We all are concerned with the current financial situation. Yet, how has it affected our retirement and our savings. We can easily calculate what we have lost, but how much must we save to make up the difference. Even more important we all must know what we need to save every year so that we can live what we deem to be a good life. Do you really know what you need to retire? If you do have you been tracking how you will get there?

I just saw this interesting New York Times tool that can help you see what you are on track to produce. It’s free and is a great illustration of how many years our current recession may have put you back. It also could be an interesting tool to help you start thinking about how much is enough and what you need to save to get there.
 

Thanks woodlywonderworks for this Flickr Photo

Yesterday this was posted on MSN.com’s Market Dispatch… 

Freddie Mac this morning said that the benchmark 30-year fixed mortgage rate fell to an average of 5.01%, with an average of 0.6 point for the week that ends today. That’s the lowest rate since Freddie Mac started tracking the numbers in 1971.”Interest rates for 30-year fixed-rate mortgages fell for the tenth week to a fourth consecutive record low due in part to the Federal Reserve’s recent purchases of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae,” Frank Nothaft, Freddie Mac chief economist, said in a statement. “On Nov. 25, 2008, the Federal Reserve announced that it planned to purchase up to $500 billion of these securities by the end of June of this year. For the sake of comparison, there were roughly $4.7 trillion of such securities backed by home mortgages available as of Sept. 30, 2008.”  

As we enter 2009 I was struck by the amount of activity in the real estate markets. If this is any indication of what 2009 will look like then I expect refinances and purchases to boom in the first quarter of this year. In December we wrote 5 offers on different properties and all of them had multiple bidders. This is a big difference compared to December of 2008 when most agents had zero offers in contract. We are not seeing the over bidding that we witnessed at the height of the market, but Bay Area properties which are listed at market prices are selling quickly a bit over their asking prices. This December we witnessed homes in North and East Richmond, which were hammered by the liquidity crisis, snatched up in less than 3 days!

We are seeing cheep financing coupled with low prices that is driving buyers into the real estate markets. This is healthy for it is beginning to clear out the foreclosure and short sale inventory that has plagued pricing for the last year and a half. In turn we believe this shrinking inventory will stabilize prices and subdue the skewed deep discounting that is caused by the banks fire selling as a means to getting real property off of their books.

This is a fantastic buyers market, and thus we are seeing the frozen gears of the market begin grind into motion.It is anybody’s guess as to when supply and demand will stabilize and a more normal market will arise. Yet, the signs of buyers returning to the markets are a definite plus and the longer rates remain low, the better off our markets will be. For the foreseeable future this will be a terrific market for buyers to get great values.

There is a great series of YouTube videos of Warren Buffett speaking to the University of Florida’s MBA class. Part 1 has a great discussion about integrity and why it is fundamental for success. I found one of the most interesting segments (shown above) to be Buffett’s discussion of the rescue of Long Term Capital Management (LTCM). LTCM was a hedge fund that went belly up in late 1990’s and was rescued by a massive industry bail out, supervised by the United States Federal Reserve. Buffet speaks about how LTCM was run by 16 exceedingly high IQ, long term veterans of the investment markets that probably had a combined 300-400 years worth of experience. Buffet makes a fundamental interpretation about risk and how much is too much. He spoke to how these men foolishly risked their own livelihood when he stated, “To make money they risked what they had and needed for what they didn’t have and did not need.”

After watching this segment I began to think philosophically about how the destruction of LTCM was a smaller scale bail out that sounded very similar to our current credit crunch and massive US bail out. Both instances were caused by some of the smartest minds in their industries. Both ended with the destruction of businesses, where owners risked everything (including the jobs and the livelihoods of others) to gain much of what they did not need to be a viable business in the first place. Is greed the best word to describe this kind of behavior?

Buffet also spoke about how knowledge can create blindness. For instance, in the case of LTCM the owners were experts at mathematics, which blinded them to the simple fundamental human and business concerns that all businesses must acknowledge. I have seen this in my own industry, where some of the brightest have let their intelligence get in the way of their own ability to make prudent decisions surrounding real estate investing. I have also seen many others avoid this pitfall, by living in a mood of wonder. I have seen how part of success is an awe-inspiring willingness to learn more and explore new possibilities, while thwarting moods of over informed arrogance. There is also something to Warren Buffett’s ability to be explicit about the offers, actions and investments he makes and how he rarely relies on inexplicit decisions. We should all be mindful that the philosophies we hold directly influence the actions and practices we live in.
 

As we are watching the Federal Reserve lower the Federal Funds rate to 1/4% and witnessing the Federal Government give away 700 billion tax payer dollars I have encountered many economists (and Dan Green) that are speaking about the fears of future inflation. In this context, I just read an interesting posting called The Inflation Factor written by Doug Short. Posted on the macro economic blog The Big Picture (that I suggest and frequently read), this article is an interesting prospective on how inflation could effect your retirement.

More pertinent to residential real estate, this article takes a look at how inflation affects our individual financial situations. It is very interesting to note how inflation can change your perspective about your home mortgage. As the posting states “…inflation is the main reason why a long-term fixed expense like a mortgage payment goes from a major burden to a minor nuisance.” Inflation is just another example of how purchasing real estate is a part of your entire financial plan. Inflation is market mechanic that no one individual can control, yet it can drastically effect how your future turns out if you do not factor inflation into your entire strategic financial plan.

Note, that Dan Green’s article Explaining What Happened At the Fed (December 16th, 2008) is interesting speculation that the current financial regulation that is occurring in the US will probably keep rates low for the short term, but will also most likely spur inflation that will make rates rise in the long term. This means if you are considering a refinance, now might be an opportune time. If you are considering buying real estate this might also be a window of opportunity.

 
Thanks H Dickens for this flickr photo. 

I have recently written about how the current volatile market has created many windows of opportunity for buyers and sellers in the real estate markets. Yet, I had not realized how the current market volatility had also created an opportunity for inner family wealth transfer. I just read an article in the Wall Street Journal, titled With Shares Tanking Think About Gifting, which illustrates this situation. When investments are down and the value is less, then there may be an opportunity to transfer these assets to family with the strategy of building wealth once the market recovers. Many wealth advisors are also speculating that congress will reform the gift and estate tax system. When you put all of this together the current volatile market may be an opportunity to pass an estate onto the next generation at a reduced cost.

This year I have had several clients take action to pass property and other assets to their children. There is great opportunity in change if you have a competent team to help you assess the different possibilities and then advise you on the prudent actions to fulfill on your ambitions. 
 

November 8, 2008
YOUR MONEY - New York Times
Is It Time to Have a Money Talk, Child to Parent?

By RON LIEBER
The federal bailouts of the last few months raise a variety of thorny questions, including who benefits at whose expense. But the question that hits home the hardest is the one that isn’t getting enough discussion around kitchen tables:

Will we have to bail out our own family members?

It’s started coming up in asides I hear from middle-aged friends who are concerned about their parents ending up in the poorhouse. And I see it in e-mail from people in their 60s and 70s, who can’t believe their offspring got mixed up in funny mortgages and wallets full of credit cards.

But often, the grown children don’t know precisely how the devastation in the markets has affected their parents’ portfolio, and the older parents don’t know what their children’s monthly debt payments are.

None of this is fun to think about. And if you dare to open your mouth about it, relatives may take offense. Silence, however, is good for no one. You don’t want to be blindsided months or years from now by a family member in desperate straits, nor do you want to worry yourself sick when there’s no reason to.

So this week, please consider starting an intergenerational conversation about money, perhaps in writing, which might reduce the risk of a knee-jerk response that leads to an argument. I’ve suggested an approach below, for an e-mail message or letter to a parent and a possible reply, though you could easily tweak it if you’re initiating the chat with your child. (more…)

There are a number of important tax law changes that take effect this year, including three changes that will affect some homeowners. There are also changes that impact business owners.

While you won’t see the impact of these changes until you file your returns early in 2009, it helps to know about them now so you can keep proper records and make the smartest decisions for your money.

Take a few minutes to review the changes so you can keep them in mind as you devise your 2008 tax strategies.

Changes for Homeowners

Homeowner’s Exemption: In the past, taxpayers have taken the opportunity to convert a rental property or vacation home into their primary residence and then later sell the property. This allowed them to take advantage of the Homeowner’s Exemption which allows a taxpayer to exclude up to $250K ($500K for married couples) of gain realized on the sale of a primary residence. An example of a common strategy has been:

• Taxpayer acquires rental property in 2000 for $100K.
• Taxpayer rents the property out for three years.
• In 2003, taxpayer moves into the property as his/her primary residence.
• In 2005, taxpayer sells the property for $600K.
• Taxpayer (married couple) avoids paying taxes on the entire gain ($500K).

(more…)

NPR had an interesting podcast on the current economic crisis and the government bailout. If you want to give it a listen the link is below. It is interesting to note that the crux of the bailout is entangled in an assessment of value. It is coming down to what price will the government, and ultimately all of us taxpaying citizens, will pay for the bad debt that is currently on the balance sheets of those who created it in the first place.

Listen to the NPR podcast here.

One of the costs of living in the Bay Area, and California for that matter, is that you are much more likely to owe AMT (Alternative Minimum Tax) when you file your personal Federal Tax Returns. Other than an act of congress to change the tax law, there’s not much you can do about it. The silver lining on this cloud has to do with… your mortgage.

The original AMT established in 1970 targeted tax shelters used by a few wealthy households and was greatly expanded in 1986 to aim at a different set of deductions that most Americans receive. The AMT sets a minimum tax rate of either 26% or 28% on some taxpayers so that they cannot use certain types of deductions to lower their income tax obligation. Sounds reasonable, right? I mean, why should people who are making millions of dollars be able escape paying their fair share of income tax!? Well, because of the way the AMT is structured, welcome to the life of the rich and famous!

According to the Congressional Budget Office, “Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.” That will be over 30 million household.

But why are we Californians affected more than the rest of the population? First, incomes in the Bay Area are statistically higher than the rest of the country. But here is the more specific reason: two of the disallowed deductions through the AMT schedule are state income tax and real estate tax.

As of 2007, the highest rate of state income tax is that of California, with a maximum rate of 10.3%. Under the standard 1040 tax schedule, if you itemize your deductions, you are allowed to deduct what you pay in state income tax. Not so under the AMT schedule. Despite the real estate downturn over the past year, values in many places in the Bay Area have remained stable and are still one of the highest priced areas in the US. Property taxes are often a significant part of one’s housing expense, to the tune of 1.25% per year of the assessed value of your home. This too is excluded under the AMT. So what’s a newly rich & famous person to do?

Generally speaking, the interest that you pay on your mortgage for your home remains deductable under AMT. That’s a bit of a blanket statement, so don’t take it as gospel. I’ve discussed this with the brightest of CPAs and they still will say “well… there may be some other issues”. The point being talk with your CPA or Tax Advisor. Nonetheless, let’s go through an example of how this can remain a tax benefit of having deductable mortgage interest on the AMT.

Let’s say you have a $500,000 qualified mortgage and pay 6% interest (and for simplicity let’s say your mortgage payment is interest only). You would have paid $30,000 of interest over the course of the year. If you are subject to the 26% AMT rate and approximately 10% California tax rate, that $30,000 would give you an approximate $10,800 reduction in your tax liability. This basically means that because of the deduction (even under the AMT), that 6% interest rate is costing you about 3.8% on an after-tax basis. Not bad.

What the moral of the story? Tax Efficiency. In the words of Ben Franklin… “In this world nothing can be said to be certain, except death and taxes.” If you accept that premise, then it would be wise structure your mortgage and money to be tax efficient. It’s not too complicated but it can be complex. For the do-it-yourselfers, run through pro formas on your Turbo Tax or other income tax preparation programs. For the rest of us, get good help from a skilled CPA or tax advisor. You need to do this whenever you are buying, refinancing or messing with your mortgage. You could inadvertently make a move that would eliminate your tax benefits.

Thomas Sowell provides an interesting and often counter-intuitive look at the economic issues facing the country.
Our Government Problem-Solvers
At election time, pols can’t help but “do something” — even if it makes matters worse.

By Thomas Sowell

We don’t look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating.

How did the government help create the current financial mess? Let me count the ways.

In addition to federal laws that pressure lenders to lend to people they would not otherwise lend to, and in places where they would otherwise not invest, state and local governments have in various parts of the country so severely restricted building as to lead to skyrocketing housing prices, which in turn have led many people to resort to “creative financing” in order to buy these artificially more expensive homes.

Meanwhile, the Federal Reserve System brought interest rates down to such low levels that “creative financing” with interest-only mortgage loans enabled people to buy houses that they could not otherwise afford.

But there is no free lunch. Interest-only loans do not continue indefinitely. After a few years, such mortgage loans typically require the borrower to begin paying back some of the principal, which means that the monthly mortgage payments will begin to rise.

Since everyone knew that the Federal Reserve System’s extremely low interest rates were not going to last forever, much “creative financing” also involved adjustable-rate mortgages, where the interest charged by the lender would rise when interest rates in the economy as a whole rose.

In the housing market, a difference of a couple of percentage points in the interest rate can make a big difference in the monthly mortgage payment.

For someone who buys a house costing half a million dollars — which can be a very small house in many parts of coastal California — the difference between paying 4-percent and 6-percent interest would amount to more than $7,000 a year.

For people who have had to stretch to the limit to buy a house, an increase of $7,000 a year in their mortgage payments can be enough to push them over the edge financially.

In other words, government laws and policies at federal, state, and local levels have had the net effect of putting both borrowers and lenders way out on a limb.

Yet, when that limb began to crack, the first reaction in politics and in the media has been to look to government to solve this problem because — as always — it was called the market’s fault, the lenders’ fault, and everybody’s fault except those politicians who created this dicey situation in the first place.

Markets often get blamed for conveying a reality that was not created by the market.

For example, the fact that “the poor pay more” for what they buy in stores in low-income neighborhoods is often blamed on those who run these stores, rather than on those who create extra costs through crime, vandalism, and riots.

If the store owners were making big profits, the big chain stores would be rushing in to share in the bonanza, instead of avoiding low-income neighborhoods like the plague.

Markets were also blamed for the Great Depression of the 1930s and New Deal politicians were credited with getting us out of it. But increasing numbers of economists and historians have concluded that it was government intervention which prolonged the Great Depression beyond that of other depressions where the government did nothing.

The stock market crash of 1987 was at least as big as the stock market crash in 1929. But, instead of being followed by a Great Depression, the 1987 crash was followed by 20 years of economic growth, with low inflation and low unemployment.

The Reagan administration did nothing in 1987, despite outrage in the media at the government’s failure to live up to its responsibility, as seen in liberal quarters. But nothing was apparently what needed to be done, so that markets could adjust.

The last thing politicians can do in an election year is nothing. So we can look for all sorts of “solutions” by politicians of both parties. Like most political solutions, these are likely to make matters worse.

— Thomas Sowell is a senior fellow at the Hoover Institution.

© 2008 CREATORS SYNDICATE, INC.

Thanks to Todd Derick for this flicker photo.

I just read an article on the Blown Mortgage blog. It had a graph showing new and existing home sales. Of course in this market both are down. In fact, the Blown Mortgage blog is claiming that the volume of existing home sales is down 15% from last year.

First, it is important to note that just because the volume of sales are down, it does not mean that values of homes are dropping. In fact this can be quite the contrary in certain areas. This is the case certain segments of the Berkeley California market where many listings are still transacting with multiple offers. Just a month ago I saw a home get 15 offers and sell at a price way above the average median price for a home of this size and location.

Second, I found it interesting that the existing home sales have begun to diverge from new home sales. In this graph since January of 1994 existing and new home sales tracked each other fairly steadily. Yet, we can see in January of 2008 that the curves are fairly far apart with the number of existing home sales beginning to level off while new home sales volume is still plummeting.

I speculate this is because many developers have stopped projects that were in the pipeline if they could. We have seen this effect in the drop in new home permits as well. We are seeing that the average homeowner in an existing home is still transacting while the investor/speculator is not. This makes sense for many home owners must sell and buy in any market. For instance, life ensues in any market and homeowners are relocated to new jobs all the time.

Does this indicate the bottom of the market? I am not sure, but it does indicate what we can expect from our market without a large volume of speculated dollars being spent to drive up prices. The air was let out of the real estate bubble for more then one reason. The constriction of financial liquidity in the mortgage markets started the deflation. Once the mood was set, the exit of speculators and investors, drove the market down further. Now we are seeing buyers who were over leveraged get caught in the falling values and go into foreclosure. I suspect that when we see the developers begin to return to the market and banks begin to loosen their guidelines, we will see a more robust market again. I also speculate that we should see a return in existing home sales before we see it in new home sales, for the mechanics of the entitlement and permitting processes means that it takes time for developers to ramp back up into production.

Interesting news on he mortgage front in California is that FHA is now offering 3% down on loans up to $729,750. FHA also allows for a 3% credit towards buyers non-reoccurring closing costs. This means that buyers can be 0% down once again. I view this as a drastic loosening of the mortgage guidelines. One blockade down… So, where are those speculators?

For those of you whose plan is to work until you are 70, here’s a warning about that strategy.

For a Good Retirement, Find Work. Good Luck.

Bill Neugent, an engineer in McLean, Va., is doing his bit to ease the looming generational financial squeeze as the nation’s 75 million baby boomers begin to retire. He’s working longer.

Mr. Neugent, 62, plans to work full time until he is 65 and then part time for the Mitre Corporation, a federal research contractor that encourages older workers to stay on.

There are, it seems, too few such workers and employers. The average retirement age for men now is 63 and for women 62. But the emphatic conclusion of recent research into retirement policy and labor markets is that working another two or three years would have a surprisingly powerful impact on the retirement living standards of millions of boomers and on the economy.

The economic gains, according to a report published this month by the McKinsey Global Institute, a research group, would include increased household savings, higher tax collections and a reduction of the fiscal strain on Social Security and Medicare; together, that would add an estimated $13 trillion to the economy by 2025, or about a year’s total output of goods and services today.

“It’s the only answer, but don’t count on the story turning out that way,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College and co-author, with Steven A. Sass, of the book “Working Longer: The Solution to the Retirement Income Challenge” (Brookings Institution Press). “It’s going to take a lot of education and changes in policy and attitudes.”

The biggest obstacle, experts say, is that most companies are reluctant to retain or hire older workers. At the top of the corporate ladder, executive recruiters are routinely told not to seek anyone over 50, notes Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School.

Similar sentiments, Mr. Cappelli said, can be found across the job spectrum. He points to a batch of evidence. In one survey, one-fourth of companies said they were not inclined to hire older workers. In a research experiment a few years ago, thousands of made-up resumes were sent to employers; younger workers who had the same qualifications as older workers were more than 40 percent more likely to be called in for an interview than someone 50 or older. In an industry survey, a majority of technology companies candidly said they would not hire anyone over 40. (more…)

The press is not saying what it means for people to not have enough money and I think we can count on them never saying this.  The very people who are writing the articles for the major newspapers don’t understand what it means so they are incapable of saying.  Also, that won’t sell newspapers so that’s another reason they won’t tell the unhappy story of what will happen.  Not enough money at retirement means they will not be able to buy the products and services they need.  The drugs they need to stay healthy will be unavailable to them and no one is going to pay the bill for them.
A Few Final Thoughts On Planning For Retirement
By Martha M. Hamilton
Sunday, June 15, 2008; F01

I have spent the past two years focused on a subject that was almost an afterthought for most of my working life — financial planning for retirement. I knew when I started writing this column that the subject was vast and complex, but I had no idea just how complicated it was.

The new retirement landscape requires us to take on a job once handled by professionals. We now play a larger role ourselves ensuring that we will have adequate resources. That means saving and investing, often on our own, and trying to protect against such unknowables as how long we may live and what financial markets will be like in the future.

I’ve learned a lot in the past two years, and since today’s column will be my last for The Washington Post, I would like to emphasize the most important lessons.

· First and foremost, we need to pay more attention to our children’s financial education. It didn’t occur to me to talk to my daughter about money management when she was younger. It may have been because I thought she would pick it up automatically or because her teen years were so complicated that we never had the time. But she did stumble upon at least one principle. In her late 20s she called me, excited to have just learned about the magic of compounding from a friend in New Orleans.

I could have sworn I’d mentioned how compound interest multiplies, though she swears I hadn’t. It may just have been that talking to your kids about money is the same as talking to them about sex and drugs: They assume you have no personal experience, so they pay no attention.

I never did talk to her about the importance of beginning early to save for retirement. This year, though, she opened a Roth IRA with my encouragement. If you can, persuade your kids to start saving in a Roth when they take their first part-time jobs. With a Roth IRA, you pay taxes at the time you put the money into savings and take accumulated earnings out many years later tax-free. Most young people probably will be in a higher tax bracket as years go by, so a Roth is a better choice for them than a savings plan in which you pay taxes down the road.

On the positive side, Alec (also known as Sarah) inherited Scottish frugality from both sides of her family. Both her dad and I grew up in families that watched spending carefully. My dad was recycling in the 1960s, picking up neighbors’ yard trimmings to put on his compost pile. And my ex-husband’s family would stop the car and pick up produce that bounced off trucks in Texas — something we once did on the Eastern Shore, as well.

Since she is not a big spender, she has avoided a huge trap — the accumulation of crippling credit card debt.

· Second, although workers are increasingly reliant on their own savings, we are not saving enough or investing as wisely as we should. Health-care costs in retirement could be $200,000 to $300,000, or even more. Most of those who are lucky enough to have a retirement savings plan such as a 401(k) have less than half that amount. That doesn’t leave much to live on.

And many workers have no access to an employer-provided retirement savings plan.

Lower-income workers have a higher percentage of their earnings replaced by Social Security, which accounts for 90 percent or more of the earnings of 40 percent of all retirees. The lack of savings is going to hit middle- to upper-middle earners hardest, potentially resulting in a sharply reduced standard of living in retirement.

· Third, in addition to health-care costs, I have learned to fear inflation — and longevity. Inflation is way scarier to me than recessions are, because it virtually never lets up. And it can erode your savings the same way a trickle of water can carve a canyon, given enough years.

Even mild inflation is dangerous. Say you have $100,000. At an inflation rate of only 3 percent a year, it will be worth just a little over $50,000 in 20 years.

I remember the 1970s, when inflation rates rose to more than 14 percent a year. That was pretty scary.

As for longevity, a long life is less of a blessing when you outlive your savings. We all have a tendency to underestimate our longevity, myself included. For most of my life, I expected to live to about 90, based on family history. But now, with my mother going on 95 and with some experts saying you should add about five years to your life expectancy based on family history, I’m guessing I might live to 100.

I am fortunate to have a pension that will provide monthly payments for life, but it is not adjusted for inflation. As a result, I want to delay taking Social Security as long as possible. A large number of workers claim Social Security at age 62, or as early as they possibly can. That results in lower payments for life. I would rather wait and have the cost-of-living adjustment on the biggest base possible.

A growing concern that I have developed in writing this column is for the large number of workers whose savings will be inadequate in retirement. This could occur for any number of reasons: because they did not save enough or did not invest as wisely as professional pension experts, or because they used their savings to survive a break in employment or, unwisely, took the money out in a lump sum when they changed jobs and spent it. Fortunately, lots of smart minds are focused on this problem, coming up with suggestions to either improve retirement savings plans or to replace them.

I thank The Washington Post for giving me this opportunity to write about an extraordinarily important issue, and I thank the readers for their helpful feedback and column suggestions and for contributing to my continuing education. I am not leaving the subject: I will continue writing on retirement issues for the online AARP Bulletin.

Join Martha M. Hamilton and Teresa Ghilarducci, an economist at the New School for Social Research and author of “When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them,” at noon Tuesday for an online chat at washingtonpost.com.

http://www.nytimes.com/2008/06/17/business/17fed.html

How do we pay for each additional day of living that we receive from medical advances?

Too much debt takes away people’s autonomy. They lose their freedom to work where they want and with whom they want, they lose freedom to change jobs or careers because they need the next paycheck. I worked with client’s personal financial situations for 7+ years and the biggest problem I saw was that people were unwittingly auctioning off their autonomy to Mastercard or to their mortgage provider. When I had this conversation with clients, many changed habits because they now had the facts and could see what their purchase of new kitchen appliances or that Mercedes would do to their freedom. Clients still purchased homes because of the history and hope for house appreciation we have seen in California. But, they usually told me they would hold off buying that next car or they could live awhile longer with their furniture all for the sake of keeping more of their freedom.

I think the answer continues to be knowledge about money, compound interest, saving and investing. The conversation needs to change to one of new virtues being no credit card debt and a bank account instead of the old virtue of having the nicest clothes, best wines, exciting and expensive vacations, Mercedes, a boat, plasma TV and huge house.

The New York Times
June 10, 2008
Op-Ed Columnist
The Great Seduction
By DAVID BROOKS

The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance and frugality. Millions of parents, preachers, newspaper editors and teachers expounded the message. The result was quite remarkable.

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

Sixty-two scholars have signed on to a report by the Institute for American Values and other think tanks called, “For a New Thrift: Confronting the Debt Culture,” examining the results of all this. This may be damning with faint praise, but it’s one of the most important think-tank reports you’ll read this year.

The deterioration of financial mores has meant two things. First, it’s meant an explosion of debt that inhibits social mobility and ruins lives. Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion. By last year, it was up to $937 billion, the report said.

Second, the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents.

The loosening of financial inhibition has meant more options for the well-educated but more temptation and chaos for the most vulnerable. Social norms, the invisible threads that guide behavior, have deteriorated. Over the past years, Americans have been more socially conscious about protecting the environment and inhaling tobacco. They have become less socially conscious about money and debt.

The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don’t have to work to build for the future. They can strike it rich for nothing.

Payday lenders have also played a role. They seductively offer fast cash — at absurd interest rates — to 15 million people every month.

Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they’ve found that they can make money off the young and vulnerable. Fifty-six percent of students in their final year of college carry four or more credit cards.

Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It’s only now become respectable to do so.

Wall Street has played a role. Bill Gates built a socially useful product to make his fortune. But what message do the compensation packages that hedge fund managers get send across the country?

The list could go on. But the report, which is nicely summarized by Barbara Dafoe Whitehead in The American Interest (available free online), also has some recommendations. First, raise public consciousness about debt the way the anti-smoking activists did with their campaign. Second, create institutions that encourage thrift.

Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

Divorce, or variations on that theme, is starting to look almost as certain as death and taxes… the national average seems to be holding with about 1 out of 2 marriages ending in divorce. Among my friends, family and clients, it seems the number of couples around me calling it quits has escalated over the past few years. I suppose it could simply be my age, the circles I travel in and living in California. With splitting couples, very often their home will be their single largest asset. They may even fight tooth-and-nail to keep the home and send their “ex” packing. Here’s the thing: this could be a huge financial mistake. Often the consequences are not realized until long after signing the settlement agreement. Generally there are three issues around real estate that come up that are often overlooked in a divorce.

The first issue has to do with the property as an asset class and liquidity. Let’s say a couple (Popeye and Olive Oyl) owns a home worth $1,000,000 free & clear, i.e. no mortgage. And in addition, they have $1,000,000 of cash and invested assets. They agree to split everything 50/50. But Olive Oyl wants the home. So she will give Popeye her half of the cash in trade for his half of the house. Though Olive now has a place to live, she has 100% of her assets invested in real estate with no liquidity (unless she sells or finances some of the equity out of the property). This is equivalent to having all of your money tied up in one single, privately held investment… not real consistent with Modern Portfolio Theory.

The next issue has to do with affordability and qualifying. Let’s say Popeye and Olive have a $500,000 mortgage. The payment on the house with property taxes and insurance is $4000 per month. Olive only has to give Popeye $250,000 of her cash to buy him out. So she has $250,000 left in cash plus the house with the mortgage. The first question is can she afford the payment? That’s a much bigger question than I can address here, so let’s say she thinks she can handle the payment. But Popeye doesn’t let her get off the hook so easy. Since both signed the mortgage obligation when they were married, Popeye will remain liable from the lender’s point of view even though he may not be on the title as an owner of the property. If Olive can’t qualify on her own either for a new mortgage or in assuming the current one, Popeye may be very reluctant to go along with this.

Last, and probably one of the most overlooked issues with taking the home, has to do with . . . taxes. Popeye and Olive bought their home for $500,000 a while back. Since the value has doubled, they would have a $500,000 gain if they sold the home today. Because it was their principal residence for two out of the last five years, they would be able to exclude all $500,000 of the gain from being taxed as a married couple (see IRS Publication 936 at www.opesadvisors.com/resource/links.html). But if Olive buys out Popeye and at some point in the future she sells the home, she will only be able to exclude $250,000 of the gain as a single person. This means she will take on about a $62,000 tax burden that she will realize when she sells the home (assuming the tax laws don’t change… so could be more!). Additionally, if Olive sells the property and pays a real estate commission, she will incur 100% of that expense, as opposed to splitting it with Popeye. This could easily be another $25,000 she would have otherwise not paid (50% of a $50,000 commission). Olive has now blown about $90,000, or 12% of the assets she received out of the divorce settlement, without even knowing it.

For those of you that are able, consider working to have your marriage not be the one-out-of-two that divorce. For the other half, seek out financial, tax and legal advice prior to settling the terms of your agreement. Your attorney may be very skilled in representing you legally, but unlikely to know all of the finance and real estate consequences to your decisions.

Copyright © Jeffrey T. Smith • (415) 464-9500 • jtsmith@opesadvisors.com Jeffrey T. Smith is a financial advisor and the Marin Manager for Opes Advisors, a Wealth Management Firm specializing in Mortgage Banking and Investment Management.

This link is to a terrific Newsweek article discussing one benefit coming out of the mortgage crash & crunch – financial literacy. I think this commentary points to the necessity of each of us acting financially responsible and seeking help where needed. I thought you would enjoy reading the piece:

Clues for the Clueless - The mortgage crisis may create momentum for improving our financial literacy. It’s about time.

A good friend and past client just sent me this National Public Radio podcast that explains how the Liquidity Crisis was born. I had listened to this on the radio the other day. It gives a real ground level, human perspective of how we ended up where we are today.

You can download the pod cast for $.95 or listen to it for free online. It is 1 hour long but worth the time spent if you want to understand why the liquidity crisis occurred and who it affects. Click the link below and give it a listen.

http://www.thislife.org/Radio_Episode.aspx?episode=355

I wanted to also thank my client who sent me this pod cast link. In his e-mail he said that this pod cast helped him to have a much more in-depth understanding of the Liquidity Crisis. His contact gave me a chance to reflect in this post and also gave me some more in-depth thinking about why our clients have fared so well in this crisis. The good thing I see about the Liquidity Crisis is that it has gotten our clients to take a closer look at their finances.

For years, we have been offering our clients financial help when buying and selling property. We did this because we could see how easy it could be for a buyer or seller to betray their financial concerns in a transaction without even knowing they had. I believe this is why my clients have prospered during this crisis while I have watched other home buyers and sellers suffer. As I have long said, “Real estate agents must be competent to care for all of their clients concerns.” Thus, as stated in the previous posting called, Guidance Verses Advice: Which Is A Philosophical Standard Of Care, this is why I distinguish myself as real estate advisor not as a typical realtor. The tactic of making a real estate transaction is simple and often fairly standardized, but creating strategies that care for your client’s futures and putting them in a better situation after the transaction than before is a completely different story.

Boomer 411 has just released a new version of their site. Beyond the nice new color scheme, The new site has some great new features such as a questions and answers section and the ability to increase the font size of the articles for those that like reading larger print.

Many people have asked me why I take such an interest in Boomer 411. I believe that the average Baby Boomer has not saved enough money for their retirement. As I recently state in a posting, The Retirement Drum Beat Gets Louder, the average retirement savings for Baby Boomer’s is less than $50,000. This means that there are many Baby Boomer’s that need help. This fact will affect not only the Boomer’s, but it will have a significant impact on the children of the Boomer’s and the US economy as a whole.

To illustrate why I am interested in the Boomer population I have compiled a series of links to relevant articles about the boomer population. Read below and then let me know how you think the situation of this large demographic will affect the situation of our country as a whole. So, I congratulate and applaud Boomer 411 for doing something to help the Baby Boomer population!

Links to Baby Boomer Articles:

Ben Stein How Not to Ruin Your Life: Living Hand to Mouth — and Barely Getting By

Are Baby Boomers Financially Prepared for Retirement?

Net Worths and Retirement Savings of Baby Boomers

The Big Squeeze

Baby boomers turning 50 must face hard facts

Seven in Ten Baby Boomers Now Less Confident Their Retirement Savings Will Last

Retiring Baby Boomers’ Home Equity Under Valued

The baby boom generation and aggregate savings - includes article about use of Survey of Consumer Finances to calculate savings rates

Thanks Joshua Davis for this photo

I just read this article in the San Francisco Chronicle called Retirement Money Wories Mount for Workers. I am finding it interesting that the media is finally picking up on the fact that the average American does not save enough money for their retirement needs. The United States Department of Labor did a study on the retirement accounts of Baby Boomer’s back in 2005. As stated in their analysis…

There was at least one retirement account in 57 percent of the households. The average or mean amount in the retirement accounts was $49,944, but the standard deviation was $174,193, suggesting that the dollar amount held in retirement accounts varies widely by individual households. The median amount held in retirement accounts–$2,000–provides another indication of the wide variation in the amounts held by households.

This means that the average Baby Boomer has the ability to generate $1,960 in income per year in a safe 4% investment. I don’t know about you, but I could not live off of $1,960 a year. For an individual to generate annual retirement income of $72,673 (which is the average annual income of the Baby Boomer Population) they would need $1,816,825 in retirement at 4%. This shows that there is a lot of suffering ahead for those Baby Boomer’s that just don’t have enough and don’t have enough time to accumulate it.

I have found that retirement is a long term conversation that many people either avoid (they decide living in the present is more important than thinking about the future) until it is too late or they do not constantly and explicitly hold their retirement concerns when making important decisions that will affect their retirement futures. Either way people end up in the same place with not enough money for retirement and not enough time to do anything about it. Retirement should be an immediate concern that we are explicit about when making large financial decisions. This is because we cannot escape the mechanics of the time value of money any more than we can escape gravity.

This can be a grim subject, which is why I think the media has avoided it for so long. Yet, it can also be an enlightening conversation about how we can plan our futures so that we take care of our retirement concerns. I believe the saying, “Live long and prosper” needs to be updated to, “Plan to live long and prosper!”.