“A fool and his money are soon elected.”
“I don’t make jokes, I just watch the government and report the facts.”
“If pro is the opposite of con, what’s the opposite of Congress?”
If that sounds like the wit and wisdom of Mark Twain to you…well, that would be a good guess, but ultimately incorrect.
We’ll devote some attention to the great Mark Twain another day, but today we focus on one of his contemporaries, the waggish Will Rogers.
The overwhelming majority of Rogers’ barbs were aimed at the politicians of his day, and though he uttered many of those quotes nearly 100 years ago, they’re still remarkably apropos today.
But you could also assemble a well-conceived financial plan just by using some of his quotes as a guide. For instance…
“Even if you’re on the right track, you’ll get run over if you just sit there.”
To a large extent, we strive for a certain level of “autopilot” in all of our retirement plans. Nobody wants to feel the need for constant changes to their plan in order to stay on track.
At the same time, we can’t just put a plan into motion and then leave it alone for 30 years. Tweaks will need to be made along the way. The best example of this is the Constitution. If we were still rolling with the Constitution as it was originally drafted, with no amendments, we’d have quite a different country today. There would be no income tax (that’s fun to dream about), women and black people wouldn’t be voting (undoubtedly a significant boost for Trump in November), and we’d all be required to have soldiers living in our guest rooms.
We would still have the rule that you have to be born a citizen in order to be president. So we wouldn’t have to worry about a Schwarzenegger or Bieber presidency. The founding fathers were quite prescient on that one.
But in the financial context, the lesson is simple: just because you’ve arrived at the correct answer for today doesn’t mean it will still be the correct answer at this time next year.
“The difference between death and taxes is that death doesn’t get worse every time Congress meets.”
I could easily spill a couple of barrels of cyber-ink just talking about taxes (and I will another day), but for now, just suffice it to say this: Taxes are going up in the future. There’s really not a mathematical alternative.
I don’t know how long the benevolent federal government will allow us to continue contributing to Roth IRAs before they decide that it creates too great a tax advantage for us down the road, but if you’ve been ignoring the Roth, you should probably think again, especially if you’re still relatively young.
If you’re under the age of, say, 45, there aren’t many scenarios I can come up with where you should be contributing to a traditional IRA instead of a Roth. Between 45 and 60, it’s much more of a case-by-case analysis. Over 60, you’re often better off to contribute to the traditional instead of the Roth, but not always.
“I’m not as interested in the return on my money as I am the return of my money.”
Or to put it in the words of one of my clients recently, “We’re not that interested in growing our portfolio very much. At this point, our main focus is not losing what we have.”
You need to be careful that you don’t slip into this mindset too early in life when you still have a reasonably long timeline until retirement and several good earning years ahead of you. But at some point, there will come a time when it’s crucial to start focusing more on preservation instead of growth.
“Live in such a way that you would not be ashamed to sell your parrot to the town gossip.”
This has nothing to do with your retirement plan. But still good advice.
Those Were the Days
To quote Archie and Edith, “Mister, we could use a man like Herbert Hoover again.”
Actually, I have no idea if that’s true. I’m guessing it’s not. Some say that he was one of the worst presidents. Others say he was simply one of the unluckiest.
But we’re not here to reflect on the tenure of the first president born west of the Mississippi. (There’s some presidential trivia you can use to impress your friends at dinner parties). We’re here to talk about the good ol’ days.
I’ll admit that I’m as guilty as anyone of sometimes thinking we’d be better off with the way things used to be, financially speaking. Every month when I look through our household budget, I can only shake my head at the amount of money that gets spent on things that weren’t household expenses when I was a kid (either because they didn’t exist, or because it just wasn’t something that people spent money on). For example:
- Gym membership
- Cell phones
- DirecTV
- Netflix
- Internet
- Sponsored kids in Kenya (I’m sure Kenyans existed when I was a kid, but to my knowledge, they didn’t have programs to make it easy to send money to them)
That list alone represents $664 every month to pay for things that weren’t around in the good ol’ days.
I hear a lot of wistfulness for the good ol’ days among my clients too. But their complaints tend to revolve more around the current investing environment and general retirement planning landscape.
For example, the disappearance of pensions is a sore spot for many. People love to cite the fact that their mom is 92 and never saved much for retirement, but she’s in fine shape financially because she’s still living off Dad’s pension.
Another complaint is interest rates. Most people like that 3.25% interest rate on their mortgage, but that satisfaction seems to be offset by the paltry 0.95% they’re earning with their money market.
And then there’s inflation. “We paid less for our first house than we did for the car we just bought!” Apparently the car dealerships print that out on a little card and give it to every car buyer over the age of 65 right before they drive off the lot, because I hear that one all the time.
So let’s rewind a couple of generations and talk about retirement in the good ol’ days. It usually looked something like this…
It’s 1975. Grandad retires at age 65 after a 42-year career at the textile mill, where they give him a gold watch and a pension. Combining that pension with Social Security for him and Grandma, they have a monthly income of $1,850, which sounds like the poverty line, but is actually equivalent to $8,250 in today’s money. They haven’t had any debt since the first year of the Eisenhower administration, and that $1,850 is more than they can spend every month.
Grandad never saved a ton of money, but he does have $45,000 in a CD that’s paying him 10.25% interest. So there’s another $4600/year (or nearly $21,000 in today’s dollars), which they also don’t need.
And by the way, life expectancy is 72 years, so the chances of living long enough to end up in a nursing home are slim.
If I’m their financial advisor, my job is easy.
“Keep spending money on the same stuff you’ve always spent money on, splurge a little bit because you can, and leave an inheritance to the kids. Now, here’s a little parting gift for you, it’s a brand new craze called the ‘mood ring.’ Hold on to it because it will probably be a worth a lot someday.”
Those were the days.
Now compare that to the current environment…
- Life expectancies continue to increase, so the chances of a nursing home stay for any given individual are higher than ever.
- Our rapidly increasing national debt means that we’ll almost certainly be seeing an increase in both tax rates and inflation down the road.
- CDs and money markets are paying basically nothing.
- Markets are more volatile than they’ve ever been.
- Pensions are quickly becoming extinct.
- Robin Williams and Princess Di are dead, but O.J. Simpson and Keith Richards are somehow still alive.
It’s a crazy, unexplainable world out there, and if retirement is on the horizon for you, you have a long list of challenging issues to address. Just because Grandad was able to do it all without professional help doesn’t mean you should try to do the same.
Get some help and you’ll be more likely to end up with what Archie would call “a happy frame of mood.”
Hold Me Closer, Tony Danza
It’s unlikely that the cassette tape can be located now, but I famously produced and recorded a Christmas album back in the ‘80s. It sold only one copy (and “sold” is probably not the right word since I’m quite confident that I gifted it to Mom for free), but its impact is still being felt to this day.
I remember when Mom listened to it, she said it was priceless. At the time, I took that as an insult because I thought “priceless” meant “completely worthless.” As in “there’s no way you could possibly get people to pay money for this so you shouldn’t even bother putting a price tag on it.”
The song that stayed at the top of the charts in the Stillman house for the longest period was my rendition of the “Twelve Days of Christmas.” Reeling off that incredibly tedious list of gifts apparently wore me out every time, and I always ended up gasping for air by the time I got down to the two turtle doves.
But one of the more underrated songs on that album was “Hark the Herald Angels Sing.” My lyrics went something like this…
Hark the herald angels sing,
Glory to the newborn king.
Peace on earth and mercy mild,
God and sinners worth the style.
I have no idea what I thought “worth the style” meant. Although it probably had just as much meaning to me as the correct lyric. If I didn’t know the meaning of the word priceless, I’m sure I didn’t understand reconciled either.
A classic case of misunderstood lyrics. I’m sure I wasn’t the only six-year-old to be guilty of getting the words to a song wrong. In fact, there have been plenty of misunderstood lyrics over the course of American history.
One of my favorites is Elton John’s “Hold me closer, Tony Danza.”
Many assumed Jimi Hendrix was making some kind of gay rights statement when they thought they heard him say, “…’Scuse me while I kiss this guy.”
And of course there’s Pat Benatar’s famous song, “Hit me with your pet shark.”
All of those misunderstandings are pretty inconsequential in the grand scheme of life, I suppose. But unfortunately, people often mishear some of the lyrics being sung by their financial advisor, and those misunderstandings can be a lot more damaging.
Here’s one that I hear a lot: “I don’t pay anything for my financial advice.”
That might be what you understood. But those aren’t actually the words to the song. In reality, the actual lyrics probably go something like this…
“My broker doesn’t charge a management fee, he just makes commissions every time he buys or sells something. So every time he makes a recommendation to me, I really have no idea if it’s in my best interest or if he’s just trying to print a commission check for himself. But I don’t mind this model because the commissions aren’t really evident on any of my statements, so it feels like I’m not paying anything. Even though it might be costing me more than if I just paid a management fee.”
But that’s a mouthful, so you can see why someone might prefer to just sing the wrong words instead.
Here’s another misheard lyric: “I’m a conservative investor.”
Maybe you think you are, or you want to be, but I often find that these are the real words to the song:
“I’m getting close to retirement, so I’ve always assumed that they’re taking some of the risk out of my portfolio as I get older. They’re doing that, right? Right??”
I was visiting with someone recently who talked a lot about how risk averse he was and how conservatively he’d been investing. And I agreed that based on his age and short time horizon until retirement, that was a wise approach. But then we looked at his portfolio, and there was nothing conservative about it. In fact, it said right there on his statement that he was a “moderately aggressive” investor.
He’d been working with the same broker for 15 years, and while he indeed had a “moderately aggressive” mindset when he started, he didn’t any longer. And he assumed that his portfolio was being adjusted accordingly, but it wasn’t.
You’d be surprised how often I see things like that.
So don’t assume you know the words to the song. Ask plenty of questions, always clarify things you don’t understand, and get a second opinion when needed.
Because the ants are my friends, they’re blowin’ in the wind.
This One's on the House
It seems like such a simple question that should have a simple answer.
“Should we pay off our house early or not?”
I get the impression that most of the people who ask me this question don’t expect me to engage them in a 45-minute discussion about all of the different angles they need to consider. But the problem with this question, like so many things in the financial realm, is that people are looking for a simple, definitive answer to something that actually requires a nuanced discussion. So perhaps it would be helpful to deconstruct some of the statements we hear on this topic.
“With interest rates so low, you’re better off investing that money instead of putting it toward the house.”
There’s an element of truth to this in many situations. For instance, if you’re a 35-year-old with a 3.5% interest rate on a 15-year mortgage, then yes…there’s a pretty good chance that you’re better off putting that extra $150/month into the market instead of paying extra principal on the house.
The problem is when people subscribe to this idea, but then don’t actually invest their money in a way that’s going to make it grow. One example:
I met with a couple a few years ago who owed $25,000 on their house, and their plan was to continue making minimum payments to have it paid off by the time they retired in four years. At an interest rate just above 3%, they had no motivation to pay it off more quickly because they could “make more than 3% by investing that money instead.”
The only problem was that they had $115,000 sitting in a money market account earning less than 1% interest. In their case, there was absolutely no reason not to take $25,000 from that account and pay off the house. They were tickled pink to get my “permission” to do just that; the problem was that they’d heard too many people say that they’d be better off not to. But that math doesn’t work if you’re not actually investing the money in a place that’s going earn you more than what you’re paying in interest.
“We need to keep the mortgage so that we can deduct the interest on our taxes.”
So let’s say this another way. “I’d rather send a dollar to the bank than send a quarter to the government.”
I don’t like sending my quarters to the government any more than you do, but I’ve found that sending dollars to the bank is even less exciting.
Let’s suppose your mortgage payment is $1000/month. And out of that $1000, you’re paying $400 in interest. That’s $4800/year in interest, which, if you’re in the 25% tax bracket, is equivalent to a $1200 tax deduction.
See how you’d be a lot better off to just have your home paid off and not have paid the $4800 in interest in the first place? Go ahead and send your $1200 to Uncle Sam, and if that extra $3600 in your pocket really bothers you, perhaps you’d be interested in purchasing my oceanfront property in Arizona. From my front porch, you can see the sea. (And if you’re a George Strait fan, you’re welcome for getting that stuck in your head for the rest of the day).
Now, so far it probably seems like paying off the house ASAP is the best way to go.
Not always. Here’s an immediate example that comes to mind where that’s not the best idea.
I have several clients in their late 50s/early 60s who don’t plan to stay in their current home for more than 5-6 more years. Either they’ll be downsizing to a smaller house in the area, moving to a different area altogether once they retire, or moving into a retirement community.
In these cases, it usually doesn’t make sense to pour more money into the house. What if it sits on the market for several months before it sells? Then we’ll be kicking ourselves for having so much equity trapped in the house instead of easily liquid and available for a down payment on the new place.
So if you’re not committed to the house for the foreseeable future, it rarely makes sense to try and pay it off any faster than you have to.
Of course, there are always exceptions to everything, so you really do have to make the decision that’s best for you. Don’t be afraid of the nuanced discussion.