “Technology is eating jobs – and not just obvious ones like toll takers and phone operators. Lawyers and doctors are at risk, as well.”

That’s not to say that technology is the only reason for the lack of jobs. He notes that new regulations, payroll taxes and health-care costs make hiring people costly. However, new technology is rapidly replacing people. Among the professions with fewer jobs, Mr. Kessler noted were tellers, phone operators, stock brokers, stock traders and travel agents.

Mr. Kessler states that there are two types of workers in our economy: creators and servers. Creators, he says, are the ones who drive productivity. They are writing software, designing chips, doing research, inventing new products. Servers, service the creators. Many servers, he says will be replaced by machines and computers.

According to Mr. Kessler, even doctors and lawyers are at risk. Computer software that can scan legal documents and computer-aided diagnosis programs can do a lot of the work of lawyers and doctors much less expensively.

The bottom line is that unless you are a creator, your job may be at risk at some point down the road. You may want to give some thought to obtaining some new skills. We suggest you check out one of our past blogs titled: “Maybe It’s Time to Diversify Your Skills”, posted September 6th, 2010.

These days, it seems that nothing is a sure thing. The more you prepare for all contingencies, the better you’ll be able to sleep at night!

Sunday, February 20, 2011

Saving Enough for Retirement?

One of our recent blogs discussed how you could use the “Rule of 72” to get a better feeling about how much you’ll need for retirement (See “Rule of Thumb Puts Retirement Needs in Perspective”, February 4th, 2011).

At the present, inflation is fairly tame, but we are seeing signs of trouble ahead. Recent articles in the newspapers and on TV talk about rising food prices. The unrest in the Middle East raises the specter of higher gasoline prices. There were already predictions of $4.00 per gallon gas prices for this summer, prior to the upheaval in Egypt.

Our Rule of 72 shows that at 3% inflation, the cost of living will double in 24 years. If inflation is 4%, it will double in just 18 years. If you expect to live until your eighties and retire at 65, you can therefore expect to see a doubling in your cost of living during your retirement years.

It’s not surprising then that Saturday’s Wall Street Journal included an article about how tough it’s going to be for the Baby Boomers to have enough money for a comfortable retirement. In the article, titled “Retiring Boomers Find 401(k) Plans Fall Short” (E.S. Browning, Saturday/Sunday, February 19-20, 2011), Mr. Browning states: The median household headed by a person aged 60 to 62 with a 401(k) account, has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve…”

Mr. Browning went on to say that 60% of households nearing retirement age have 401(k) accounts. Those accounts he says: “represent the majority of most people’s savings”.

If you are like the typical person nearing retirement, you don’t have a lot of time to make up the difference. You may have to work longer, save more, spend less and plan on a more austere retirement budget. If you have a hobby that you can turn into a small business, you may be able to supplement your retirement income and perhaps make up for the likely shortfall. At the same tim,e you’ll be doing something you love, so it won’t really seem like work!

Most people, unfortunately, have no idea of what they will need to retire. If you haven’t done any planning, you should consider seeing a professional to help you make the most of what you have and the time left until retirement. One thing is quite certain. With the state of our economy and the prospect of higher prices, taxes and inflation, you need to increase your savings as much as possible to prepare for a comfortable retirement.

Thursday, February 17, 2011

A More Fiscally Conservative Mortgage Market Ahead?

There were a multitude of causes for the recent “Great Recession”. Many blame Wall Street and the big banks. They surely deserve some of the blame. One major contributor, however, was our Congress, seemingly bent on providing housing for low-income families. They pushed Fannie Mae and Freddie Mac to offer low-down-payment mortgages to people who really couldn’t afford the cost of a home. This helped fuel a runaway real estate market that was helped by low interest rates.

The new regulations passed last year by Congress were touted as a key to preventing another such crisis. Yet the issue of what to do about of Fannie and Freddie was glaringly unaddressed by the legislation. Taxpayers were on the hook to pay off the billions of dollars of debt the government had guaranteed for Fannie and Freddie.

We were delighted this last week to hear that the Obama administration was recommending that government support for Fannie and Freddie be discontinued. The administration recommended several alternatives that would take several years to complete.

We will likely see less government backing for mortgages, higher mortgage insurance premiums, tighter underwriting rules and higher equity requirements for borrowers. Thus, it will be more difficult to buy a home and we will see fewer homeowners in the future. While that may see like a bad thing, it’s better than the alternative of another recession and housing crisis.

We should also note that banks are already beginning to require that homeowners make larger down payments. An article by Mitra Kalita, titled “Banks Push Homebuyers to Put Down More Cash” (February 16th in the Wall Street Journal) pointed out that, as part of its recommended changes, the Obama administration has recommended a minimum 10% down payment for conventional loans. In the article, it was noted that last year the average down payment for conventional loans was actually 22%, more than double what it was three years ago.

The good news is that these changes will help prevent an over-zealous housing market in the future. The bad news, however, is that these changes will make it more costly and difficult to obtain a mortgage and will likely slow down the housing recovery that is so important to our economy.

Tuesday, February 15, 2011

More News on Long-Term Care Insurance

We just received an email from Bob Gertie, CEO of Advisor Insurance Resource (Advisor Insurance In his email, Bob discusses the fact that another long-term care insurance provider (Berkshire) is dropping out of the market at the end of 2011.

We have written in previous blogs that significant changes are taking place in the long-term care insurance industry. (See our blog titled: “Another Blow for Long-Term Care Insurance”, November 13, 2010). In that article we noted how MetLife was dropping out of the long-term care (LTC) insurance market and that John Hancock had recently increased prices of up to 40 percent on its policies.

Mr. Gertie noted that Berkshire has a very low market share in the industry and typically charged premiums that were often 30 percent higher than other insurers.

Mr. Gertie went on to say: “Berkshire’s decision solidifies my view that we will end up with only a few companies offering long-term care insurance in the future. He noted in his email that the largest providers of long-term care insurance were currently Genworth with 1,072,111 policies, John Hancock with 881,622 policies and Transamerica with 217,119 at the end of 2008.

He noted that it doesn’t make sense for companies with a low sales volume to stay in business due to the high expenses to meet new regulatory requirements, sales and marketing costs and new business underwriting costs.

The bottom line: if you decide to purchase a long-term care policy, make sure you buy it from one of the large providers. The smaller companies likely won’t be able to compete in the long run.

Sunday, February 13, 2011

More About the Risk of Bonds

In a recent blog titled “So You Think Bonds Are Safe?” (Posted Saturday, January 22, 2011, we discussed many of the risks associated with investing in bonds. We won’t repeat the points we made in that article but we wanted to follow up on a concept we introduced to our readers: the concept of a bond’s “duration”.

In the article we discussed at length the how interest rates affect bond prices. If interest rates go up, bond prices come down and vice versa. If you hold a bond to maturity, and the company that issued the bond stays in business, you’ll receive the principle value of the bond and generally won’t lose any money (You could lose money, if you bought the bond for more than the face value of the bond. This could happen, if at the time of your purchase, interest rates are lower than when the bond was issued.)

If you have invested in a bond fund, you will likely be invested in hundreds of bonds and can’t just hold on until all the bonds mature. After all, the fund manager will be buying and selling bonds as he sees fit. Whether you make a profit and how much you make will be affected by a measure called the fund’s “duration”.

Duration is a measure of a bond funds’ sensitivity to interest rates. The shorter the duration the less sensitive the bond funds’ net asset value is to an increase in interest rates. The longer the duration, the more sensitive it would be. Generally, a bond fund with a duration of 5.0 years would drop 5 percent in value for every 1 percent increase in interest rates. Vice versa, the fund will gain 5 percent in value for every 1 percent drop in interest rates.

How one calculates the duration of a bond or bond fund is beyond the scope of our blog. You don’t really need to know how to calculate a bond fund’s duration, however, since Morningstar® provides it for you online. If you go to, for example and look up JASBX, the Janus Short-Term Bond Fund and then click on the “Portfolio” tab, you will see its “Average Effective Duration,” listed on the right, is 1.8 years. Thus, if interest rates rise 1 percent, you can expect the net asset value of the fund to drop 1.8 percent.

With interest rates likely to increase in the coming years, an investor should be careful about buying bond funds with high durations.

Wednesday, February 9, 2011

Words of Wisdom from Mark Twain

We all know Mark Twain from his wonderful novels: The Adventures of Huckleberry Finn and The Adventures of Tom Sawyer. According to Wikipedia, he started out as an apprentice to a printer. He also became a typesetter and while doing so, he contributed articles to his older brother Orion’s newspaper. Following that, he became a riverboat captain and then went out West to join his brother. He tried gold mining but failed at that and then turned to journalism. He wrote travelogues and became famous with his story- The Celebrated Jumping Frog of Calaveras County.

He made a lot of money as a speaker and writer but was not a good businessman. He was eventually forced to declare bankruptcy. It seems ironic therefore, that he was known for his quotes about money and the markets. Our book of financial quotes that gives us ideas for our “Words of Wisdom” blogs, has no less than seven quotes from Mark Twain.

One of his quotes seems appropriate for the current times. Indeed, it’s actually appropriate for all times. He said: “there are two times in a man’s life when he should not speculate: when can’t afford to and when he can”.

Lately, the stock market has been on a tear. It’s tempting for all to jump on the bandwagon. We don’t want to be left behind. We don’t want to miss the party. But whether we are wealthy or whether we are struggling to make ends meet, we should pay heed to Twain’s advice. When a “can’t fail” hot asset comes along, should you invest a bit? Maybe. Invest a lot? Probably not. The wise investor, buys low and sells high. Twain should know. He learned the hard way.

Sunday, February 6, 2011

Market Back Over 12,000 --- Time to Relax?

With the Dow Jones Industrial Average now over 12,000 and many talking about continued recovery, is it time to take a breather, relax and quit worrying about the economy and your children and grandchildren’s future?

We think not. While we are as hopeful as everyone else that the world economy will soon recover and the U.S. can get its arm around its debt, there are so many uncertainties, we think it’s best to continue to plan for tough times ahead.

We’ve written many times recently of the continued downward trend in home prices and the continuation of foreclosures at a rate higher than last year. Employers remain hesitant to hire and we’re a long way from getting our arms around our rising debt.

The unrest in the Middle East that surfaced this past week could have huge implications for the world economy. Gasoline prices were already projected to hit $4.00 a gallon this summer, prior to the crisis in Egypt. Commodity prices are on a rampage.

An article in the Wall Street Journal this last week titled “Emerging-World Fear: Inflation” by Tom Lauricella and Alex Frangos (Monday, January 31st, 2011) discusses the problem with rising inflation in emerging market countries. In the article, the authors quoted Michael Shaoul of Oscar Gruss & Son who wrote in a research note: We currently view overheating within the emerging-market complex as the greatest macro peril facing the global economy.”

Interest rates here in the U.S. have been at an all-time low for some time now and at some point will rise, along with inflation. Municipalities and state governments, with their rocky finances could likely see higher interest rates sooner, rather than later. And, it’s hard to imagine that we won’t see increased taxes in the not-too-distant future, as the government at all levels, tries to address the debt problem.

We are generally optimistic in nature. But, while there are some hopeful signs of an improving economy, there is still a lot to be concerned with. We believe it prudent to continue to focus on strengthening your balance sheet. Pay off credit card debt; pay down your mortgage and any other loans; cut discretionary spending and increase savings. There may still be some rough roads ahead.

Friday, February 4, 2011

"Rule of Thumb" Puts Retirement Needs in Perspective

You may or may not have heard of a rule of thumb called the “Rule of 72”. It’s a handy rule you can use to estimate how long it will take you to double your money based on a particular interest rate. Most people use it to project how their portfolio will grow depending on the investment return they expect to realize. You can also use it to estimate the impact of inflation on your purchasing power.

First, a quick explanation of the rule. It’s really quite easy to apply. Let’s suppose you believe you can earn 7 percent over the long run on your investments, before tax, and 6% after tax. If you divide 72 by the after-tax return of 6, the result is 12. The result of this calculation, 12, is the number of years, approximately, that it will take for you to double your money, assuming an after-tax rate of return of 6 percent.

Thus, if you currently have a portfolio of $250,000 and believe you will need at least $1 million in order to retire, you will need to double your money twice, first to $ 500,000 and then again to achieve your $1 million. If you expect to receive an after-tax return of 6 percent it will therefore take you 24 years.

In planning for retirement, we believe too many people fail to consider the impact of inflation on the amount of money they will need in retirement. This is especially true for those in their sixties, who often use their current spending rate to estimate what they will need in retirement. Yet, they may live another twenty to thirty years. If inflation during their retirement years is 3 percent, according the rule of 72, their living expense budget will double in just 24 years, and in just 18 years, if inflation is 4 percent!

Applying this simple rule can open your eyes to the difficult task of saving for retirement. In most cases, the amount you’ll need is likely far more than what you’ve been thinking. We hope you’ll find this simple rule a helpful tool to bring things into perspective.

Wednesday, February 2, 2011

Continued Troubles for Real Estate

Although there are signs the economy is improving, a significant roadblock appears likely to remain in place for sometime to come. Numerous articles we’ve read lately point to a continued downward trend in home prices. We wrote in a recent blog that you shouldn’t consider buying a new home unless you plan to stay for several years.

On Monday (January 31, 2011) two articles appeared, attesting to the further decline in home process. In an article in the Sarasota Herald Tribune by Jack McCabe, Chief Executive Officer of McCabe Research and Consulting LLC, Mr. McCabe stated that it will be sometime before we can declare that housing prices are going to start going up. He said: “We’re not there yet and won’t be in 2011 or, quite honestly, in the near future.”

While some areas of the country may be experiencing a rebound, Mr. McCabe was talking specifically about Florida. A primary reason for his doom and gloom, as stated in his article is: “According to the Mortgage Bankers Association, the largest wave of highly toxic, negative amortization junk loans to hit first-term rate adjustments occurs in 2011-12, portending an additional wave of distressed properties hitting the market for sale in addition to today’s current inventory.”

According to Mr. McCabe, the median price for a single-family home in Sarasota, Florida dropped from $322,700 in 2005 to $160,100 by the end on 2009. Prices dropped another 1.8 percent in 2010 and Mr. McCabe expects the price to drop another 2 to 3 percent in 2011, with median condominium prices to drop another 5 to 10 percent.

Another article, yesterday day in the Wall Street Journal by Nick Timiraos stated that “housing prices are falling at an accelerating rate in many U.S. cities. While Mr. Timiraos noted that the decline is not universal, he noted that a Wall Street Journal survey found that prices declined in the fourth quarter in all of 28 major metropolitan areas tracked.

What this tells us is that any significant economic recovery will likely be muted by real estate prices. Consumers need to continue to be conservative and concentrate on reducing debt, increasing cash reserves and spending cautiously.