Tag: Inflation
The Ultimate Retirement Plan | Wade Pfau | Ep 63
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
[Music] welcome to the market call show where we discuss what's happening in the markets and the impact on your Investments tune in every Thursday on Apple podcast Google play Spotify or wherever you listen to podcasts hi Wade how are you doing I'm doing great thanks for having me on the show you know I'm so happy to have you here if you're in the retirement income planning business or if you're a financial advisor or a money manager somehow managing money in the space for retirement income planning everybody has heard your name you've been around in this field for a long time and as I was looking through your uh resume from various sources it's like okay well what are we going to exclude you know there's because there's so many things that you have done but I thought I would just kind of just fill in for viewers that don't know you a little bit about you um you know you're an active researcher and educator about retirement income strategies you know you do a lot of speaking I know you're going to be speaking here in Denver uh pretty soon uh you are a professor are you still a professor of retirement income at the American College of financial services I am currently yes and the director of Retirement Research for McLean asset management and in-stream uh you did your PhD in economics from Princeton and you did interestingly you did a dissertation on Social Security reform which we hopefully we'll talk a little bit about later uh you're also a fellow CFA Charter holder like myself um and you've got lots of AD you know accolades and some great books in particular one that I really like that you've done is a retirement planning guidebook uh 2021 uh and then you have that safety first retirement planning how much can I spend in retirement etc etc you've done some stuff on reverse mortgages The Unwanted stepchild that actually is a useful tool for many people yet not quite known by many so uh with that said I I was just curious tell me a little bit about your background where did you grow up so uh well I was born outside of Detroit I lived there until I was 15 moved to Iowa after that my my mother is originally from Southwest Iowa so I graduated high school in Des Moines Iowa and then went to the University of Iowa after that so pretty much midwesterner lived a number of different places afterwards including New Jersey Pennsylvania Tokyo Japan for 10 years and then now I live in Texas you live in Texas now yeah actually these pictures behind me and all are all the places I've lived over the years so it's so so you so you grew up in Detroit mostly it sounds like but moved all traveled a lot um how did you go from you know studying what did you study Finance initially when you were in college in undergrad economics and finance economics okay so how did you go from economics and finance to just being so focused it seems like you're focused on retirement income planning well yeah I mean uh financial planning as an academic field is still pretty new and even I entered the PHD program uh in 1999 and actually Texas Tech University started the First Financial Planning PhD program in the year 2000 so it wasn't even an option at that time but academic economics is very mathematical and theoretical and I was always looking for ways to apply to more real world type activities and that's ultimately how I made my way into financial planning indirectly you mentioned the my dissertation on Social Security reform that was testing how in the early 2000s there was a proposal to create personal retirement accounts to carve out part of the Social Security tax and put that into like a 401k style account and I was simulating how that might perform and ultimately that's the same sort of thing I've made my career on at this point which is just writing computer programs to test how different retirement strategies perform in looking for ways to get more efficiency out of one's asset base for retirement now that was during the bush 2 Administration if I remember correctly wasn't it and so and uh what were your findings in that what was your general thesis or not thesis but your general conclusion well at the time what I determined was that it could be made to work but it wasn't obviously a better approach and now in hindsight I realize more and more that there's so little in the way of protected lifetime income that carving out more of Social Security which is that inflation-adjusted protected lifetime income and exposing that to the market as well uh probably would lead to worse outcomes for many people than we do need some risk-fooled income and so now that traditional pensions are going away Social Security is one of the last holdouts and so it probably wouldn't be the best idea to private or not privatize but uh create personal the defined contribution 401K style accounts out of those Social Security contributions very interesting and we'll we'll touch a little bit more I have a lot a few questions on Social Security uh in general um you know from a macro perspective and also a micro perspective personally for uh people so um one of the things that I really like about what you've done is that you kind of take more of a approach that I'm kind of used to like more of an asset liability management approach when you think about funding ratios rather than the traditional way that you hear financial planners talk about it I really like your overall framework and one of the things that I I think is very helpful is your retirement income style protocol your resubm Matrix can you explain a little bit uh to the viewers about your ideas there and and what how that helps an individual determine their overall approach to how they should tackle their retirement income plan yeah absolutely and that's really one of the the confusing aspects of retirement income is there are different strategies that people can use and unfortunately just there's a lot of disagreement and arguments about one strategy is better than all the others and and by what I mean by that is you have What I Call Total return which is just a you build an Investment Portfolio and you take distributions from it throughout retirement you have different bucketing or time segmentation strategies and then you also have strategies that will focus more on having protected lifetime income through annuities or other tools to cover your Basics before you start investing on top of that and they're all viable strategies at the end of the day and that's an important point that Advocates of Investments only don't appreciate how powerful the risk pooling that annuities can do to offer more income how that is competitive with anything that the stock market might do and so people really have options about what they're most comfortable with and that's what the retirement income style awareness is about developing a questionnaire to help guide people in the direction as a starting point which of these different retirement strategies resonates best with your personal Outlook and preferences you may not ultimately choose the the strategy coming out of that but at least it gives you a starting point to say okay it seems like I might look here first as a way to build my retirement strategy and ultimately if that helps me connect to a strategy that resonates and that I can stick with through thick and thin in retirement that can help give a better outcome because they're all viable strategies but where a strategy doesn't work is if you're not comfortable with it and you don't stick with it and you you bail on it during a market downturn or something like that that that's what the retirement income style awareness is really designed to do is just provide that initial talking point on which kind of approach might work best for me to to think about as a starting point yeah I like that because what it's doing is it's basically more holistically looking at how you would can solve the problem and typically you'll find advisory firms that will will overweight if you will one over the other they're like I'm a Time segment guy or I I hate annuities it's all Total return annuities are a scam or uh you know I will never buy an annuity or uh you know Etc et cetera and risk pooling is is something that's really important but it's also very complicated and I think that's why a lot of people have shunned annuities and annuities have changed a lot over the years um and you know coming from my background you know which is more of a total return approach that's great if you have a lot of money but in in other cases you know I think that you can you can you can look at the problem from a optimal way of doing it or you can look at the problem from a way that's actually going to get implemented and work and what I like about Risa is it's practical pretty much all the stuff that you're doing is practical it's not completely theoretical one problem though with that is that you can have somebody who has a safety first for example mindset but their situation is such that if they have a Safety First with 100 of their Capital that they're very unlikely to be successful can you can you expound a little bit upon how you would think about that in terms of giving advice to people in that scenario yeah so that scenario is probably more they do have a safety first mindset but they've been pigeonholed into a total return strategy but they're ultimately not comfortable with the stock market and therefore maybe most of their Holdings are in cash or in bonds which doesn't support a whole lot of spending power and that's you kind of there's three basic ways you could fund a retirement spending goal the first is just with bonds or with cash not really offering much yield on top of that and then to try to spend more than that the um the probability base perspective is invest in the stock market and the stock should outperform bonds and that should allow you to spend more throughout retirement the safety first approach is more now let's build a floor of protected lifetime income that then brings in with an annuity the the risk pooling the the support to the long-lived helps provide more spending power than bonds alone as well and people have that option and it's when the safety first person gets pushed into a total returns probability based strategy and just doesn't invest in the stock market they're ultimately left with bonds which which is the least efficient way to fund a retirement spending goal over an unknown lifetime very true and you know I guess a lot of people did take that approach probably when I first got in this business 20 over 20 years ago there was a lot of people that were doing that who were retired back where the municipal bonds were paying it was it was conducive the market was conducive for that we had high interest rates that were in the long-term secular decline so you had capital appreciation from those bonds he also had reasonably good uh tax-free interest yields that were working for people and inflation was falling um and so now we potentially could be in the opposite inflation Rising who knows how yields are going to work themselves out but um it when you're looking at this um you you bring up this concept of some of the retirement risks and and you have like these uh longevity sequence of returns spending shocks Etc of of the risks that you're seeing out there which one would you say has had the largest impact negative impact on people that they really need to solve for you know longevity sequence of returns spending shocks and surprises well longevity in a way it's the overarching risk of retirement and it's misnamed because it's a good thing it's if you live a long time it's just as an economist will point out that the longer you live the more expensive your retirement becomes just because every year you live you have to fund your expenses for that year so the cost of retirement grows with the length of retirement and then it's when you live a long time not only is there that issue that you're having to fund your budget but then there's just more time for all those other types of risks to become a problem as well with the macroeconomic environment with changing public policy with inflation even a lower inflation rate still is slowly eating away at the purchasing power of assets and then the spending shocks are things like big Health Care bills helping adult family members having to support a long-term care need to to pay for care due to declining cognitive or physical abilities and so forth and so so it's really that longevity is if you don't have longevity there's not really time for the other risk to disrupt your retirement too much and that's why longevity usually gets listed as the primary risk of retirement interesting I hadn't thought about that so a lot of the other risks are kind of correlated to the longevity element um so so really tackling that that that could be one of the biggest parts of all the surrounding risks around that you you talk a little bit in your book a retirement planning guidebook you talk about quantifying goals and assessing preparedness and I I had mentioned before that I like that you're taking your approach more like a Alm or asset liability management type of of an approach which basically that's what it is um and uh and I don't think the average person thinks about it that way they tend to think about it as like I have so much money and I'll be able to with draw so much from it sometimes there's unrealistic expectations about it but one of the common things that I've seen is that most people are not spending the time they need to do on budgeting really to actually even come up with a number or help come up with a number of what your present value of assets need to be to be prepared do you have any kind of practical tips for people and their advisors on how they can actually think about and execute a good budget not only just you know come up with one but actually implement it well now that technology can really help with that and so if people are comfortable with some of the the different websites or software that Aggregates all of your different expenses different credit cards and so forth into one Excel spreadsheet that's a very easy way to to start budgeting now for people who mostly pay in cash that can be a lot more complicated these days I don't use a lot of cash so I just simply when in the rare case that I have an ATM withdrawal I'll just kind of call that a household expense for that time period and not worry about breaking that down much more but uh when you start having those credit cards or debit card type expenses now the the software may not categorize them in the way you desire and so I usually try to not more frequently than once a month but maybe once a month once a quarter download the expenses while I can still remember well enough if I have to change some of these categories and so forth to then be able to keep track of all my expenses and know exactly then pretty much to the scent almost what I spent that year and then to start thinking about well were there any anomalies of course there's always going to be anomalies and to make sure you budget in that sort of thing but that really once you have a few years of expenses down and once you think about bigger Big Ticket items like car purchases and things that can really give you a foundation to start projecting ahead at what your expenses may be in the future as well and then then you have a way to start thinking about well how much do I need to fund those expenses and that's the whole idea of that asset liability matching do I have the resources necessary to fund your expenses are just your liabilities and do you have the resources to be able to fund that with a level of confidence that you feel comfortable with hmm interesting so I I had a meeting with a client actually who was forced into early retirement and a former engineer and keeps meticulous records has for years and uh he gave us the actual numbers for the last three years and I I figured out what the compounded rate was and it was a lot higher than the inflation rate reported by the bl by the government so um I I think there's some disconnect there between you know how we model and reality um you know uh when you look at financial planning software and you look at the assumptions that are the number of assumptions that are involved in the financial software and you know even if you're not taking Point estimates if you're doing Monte Carlo or whatever stochastic process it's very difficult to come up with a robust plan so I'd like I'd like for you to give me some and I know this is kind of a big general question do you have any general tips to people who are doing this modeling on how and for and for clients actually for for individuals and how they can make their retirement more robust to be able to deal with all the changes that can happen in the world like you said public policy changes Market changes Etc yeah you will have to revisit things over time and and as you get new information about your spending make revisions to the budgeting but uh it's still just a matter of when you're like round up your expenses or be conservative with some of your projections there's some categories that are challenging as well like healthcare and when someone switches to MediCare at age 65 that could lead to an entirely different set of health care expenses and with all your expenses on Health Care in the past you might have to completely upend that and and and do a reset there so it is challenging but if you're trying to build in conservative projections the default is usually whatever you believe your expenses will be you just adjust that for inflation every year and most people don't really do that they tend their expenses don't tend to necessarily keep up with inflation over time now that can get complicated but the way I describe it in the retirement planning guidebook is you'll have one particular budget through ajd and then you'll have another lower expense budget after ajd but also building in what if there's a long-term care event and so forth how much additional Reserve assets would I like to have set aside for out-of-pocket expenses that sort of thing and then it's not going to be perfect and it's going to need revised over time but I think you can start to get fairly confident like I've sort of done these exercises I'm still far away from the retirement date and of course I may be wrong but I I think at this point I have a sense of what my expenditures will be or what they can be at least uh over the longer term Horizon of course subject to new technologies new inventions everything else that can happen uh that would change your expenses but at least roughly speaking I think you can start to figure these things out yeah um I guess I'm coming from a practitioner who's been doing it for you know 25 years and seeing the the the conventional wisdom by the best experts at each point in time and looking at how people have actually fared without advice and what I've found consistently is that changes in in particular with government policy has led to uh sub-optimal choices for people who are trying to optimize to the typical cfp advice so and let me let me uh back that up a little bit with with uh some some examples um education planning what was optimal has changed in my career probably four or five times um let me just put it this way I I have put more emphasis in tax diversification and diversification and stuff in how you do things now because what if you if you over optimize in these scenarios it's sub-optimal does that make sense right if like if you designed everything to handle one particular public policy and then it changes on you like right now Roth IRAs or Roth accounts are incredibly attractive to have Assets in but something could change it could just be not that they might necessarily ever tax a Roth distribution but they could add a required minimum distributions or they could count it in the modified adjusted gross income measures used to calculate taxes on Social Security benefits or to calculate higher medicare premiums and so forth and so if something like that happened and you'd been doing all these Roth conversions to get everything into the Roth account yeah that would be overdoing it and subjecting you to that particular risk so I do think tax diversification is is quite important so that you still have flexibility and options because the the uncertainty is the rules will change and we see that every couple of years we just in late December 2022 secure act 2.2.0 came out and that has changed a number of different public policy matters related to retirement income it's gonna and that will continue to happen over time so so be flexible and part of that is just not overdoing things making sure you stay Diversified with with how you're approaching planning yeah in today's environment what we see a lot is is people that have taken the advice of Max 401K uh you'll get a lot of tax deferred and and what's happening is is they're coming to retirement with a large very large 401K plans and things like that and then they just get nailed in taxes and in fact I'm finding a lot of people pay more taxes when they're retired than they did in some cases than when they were not retired um and uh and and it becomes an issue it becomes a real issue then they have estate planning issues and things like that so um uh I just I'm glad that you said that about the the tax diversification I think more than ever especially given our our current you know country's economic condition there's a lot there's we're going to have lots of changes and they could be very large changes uh in particular if you considered quote unquote rich um so I'm sorry I put my little uh two cents in there but getting back to your book uh you have this concept of the retirement income optimization map um again going back to the assets and liabilities and all of that and when you're you when you're you talk about optimizing that's that's why I brought up the the concept of optimizing I I think there's optimizing within ranges one of the concepts that I've kind of looked at and you talked about you talk about different people's retirement styles um one of the issues that you can look at is like matching the duration of your expected liabilities up for a certain period of time so let's say you have a certain percentage of your portfolios in a total return portfolio and then and then another percent that you're you're cash matching or your duration matching matching for one to five years or whatever uh I think some people call that time segmentation you can call it many different things if forget about psychology and how somebody feels if you are just a rational investor a rational person what would you say the optimal length of time is on average for somebody retiring 65 say to cash match or to duration match uh you know their near-term expenses at one year is it five years is it 10 years I know that's a a loaded question but if you forget about forget about psychology and just go pure rational mm-hmm well pure rational the the total return investing approach which has less emphasis on trying to duration match uh can work and also if you then use a an income protection or wrist wrap type strategy you you have that income floor in place that is lifetime so it's already kind of duration matched to your liability so time segmentation is certainly a viable strategy in terms of my personal preferences it's my least favorite strategy so the whole behavioral point about time segmentation is if I have five years of expenses in in cash or other fixed income assets I don't have to worry about a market downturn because I feel confident that the market will recover within five years and I'll be fine and that that story that's a behavioral story and it just doesn't resonate with me personally I I can understand it resonates with others but it doesn't resonate with me personally and therefore I don't necessarily think about what sort of like front end buffer you need in place too to somehow be rational or optimal also that's where something like a reverse mortgage can fit in in a really interesting manner because if you set up the growing line of credit on a reverse mortgage that can be the the type of contingency fund that you can draw from so that you don't necessarily need to have as much cash or other assets sitting on the sidelines to fulfill that role so I would look more at some other of course you need some some cash but I tend to say less rather than more and maybe look at some other options as well about how to have that liquid contingency fund that's great so so basically the in in the guaranteed income sources plus plus reverse mortgage could uh provide a buffer provide a floor so that you could have uh less cash and and you're generally getting a higher expected rate of return on the annuity than fixed income securities and your at at least at the present time a reverse mortgage line of credit grows at a faster rate than the cash which can be used tax-free when you need the money uh so you can see that Evolution that Carol davinsky is one of the famous planners and researchers in this area and in the 1980s he talked about the five-year Mantra which was have five years of expenses in cash now cash you create drag on you're not able to get as high of potential returns with the money you have in cash so he gradually lowered that down to two years in cash and then when he came across reverse mortgages and in subsequent research and and descriptions he talked about having six months of cash alongside a reverse mortgage growing line of credit so I think that's an example of I I think something like that sounds pretty reasonable that's that's that's that's really helpful so and I want to Circle back to reverse mortgages here but before we do if you don't mind I'd like to talk a little bit more about social security uh so we're kind of getting into the realm of the the guaranteed side of things not the total return side of things um or or I more more knowable income sources um I was just looking at the kind of the statistics right now total debt in the United States is really huge um we're running very large deficits project to be like 2 trillion we have a Pago system right now in Social Security and even if we taxed it's been argued by many people even if we taxed every billionaire 100 that would barely make a dent in our current situation so we have huge unfunded liabilities off balance sheet uh type unfunded liabilities how can we really expect Social Security to keep up with inflation and will it be there for quote unquote you know what I'm saying well it will need reforms it's very unlikely to Simply disappear for my own personal planning I I assume I'll get 75 percent of my presently legislated benefits but for people who are younger as well further away from their their 60s uh the social security statement they receive assumes the zero percent average wage growth as well as zero percent inflation and the reality is there's probably going to be a positive real wage growth over time so you're presently legislative benefit could be a lot higher than what your social security statement is implying and therefore when you offset a benefit cut with the uh the wage growth that can be expected over time you may not have that much less in terms of what you're going to plug into your financial plan but yeah I certainly we don't know how the reforms will shake out but if nothing is done sometime in the 2030s Congress would have to legislate a benefit cut and to keep the system so that enough payroll contributions are coming in to cover exist current benefits that cut would have to be somewhere in the ballpark of 20 to 25 percent so I just simply assume I'll get 75 percent of my presently legislated benefit as part of my financial plan is is it fee Is it feasible feasible to actually get Social Security in a funded situation or is it gonna is it most likely going to stay Pago in your if you had a crystal ball oh it yeah it's always been pay-as-you-go and right so the buildup of the trust fund was an effort to just build up some reserves in anticipation of the changing demographics where there's more and more retirees relative to the workers paying contributions uh they try to keep Social Security funded over the 75-year time Horizon and so it's never permanently funded but yeah with a 25 20 to 25 percent benefit cut that would be sufficient to get the system to be expected funding funded fully over the subsequent 75-year time Horizon that's that's really helpful um thinking about it that way in terms of just potentially a 25 less is a reasonable way to look at it I think um the that part of it's not so hard what's harder to understand or to get a grasp on is whether or not that's going to be what that means in real terms for for a retiree um if we continue on a certain path and inflation is is in a different scenario in the future how how do you think about scenario when or inflation when you're when you would set up a plan or a retirement plan what how would you what kind of what kind of uh of Monte Carlos if you will would you put on on your inflation expectation so I do well I tend to just try to think of everything in today's dollars so that the inflation's factored out of it but I the way I think about long-term inflation is the markets tell us what they expect inflation to be if you just look at the difference between a treasury bond and then a tips treasury inflation protected security with the same maturity uh the difference between those two is what the markets expect inflation to be in if they thought it would be different they would invest in one or the other to get that aligned inflation is coming down now and even over the next five years at this point markets are only factoring in an average inflation rate of about 2.1 to 2.3 percent so it seems like markets really expect inflation to come over to come under control even over 30 years right now the markets are building in about a 2.3 percent average inflation rate which is below historical numbers and in terms of if I'm building a Monte Carlo simulation right now I'd to be a little more conservative there I'd base it around a two and a half percent inflation rate with historical volatility and inflation is around four percent so so you're basically an average of 2.4 or 2.5 and then uh standard deviation is like four basically okay so uh that that sounds reasonable um I I guess what is interesting about that is I guess if you assume that we have typical real rates of return for different asset classes that that all works itself out if you put it in present value terms um but if that's not the case and and it should stay that way ultimately it should stay that way but you could have major moves in markets in people's uh time Horizon when they retire which leads us to sequence of returns conversation uh when people retire you can have these you can have these big shifts in markets things things are rough right when somebody retires uh we uh remember I told you about that engineer we had a conversation with forced into early retirement right when the market topped uh the good news is is he had two types of annuities that worked out perfectly for him in the sequence return can you explain sequence return risk for listeners and and what it means and how to you know strategies to mitigate that a little bit more and just one quick last comment on the inflation too like if you thought when I said these low inflation numbers that that's ridiculous inflation would be much higher well then you'd benefit from investing in tips because they'll provide you a real yield plus whatever inflation ends up being and so they'll perform better if inflation is higher and they've already discounted that that was one of the best performing uh fixed income markets uh in the last couple years so but anyhow but but yeah a sequence of returns risks so that's it whenever you have cash flows going in or out of a portfolio the order of returns matters and it's when you start spending in retirement that it matters a lot more so it's like the market could do fine on average over the next 30 Years but if the market goes down at the start of my retirement I'm not having to sell more and more shares to meet my spending needs and sell a bigger percentage of what's left to meet my spending needs such that when the market subsequently recovers my portfolio doesn't get to enjoy that recovery and so it can dig a hole for the portfolio and the the average return could be pretty high but if you get a bad sequence of market returns right at the start of retirement it can really disrupt that retirement and lead to an implied much lower average rate of return than what the overall markets were doing over your retirement Horizon yeah so and in terms of actually uh let's say you're coming up on retirement so this is a common scenario you're retiring in 10 years or five years what should an investor be thinking about doing to transition from that accumulation to distribution phase to kind of mitigate that sequence of return risk so when people start thinking about retirement I think that's where the first step take that retirement income style awareness to get a sense of what sort of retirement strategy might work for you because that's where you then have um different options if you're more of a total return investor that's the whole logic of the target date fund and so forth is just start lowering your stock allocation but still investing in a diversified portfolio as part of that transition into retirement if your time segmentation the easiest way to think about the transition is instead of holding those Bond mutual funds you start exchanging those in for holding individual bonds to maturity like if I'm 10 years before retirement every year for the next 10 years I could start buying a 10-year bond and then when I get to my retirement date I have the next 10 years of expenses covered through these maturing bonds if you have more of an income protection or risk draft strategy the the options would then to be thinking about well if I have an income gap I'm trying to fill where after I account for Social Security or any pensions I'd really like to have more reliable income to meet some basic expenses well you could start looking at purchasing annuities that would turn on income around your projected retirement date as a way to have that transition into retirement and so they're all viable options and it's just a matter of taking the the route that you feel most comfortable with very good that's really really helpful um now I I guess at least is a little bit into the what I would call the traditionally unloved unwanted stepchildren annuities and reverse mortgages uh you know they've gotten a bad a bad rap for so long but they're so useful in in as tools I would say probably the reverse mortgage is the least understood and uh and and one very helpful um tool I think maybe because of just the history of them and how they used to be structured versus how they're structured now um can you give me a sense about how to think about reverse mortgages for people is it only for people who are you know can barely get their their plan together with their assets or or does this also work for people who have a cushion but they should still do a reverse mortgage more yeah I mean the conventional wisdom a lot of times is that the reverse mortgage is a last resort consideration after everything else has failed and maybe then just a way to Kick the Can down the road a little bit but ultimately that retirement wasn't necessarily sustainable since about 2012 that really the focus of the kind of research retirement planning financial planning type research was looking at how reverse mortgages can be used as part of a responsible retirement plan and so it's not that a lot of advisors may just think the reverse mortgage is only for someone who's run out of options but but that's really not the idea it's we have different assets and it's back to that real map the retirement income optimization how do we position those assets to fund our goals and the reverse mortgage provides a lot of flexibility about how to incorporate our home equity asset to help fund our retirement plan and it can lead to a lot more efficient outcomes than just simply say leaving the home sitting on the sidelines and saying well I've got the home if I have long-term care needs I'll sell my home to fund the long-term care something like that otherwise I'll just leave the home as a legacy asset for my beneficiaries there's much more efficient ways to incorporate home equity into a retirement plan and that's what the whole discussion around reverse mortgages is how can I I use a reverse mortgage to help build a more efficient retirement plan and not as a last resort but as part of a responsible well-funded retirement plan it's just another Diversified tool to a source of source of of assets that you can use that's not just sitting there I just had a conversation with a client yesterday that is about to retire in a few years and uh that is exactly what he said that other property that I have in that other State uh I'm just gonna keep that as a that'll be my I'll sell it if I need to you know there was a conversation about health care contingency and um uh long-term care and things like that and that was his rationale um and and in discussions with clients there has been a a ton of resistance you've been really good at putting out information that shows why it makes sense to have it as a potential use so can you explain a little bit about the the line of credit portion of it and how that how use how that could be advantageous yeah and it really it goes back to this idea of sequence of returns risk and if you look at a reverse mortgage in isolation it may look expensive or whatever else but it's how does it fit into the plan and by reducing pressure on the Investments it can help lay the foundation for a better outcome and the the growing line of credit is one of the most misunderstood aspects of the reverse mortgage and I think it was partly unintentional and it may sound too good to be true in a way it probably is and we saw in in October 2017 the government put some limitations on the growing line of credits so it was incredibly powerful before then it still quite powerful not as powerful as before for new uh anyone who opened a reverse mortgage before October 2017 was protected to have those Provisions in place for the entire life alone but if you wait and then after October 2017 you still have the growing line of credit it's not as powerful but but the idea is I believe the government assumed people would open reverse mortgages because they want to tap into the funds but financial planners realized with the variable rate not with a fixed rate but with a variable rate home equity conversion mortgage you do have to keep a minimal loan balance of say 50 to 100 dollars but otherwise the rest can be left as a line of credit and that line of credit grows at the same way the loan balance would grow and so you can understand why if you borrow money the what the loan balance will grow over time well it just happens to be the case that the kind of neat planning trick is if you open the reverse mortgage and 99 of it is in the line of credit the line of credit is growing over time at the same rate that the loan balance would have been growing and ultimately this improves the odds dramatically of having a lot more access to funds over time if you open it sooner and let the line of credit grow versus just waiting to open it at the time you might actually want to start spending from it yeah how has it been limited uh limited versus the way it used to be what what are the limitations well they increased the initial mortgage insurance premium which is not directly to the line of credit but then every every so often used to be more frequently we're now getting overdue at this point with it's been over five years but they revised the tables that determine the principal limit factors of what percentage of the home value can you borrow and so as part of that 2017 change they uh lowered the the borrowing percentages and also they lowered I mean this this part's a good thing but they lowered the ongoing mortgage insurance premium that would cause the loan balance to grow at a slower rate but it also in turn caused the line of credit to grow at a slower rate so it before that change I was running simulations where if you opened a reverse mortgage at age 62 there was like a 50 chance that within 20 years the line of credit could be worth more than the home and that's no longer the case it's still there's still a probability that the line of credit could grow to be worth more than the home but it's not nearly as dramatic as what I was Finding before the rule change that's very interesting because the line of credit growth rate is tied to interest rates and home prices have somewhat of an inverse relationship to interest rates to some degree but it's basically positively skewed so it's not it's hard to know but uh uh but yeah that's that is a great planning tip and it's interesting because we have had a lot of friction with this discussion with uh clients uh mentioning to them because they just have it in their head that I'm going to lose my home and I'm going to there's all these things that can go wrong and then you have to explain it's a big education process and of course they are required to do education as well no we don't sell reverse mortgages but we always you know if we if we you know we mention it to people as a source and you know having it there makes a lot of sense uh and and the same thing with the annuities um you know I have a love hate relationship with annuities but I'm becoming to love them more and let me tell you why before it was all commission driven you know and we're fiduciaries we don't do commission stuff now with the Advent of finally the insurance companies have really gotten to the point where there's at least enough of them now doing products that make sense with the guarantees I mean there was always companies out for a long time there's companies out there like Americas Etc that had just pure plain vanilla uh va's variable annuities that had just lowered your expenses and maybe eliminated a surrender or something but the guarantees is where the real there were folks too much on tax deferral and not enough on guarantees what were the guarantees is really really what we're really looking for here uh and the only way you could even get them you guarantees would be if you did a commissionable product so we'd be handing you know we would be referring people to Insurance guys who were selling commissionable products and then sometimes you don't know what's going to happen after that happens uh with that client so now thank God we have uh we're in a scenario now where the where the financial industry has finally caught up to what needed to happen with annuities yeah the only annuities yeah yeah the only annuities and there's it still has a lot more to be done it's it's you shouldn't be overlooked and I think what happens one of the reasons that I think they're so helpful uh for people is that risk tolerance is time variant people say their risk tolerance is X and then as soon as you have a market decline then their risk tolerance is all all of a sudden why which is more conservative and and uh these annuities can help people psychologically overcome that right you can always look to something that is either staying equal or growing and you can also have growing income streams during the Gap we see that a lot there's a gap between uh when they get Social Security and when they retire and it kind of fills that Gap and it's funny when I was when I was I actually had my assistant who's also a CPA excuse about my financial planning system I had to read this book first and she uh she said it sounded like like you uh were like in the room with him uh because there's so much stuff in here that you and I agree with it's amazing uh before not even knowing you so and I think it might have to do more with the approach of taking things more from uh your academic background and your CFA background it gives you a different perspective than what kind of the traditional financial planners had who had come more from a sales background and now what's happening is is we have uh the whole industry is now moving in the I think moving in the right direction and I think you've been a big uh reason why that's happening so I I really want to thank you for that all your work is really making a difference I want to talk a little bit about Medicare if we can and health insurance this is probably one of the most the hardest part is the medical the medical discussions in some ways um people don't want to think about long-term care people don't want to think about health costs I was looking at some of the statistics you know long-term care statistics is how much it costs it's a big number how would you how would you model the contingency planning you know for let's just start with long-term care how would you model that would you model it as a present value number or would you try to put it as a as something that's over time how how would you how do you approach that yeah actually so I did try to make the retirement planning guidebook as comprehensive as possible and and so I as part of that developed a long-term care calculator and the the basic logic of it is develop a scenario that you would feel comfortable that if you could fund that scenario uh you'll feel like okay things things will work out whether that's three years in a nursing home whatever the case may be but develop that scenario where you're saying okay at age 90 I will spend the next three years in a nursing home right now in the United States the average cost for a semi-private room in a nursing home is a little bit under a hundred thousand dollars I'll say in today's dollars a hundred thousand dollars a year but then I'm gonna plug in the the math gets complicated but you've got what's the inflation rate in long-term care what's the overall inflation rate and then back to this whole idea of the asset liability matching like what's the investment return discount rate you're comfortable assuming as well and also recognizing that if I do go into a nursing home I don't have to also fund my entire budget of a like if I thought I was going to spend 80 000 a year well I'm not going to be going on any sort of trips I don't have to go to restaurants or anything uh a lot of my other expenses would reduce not not 100 but they would reduce so plug it in what I think is a reasonable reduction to the rest of my budget and then you get calculated a present value of here's how much money I'd have to have set aside as a reserve asset to feel comfortable that I would be able to fund this long-term care need and and be able to have a successful retirement and for people who are worried about and who may be paying out of pocket for long-term care that could be several hundred thousand dollars to be blunted on average that's what it comes out to I actually had a coffee with a gentleman and he said uh what is it just tell me what the number is I said well it depends on your age he says no just tell me what the number I said it's roughly about 300 000 roughly on average it could be more it could be less uh you know uh okay and and there's there's there's different ways you can fund it right you can do long-term care insurance uh traditional Standalone you could do um you know life insurance policies that have embedded features you could do if you can't like qualify for um you know you know get a policy you can maybe get it embedded in an annuity of some sort you can sell fund um so it's not an easy thing that you can uh solve it with a quick answer um but but it's important to have in a plan and I and I like the fact that that uh you've emphasized that a lot in your work um it's just it's just great that that people are thinking about it from that perspective I want to switch gears a little bit um and talk a little bit about tax efficiency uh you know taxes are such a huge part of the impact of a plan and there's so many different angles to it and and the tax rules change so much um I'll tell you one of the challenges that I have asset location the concept of balancing you know where you put a certain asset according to us is tax efficiency versus keeping an asset allocation in line right up you know operationally keeping it in line with the objectives and then as money is being spent taking it from the right place it's a challenge even with excellent software and then sometimes I'm finding that it doesn't actually work out as planned so can you can you give me some practical tips on how to deal with asset location well the the basic logic of asset location but yeah I mean in practice it gets incredibly complicated as you're spending from these accounts to think about also rebalancing and making sure you're keeping the right asset allocation between stocks and bonds and the NASA location is where do you keep these things but generally just is a basic guideline your taxable brokerage accounts of course you want some cash there for your liquidity but otherwise that's your most tax efficient stock Investments so if you own stock index funds and so forth the on a relative basis they're most likely to be best off in your taxable account because a lot more of their returns will be those long-term capital gains that get the preferential tax treatment then with like your tax deferred IRAs and 401ks that's more of a place where less tax efficiency so bonds and so forth maybe lower returning type asset classes and then for your Roth accounts the Roth IRA and so forth that's where less tax efficient but higher expected return type asset classes could go the Emerging Market funds and small cap value and that sort of thing and that does also work with distribution ordering as well because the Roth will be what you tend to spend last and so also having these uh riskier asset classes that may have more growth prospects over the long term that can be a good place to set them aside since you're not likely to be spending from those accounts until later in retirement okay yeah it I think for a lot of people it's a little bit of a daunting thing and in practice it can be with contingencies and things like that can be hard to to do correctly and keep managed and I know there's good news is there's good software now that that helps with that um as far as tax efficiency the other you mentioned the order of withdrawals I mean traditionally you know you have the you know your traditional order of withdrawal that you would you would uh do in in the past a lot a lot of recommendations has been you know you want to take from your taxable accounts first right let those tax-free tax deferred accounts grow and then and then you start taking from those other sources but you make a really good point that that's not always the best thing to draw that taxable account down too fast can you expand upon that a little bit well the yeah the the basic tax efficient distribution is spent down taxable assets than tax deferred like IRAs and then tax exempt like Roth against last but you you can do better and so the the better approach is to have a blend of taxable and tax deferred until the taxable account depletes and then a blend of tax deferred and tax exempt after that and as part of that blend you can do rock conversions to in the short term pay higher taxes if that can better position you to pay less taxes over the long term and to have a higher Legacy value from assets over the long term yeah and then getting more specific than that it's there's no you really got to run the the individual numbers on a case-by-case basis but generally there's the opportunities to sustain your assets for much longer by having a more tax efficient distribution strategy that digs into that taxable plus tax deferred and then later tax deferred plus tax exempt exactly and and that's why it's important while you when you're an accumulation phase make sure you have some tax diversification if you can yeah have Assets in all those different types of accounts yeah so that you're not nailed so bad uh later on uh and then there's a lot of complexities that can happen with happen that we see quite a bit with concentrated stock positions and things like that which is probably outside the scope what we're talking about today so um and lastly here last last topic here non-financial aspects of retirement this is a huge huge huge thing uh it's funny it was the last towards the end of your book and I'm glad that you talked about it uh because uh there's I can't tell you how many times um you know you see people think that they're going to be happy sitting on the beach and then they they do that and they're miserable uh or or spouses that wind up hating each other for some reason can you tell can you give us some ideas about um like what should people be doing like say they're five years into retiring or ten years into retirement retirement What should people be thinking about doing to kind of get their their overall lifestyle satisfactory when they actually do retire yeah and and that's this is in some ways more important than any other Financial stuff because with the finances it's easier to adapt but work does so many things in a person's life it's not just that it provides a salary and you need a way to replace all the other aspects of work such as structure to the day camaraderie feeling part of a team feeling like you're creating value for a society all these different aspects that you need to be able to replace with something that gives you motivation to wake up in the morning in retirement and so to say simply it's not the best starting scenario if you retire because you hate your job you want to be able not to retire away from something but to be able to retire to something you want to have and it gives you purpose and passion and meaning to give you the motivation to wake up and and have something be active each day because in all too many cases people just they start doing passive things like watching too much television or surfing the internet too much and that can lead to a really miserable and unsatisfactory retirement wow that's huge that's interesting have something to retire to so uh and and start figuring that out sooner rather than later right not don't wait till the very end and go yeah what am I doing uh and sitting there staring at your wife or your husband yeah that's the idea that there's all these things you you want to get done but you just think well when I retire then I'll have more time to do it well if it's something you've been holding off on doing for the past 40 years it's not likely that just having more time in retirement is what you need you may just simply either not be interested if it's a hobby like oh I want to go back to playing the guitar or something if you're waiting for retirement to do that sort of thing there you go that retiring may not be enough and then people might start feeling bad that you no longer have the excuse and that's where if that sort of bad feeling compounds it can create a spiral like a downward spiral where people just become less engaged and less positive and it can even impact Health which then in turn makes it harder to be engaged and involved and and can lead to downward spirals it's really important to try to avoid that and as part of that not waiting for retirement to to consider all these other aspects of your life outside of work but making sure you're nurturing relationships and having hobbies and having things outside of work so that it will then be easier to transition into the retirement yeah that's great so is there anything as we close here is there anything that you're really excited about that you're working on right now that you want to share or is there at all right now I am just trying to get the updates done for the retirement planning guidebook and where we're doing the best we can to build out that retirement income Styles ideas uh something that people can benefit from and uh the other main research area is with the tax planning as well that I think this will be a Hot Topic and I've already done a lot of work in that area but it is such a complicated area that just trying to push forward as well about like Roth conversion strategies and and how to best Implement those in a most of the work in that area just assumes a fixed rate of return and with the reality of not fixed rates of Returns on your Investment Portfolio that also dramatically complicates some of those tax planning decisions so I'm continuing to push ahead in those areas interesting so more stochastic modeling in your future yes stochastic modeling and now you're probably going to be uh that Technology's got to be in there somewhere too any plans uh that you want to announce or share with new technology that you're going to be coming out with or software programs or anything like that or I mean I just have this Vision in my head if I were you I'd be doing something like that but I mean I'm just saying yeah don't Envision creating tax planning software but uh the retirement income style awareness that's where I'm putting on my efforts in terms of having software and that's an easier problem than the tax planning problem definitely yeah there's a lot of changes always yeah you'll be coding to your uh blue in the face all your staff would be so uh the uh it's interesting I I I'm actually going to be diving into that that profiling software that you have um I had a conversation yesterday about that so that's very good so where would people uh would you like people to send you see learn more about you um anything that you're up to oh yeah uh so my website retirementresearcher.com all one word retirement researcher and if you go there you can sign up every Saturday morning we send out an email with different articles and things and then my retirement planning guidebook is on Amazon or any other major book retailer and also I do have a podcast as well they're retire with style podcast with Alex mergia who's my a co-co-researcher and and co-founder of the retirement income style awareness excellent all right Wade thank you so much appreciate you coming on it's been a pleasure thank you the information in this podcast is informational and General in nature and does not take into consideration the listeners personal circumstances therefore it is not intended to be a substitute for specific individualized Financial legal or tax advice to determine which strategies or Investments may be suitable for you consult the appropriate qualified professional prior to making a final decision wealthnet Investments is a registered investment advisor advisory services are only offered to clients or prospective clients where wealthnet Investments and as representatives are properly licensed or exempt from licensure [Music] foreign
The Case for $20,000 oz Gold – Debt Collapse – Mike Maloney – Silver & Gold
Jason 0 Comments Retire Wealthy Retirement Planning
If you know how the world financial system works you know the game
that you're playing and if you don´t know the game
and the rules that we're playing by you are going to get slaughtered, you are going to get slaughtered. Ever since the Federal Reserve was born,
we have been living under a lie. In order for us to mantain the levels
we've got and to maintain the prosperity Obama has to be twice as far in debt
when he leaves office than when he came in, or the whole thing
is starting to collapse.
The Federal Reserve, they're buying
bonds directly from the Treasury. This is Quantitative Easing,
they're calling it, and that means there's
an emergency going on. I can see that there was not anything in history as far as finances goes, that was
as much as a sure thing as gold and silver accounting for the
expansion of the fiat currency supply. There is absolutely no chance
in hell that this won't happen, right now it takes about 15000 to
20000 dollars an ounce of gold. I believe that there's going
to be a deflation first and then all of the
world's central banks will start printing like crazy to get us
out of that deflation and Ben Bernanke will be leading the charge. You can´t have a debt that is 10
times the size of your economy. It's not posible. Everything comes
to its screeching halt first. I've got to show you the world's stock markets and real estate bubbles have to continue crashing because all it is is the market trying to seek fair value.
It's trying to seek equilibrium, this is what the markets do. It is their job. Basically, you know, our entire currency system is imaginary, it doesn't really exist. It's just that
we're all dreaming the same dream. If anybody chooses to wake up… it's over with. Thank you very much! I'm Mike Maloney author of the bestselling book
on precious metals investing, Guide to Investing in Gold
and Silver, is part of the Rich Dad series that
Robert Kiyosaki started, the original book. Robert
Kiyosaki says: write a book no other instructions: write a book, and so I start writing this book two and a half years of
research and writing probably 30 hours a week, every week for two and a half years.
It's a very well researched book.
The one thing I really worry about is perpetuating misinformation,
I want it to be accurate and then I tried to boil it down and
make it real simple. I read all these books by economists like Milton Friedman Murray Rothbard, Ben Bernanke, if you get a chance to
read some Ben Bernanke, don't! He is a horrible author, just horrible. They're all trying to write over each
other's head and impress each other And by doing so, they make
economy sound so complex that everybody thinks well,
I can't understand economics. It's really simple. Economics is very simple if you
boil it down to its essence and it's not that difficult to
understand and that's what I tried to do in my book.
For the people that
have not read my book, about 75% of it is not about investing in gold and silver,
it's some history of money and then how the world economy works
and what could potentially happen you know, where we came from,
where we are today and what could potentially happen. By the way, I really couldn't care less
about gold and silver, I don't want gold and silver, it's just in its
cycle right now, it's a stupid lump of metal that doesn't have cashflow or
spinoff dividend yields. And so I don't
want gold and silver, it's just that right now
I don't want anything else. They're just in their cycle right now
and they're going to be outperforming everything else, in my opinion
from all of my research, and they're going to be able
to buy a whole lot more other stuff.
A whole lot more real estate, whole lot more stocks, whole lot more oil wells, farmland, all the true wealth. It's in the buildings, the businesses,
the farmland that is out there, and people get this
picture in their head that if there is an economic disaster,
if there were some sort of collapse that it's going to be like this nuclear
wasteland afterwards, it's not. All the buildings still are going
to be there, the apartment buildings. It's just that they're all going to be on sale. The problem is when investments are
on sale nobody buys, the public comes charging in, and they
chase investments after they're going up.
Gold and silver get hot whenever they're going up and
as soon we see them take a dip, it's like sales turn off like a
light switch, most of the time. And I don't want anybody to get slaughtered. I really don't want these bad things
to happen, I just think that all the evidence is there. What our leaders have done
to the economic system is going to cause these things to
happen and it's inevitable, and I'm trying to warn
as many people as possible as quickly as possible.
My company has a mission, to get as much gold and silver
in the hands of the middle class as quickly as possible, because when there's great economic upheaval,
there is great political change, and usually goes along with it In the hyperinflation in
Weimar Germany in 1923, this hyperinflation ended on November 15th, 1923.
On November 8th, one week before the end of the hyperinflation, Hitler's storm troopers pointing machine guns at the front
door of the Burgerbraukeller where there was a political meeting,
this big beer hall where there about 3000 people
listening to politican speeches and on that night
he took the stage at gun point and to this literally captive audience
gave a speech that changed the world.
Nobody knew the name Hitler,
nobody knew who he was until he gave this speech to a newly empoverished middle class people that were scared and
looking for somebody to lead them, and here this charismatic guy takes
the stage, gives them a scapegoat and says "I know the way out of this". The next day, those
people in that beer hall followed him to try to do
a military… a coup to take over the government and it failed. He was imprisoned, he was tried for high treason, his trial went on for an entire month, and during that month he
had the ear of the nation. He was covered in every newspaper all across Germany, and the judges were
sympathetic to his beliefs so they let him go on for hours
on end with the speeches and that's when he gained power
was when the middle class was scared. The middle class defines a
country with their vote. The country, as the middle class
goes so goes the country, and so what I'm worried about is not the loss of my
financial well being, it's the loss of capitalism,
it's the loss of our quality of life, it's the loss
of our freedom of choice.
That's what I'm worried about, and I know that there are certain people
that I'm not going to be able to reach. Joe-six-pack, I refer to
the guy that comes out of his beer and
football induced coma at the very end of the bull market and
comes charging in and buys at the peak. I can't do anything for him.
I'm hoping that I can do
something for all of you. These are wealth cycles. If you have
two asset classes that are rising, you have for instance, let's say
that this is real estate on the bottom and on the top here
we've got precious metals. Precious metals in this last decade here, precious metals outperformed
real estate and stocks but everything went up. Stocks went up, bonds went up, real estate went up
and so did commodities and precious metals. Is that possible? Can everything go up?
Think about it for a minute. If we've only got so much stuff in
society and if you've got these 3 or 4 asset classes and everybody rushes toward one, pushing
it to a bubble shouldn't it be drawing currency away from the others?
Shouldn't the others be going down? Well, they didn't in the last decade.
And what's happening here if you've got
two things that are going up, if you're invested in this one down here, when you've got to sell, you can't
buy as much as this one. If you're invested in this one, when you
sell you can buy more of this one. They're both rising in price, this one is falling in value when you sell it you can't
buy as much gold, or food or oil. Your house is worth half as much
in oil, as oil was 10 dollars a barrel in 1999. So your house measured in oil has crushed,
the stock market measured in oil has crushed. If you start looking at your home
or all of your investments and you divide them by something
else, you measured them in the price of a bushel of wheat, a pound of copper, a ton of iron shares of the Dow or ounces of gold, you're going to discover something. These two things that
they're going up, eventually the people that are invested
in this one realize that the smart investors realize that
it's going into a bubble,they sell and they buy undervalued asset, and then this trend reverses.
It can't go on for ever, and if it did, if gold outperformed real estate
for ever, there would come a day where one ounce of gold would buy
the entire planet and we all know that that can't happen.
Right? So, eventually one becomes overvalued
and the other one becomes undervalued and the cycle reverses, and then it reverses again, and what is happening is that they're
printing currency about this rate and that's the reason you can't see it.
People would say: "well, at least my house is worth a
100.000 dollars more than it was in the year 2000", or "it's worth 20 per cent more" Well, in fact if the inflation was 40 per cent
it actually went down in value.
They'd say that, you know, they looked
at the stock market and the Dow right know is just
barely above its 2000 high. In the last decade stocks
have gone sideways for a decade. We've had inflation during that time,
they inflated the currency supply. So, if you start measuring one thing with
another thing, so you're measuring stuff against stuff instead of using
currency, what you discover is that everything is trapped
in this valuation channel, where it goes from overvalued to undervalued
to overvalued and undervalued again, and the thing that you're
measuring it with is doing the exact opposite mirror wave. The trick is sell the overvalued asset near the peak if you can, find the undervalued asset
and I call this wealth cycles.
And if you can do that, it's a road to true wealth, you're
escaping that valuation channel. Here is a real example,
this is the Dow measured in points. And what are points? Points are derived by the dollar value of the
underlying stocks, so basically its points are dollars, and one of the reasons that
they measure it in points is just like when you go to Las Vegas, they take your
currency and they give you chips. Now they're pieces of plastic, so
you don't care, you're just having fun. So change it to points, and it's not as bad as if
"Wow, you lost so many dollars" "it went down so many points". Anyway, that's the Dow
measured in points, but if you go every month during this
entire graph from the year 1900 to today, and each day you take the points on the Dow
and divide it by the price of gold you get how many ounces of gold one
share of the Dow is worth, and this is what it looks
like measured in gold. It's not going anywhere, it's got a mean of about 4 ounces of gold,
which means that the price of gold should be one quarter of the
points of the Dow and then things will sort of be in equilibrium.
It's fair value when the Dow is only four
times the price of gold, but what you see here is that it goes into, it goes from fair
value into a bubble 18 ounces of gold, it crashes down to 2 ounces,
another bubble of 28 ounces of gold because the bubble was bigger, because they print more currency in
the meantime, when it crashed it went down to one ounce of gold. There was a
day in 1980 when gold was 850 and the Dow was at 850 points, one ounce of gold bought the Dow.
Conversely, if you cash out you could only buy one ounce of
gold with the proceeds of your stocks, and then we're going on to the
biggest bubble in history. There's no time in history,
this point in 1999 – 2000 there's no time that gold
was as unloved and ignored as in that time period. It was no
nation's money and it had gone down for 20 years, it was "the worst investment
you can possibly make", nobody wanted it.
Take this, This is the price of the Dow measured
in gold. Flip it upside down and you've got the price of
gold measured in the Dow. Put these two things together, and what you find is
that there's a cycle here and if you've written
stocks up to 1929 and then sold your
stocks and bought gold, and then in 1932 gone to gold … and then, gone
back to stocks I mean, and then in 1980 go back into gold, and so on, uh… this is the road to true wealth,
I mean, you're making massive gains here. I show two hypothetical
families in my book and one goes from 35 bucks to
11.000 bucks over that time period and the other one goes
from 35 bucks to 11 million and that is the difference,
one family creates a dynasty the other one didn't even break even.
This is the Gold-Dow ratio instead of the
Dow-Gold ratio, so you're measuring gold's value per ounce measured in what
percentage of a share of the Dow that it would buy, and what is showing is that gold is nowhere near a bubble,is very
undervalued here and still has to go up, the mean should be 25 per cent or more. and in every bubble in history
and in nature, I used to be an electronics engineer in physics, when something is out of whack, when it
reverse back to the mean it overshoots. if it's more out of whack, when it
reverses to the mean, it overshoots further, so I'm expecting the day where the price of gold would be
double or more the points on the Dow.
This is the Silver-Dow ratio. Silver has just I mean, the gains here
should be immense. This is just gold
for the past decade. I just challenge anybody to go and find
an index or stock or anything, that looks that good over
the last 10 years. This is a perfect chart, it's very bullish, there's nothing here saying gold, in this information that you're looking at,
this is what technical analysts look at when they're trying to figure out whether
to buy an asset or sell an asset, and this is saying that gold is probably going to continue
rising, there's nothing bearish in that signal. This is the SP 500 over the
last decade, so representing stocks of the 500 largest companies
in America and there is gold. uh… Here we have silver and I recently spoke at the 8th annual
banking conference in Socci Russia, this is the big banking conference
for all of Europe and Russia. And I was showing them this
at the very end, they cut me off it was really interesting.
I was running out of time, and you hear this voice
come over the loudspeaker and it is their Finance
Minister in their parlament, telling me: "mister Maloney, mister Maloney,
you've got to stop now mister Maloney" they were trying to cut me off,
I was presenting this information they did not want presented
at this conference, and then he comes up to me afterwards, he's got
a copy of my book that he bought, he wants it signed! Oh, by the way, please visit our
table afterwards, we're giving away, these are 100 trillion dollar bills, they are real,
they are from Zimbawe, we are giving away 20 quatrillion dollars at my table, so…
Uh… come and get your 100 trillion! OK, so… what I showed here was that
there is an inverted head-and-shoulders and this works just as well upside down,
as it does rightside up, you can see the head hanging,
it's like this guy hanging from his feet. This is the head and shoulders
that I'm tracing out here in blue, and then, you draw across the neckline, and you invert that
head in a predicted move and you see this, if you watch my…if you google "10 dollar oil" you'll see a video where he's cutting me off, and
I'm sort of flashing through this, I don't get a chance to describe it, but
I was predicting that silver would make a big move and guess what? That's what silver did. It doubled from where it was. This is the spot price of silver.
This is the price of silver IOUs,
the price of gold and silver is determined by people going:
"I owe you 5.000 ounces of silver, I owe you 5.000 ounces of silver, I owe
you 5.000 ounces of silver and handing this things out, and they're trading this IOUs
on the Commodities Exchange and that's what determines
the worldwide spot price. Now you can do this naked…it's called the
naked shorts. If you don't have the silver to cover it, if you're not sitting on a
pile of silver and you are writing IOUs, you can still sell them. And some big banks do this, like
J.P.Morgan and they crash the market and then come in and cover their shorts,
they buy those IOUs back at a lower price than they sold them for
and they get to make the spread. They fleece the public and
some funds that invested in silver for hundreds of millions
of dollars by doing this, and they do it, they've
done it on a regular basis. But Silver fell too low this
time and so did gold, and investors that were looking for physical
realized that it was just too cheap, and they all had to get some
and shortages developed, and all across India, Europe
and North America the cupboards were bare.
There were 3 months
where we can only get one silver product
at a time, and we had no gold. We didn't have gold and my
dealer shipped for 3 months and I deal with 4 of the world's largest
wholesalers and they could not find gold for us. People don't realize how much gold
and silver there is on the planet. There are 6.6 billion
people on the planet, there are only 2.2 billion
ounces of gold. That's a third of an ounce per person. Silver is even
more rare. There's only about 14th of an ounce per person.
That means that 14 people have to
share that same one ounce of silver. And right now, you can get a whole lot for your currency. uh… I'm going to take a little detour here. I did not define the difference
between currency and money, and you will hear me say: currency, currency,
currency, over and over and over again. Back…before World War One, uh…
Each note the Treasury issued,
each dollar in existence in the United States would say that there have been deposited
within the United States Treasury 20 dollars in gold coin, and payable
to the bearer upon demand. The money was in the vault, the currency was a note they
gave you, it was a claimcheck, only a claimcheck on
the money. The same as if you go to the dry cleaners
and give them your shirt, and they gave you a
claimcheck for your shirt.
The value is that shirt at the
dry cleaner's, not the piece of paper that says that
you own that shirt. So our currency that circulated, was the paper US dollars,
and they were claimchecks on money, and people do not understand that
money has to be a store of value. Only gold and silver
qualify as money. They have all the attributes that
you need. They are portable, durable, divisible, fungible… and then money
is a store of value over long periods of time. One of the things that
I always start with is how currency is created, because if you know
how the world financial system works you know the game
that you're playing.
And if you don't know the game
and the rules that we're playing by you're going to get slaughtered, you're going to get slaughtered. So this, just by knowing this,
increases your odds just a hundred fold of winning. So…uh… "When you or I write a check
there must be sufficient funds in our account to cover the check, but when the Federal
Reserve writes a check there is no bank deposit
on which that check is drawn. When the Federal Reserve writes a check it is creating money". And that is "Putting it Simply" from the Boston
Federal Reserve's website. Basically, the way this works is: the trader of the
United States is the US Treasury.
Uh… but every country has the
equivalent to our Treasury so the Treasuries around the world uh… create a bond and, what is a bond?
A bond is just an IOU: Loan me a trillion bucks and I promise
that over a 30-year period, I'm going to pay you back 2 trillion That's basically a bond, an IOU. And there's something in the middle
here called open market operations, that I'm gonna just show
you real quickly, but the open market operations
is just a shell game that obscures what is truly going on. So banks show up at the
Treasury Auctions, primary dealers they're called, and then the Federal Reserve comes along
and through open market operations, they write a check to the bank
and they buy that bond from the bank, so the Federal Reserve
ends up with the bond but then the next month those banks show at the
Treasury Auctions again. Now the Treasury has the dollars and the Federal Reserve has the bond,
and this process repeats itself over and over and over again. And there is a build up of
dollars at the Treasury and bonds at the Federal Reserve, So, we borrow currency into existence
with an IOU, that bond, and the Federal Reserve opens
up the bigger checkbook that doesn't have a single penny in it, and writes a bad counterfeit check and hands that to the Treasury, dollars spring into existence, then the Treasury deposits that in
the various branches of the government and the government does
some deficit spending, on social programs, public works and war, and then they pay those government workers, the contractors
and the soldiers.
And all of those people deposit
in their private banks, "Banks create money by 'monetizing'
the private debts of businesses and individuals". Federal Reserve Bank of New York. So, now the miracle of fractional
reserve lending comes in to play. Fractional reserve lending
is just what it says. They reserve a fraction
of what they've got, if you go to the bank
and you deposit 100 dollars, the bank is allowed to keep 10 dollars
in your checking acount in case you want some
of that 100 dollars, and they get to steal 90
dollars of it without telling you.
Your checking account never has
the balance that it says it's got in there. They have borrowed most
of that currency out of there, and they're going to
loan it to other people. When those people sign their loan,
currency actually gets created because you had a 100 dollars on deposit, and they have 90
so now there's 190. Then, they go and buy something, that's
the reason they're taking out a loan. And they buy a house or a car, or someyhing like that, and when they buy that thing, the seller then deposits it in his
bank account so that 90 dollars get deposited and then they get to go
and steal 90 per cent of that meaning 81 dollars, so now there's 271 dollars
on deposit. Can everybody see how the currency supplies is getting
magnified by the banks here? And that process happens over
and over and over again, and under a 10 per
cent reserve ratio, every dollar deposited
can create another 10.
So if you deposit a trillion in base
money, you can create 10 trillion, uh… And that is basically it, there is nothing else.
Our entire currency supply is either IOUs or receipts for IOUs. That's all that it is. It's all an imaginary agreement
and it is all giving value because you experienced yesterday
that the dollar purchased you something, so you expect that is
going to tomorrow. So you have this agreement that is, basically, you know, our entire currency system is imaginary. It doesn't really exist, it's just
that we're all dreaming the same dream. If anybody chooses to wake up, it's over with. So it's really just a couple
of bucks that is whipped up in this little voodoo hocus pocus
scheme here, where the Treasury and the Federal Reserve
write IOUs for each other, a check is an IOU,
a bond is an IOU, and they swap IOUs: dollars
spring into existence.
A dollar is a receipt
or a claimcheck: an IOU! Then the rest of the currency supply is a bunch of numbers that the
bank type in their computers. They don't exist. In my book, I call things money until I get to the point
where I define what money is. And the difference between money and
currency and from that point forward, I only call gold and silver money, and I call everything else currency, but in the original manuscript, when I start talking about the massive
currency creation that is going on, and how banks are just debasing their
currency supply all over the world and how this Mandrake
mechanism works, I start referring to it as
the numbers supply. the M3 number supply, uh… the base number supply because they're just numbers that somebody made up.
I can write numbers on a post-it and hand them out like this. They make them up, they type them
in a computer, it is nothing but a supply of numbers, How many numbers are there? It's infinite! So it's nothing but a number supply.
But it becomes real when you work for some of that currency supply, that number supply, and at that point, it now represents your blood,
sweat, labor, ideas and talent. You are what gives the
currency supply value. It would have no value without you. And the way that that value is enforced
this is the really cruel joke here. Let's say you save a part of that
currency supply, so you can pay tax to the tax collector in the
United States, that is called the IRS, so that they can turn that over to
the Treasury so the Treasury can pay the principal plus the interest on that bond which was paid for
with a check from nothing. So, you can see that, right? Everybody sees how this works? Now, there's another joke. There was interest
due on that bond.
Let me ask you, if you borrow a
dollar into existence and it's the only dollar that exists on the entire
planet but you promise to pay back 2 dollars, Where do you get the second dollar? Has anybody got the answer on that one? You borrow it into existence. When people say they're
just printing money, they're wrong. First of all, they're printing currency,
but they're borrowing currency into existence. The Fed doesn't just print money, what they do is they
indebt us in the future.
Everyone of these loans that we
took out of the bank that created the vast majority of our currency supply,
95 per cent of our currency supply, roughly, has been created by the banks uh… i think actually is 93
percent now and the Federal Reserve
created about 7 percent but uh… before the financial crisis the actual physical paper dollars
are what the Federal Reserve and the Treasury creates it's known as base, they call it
base money, I call it base currency uh… and then we create the rest of the currency supply by going to the bank and borrowing for home or something like
that or buying dinner and sign our credit card. When you sign a credit card receipt
you've expanded the currency supply of the planet. The problem with this system is that every single month
there is a payment due on that bond for the principle
plus the interest and there's payments due on your home
mortgages and on your cars and on your credit cards every single month you've got to make a payment on that currency that you borrowed into
existence and on the balance sheet that payment extinguishes the currency
that you borrowed into existence, so the currency supply
starts to collapse.
This system requires that we go deeper into debt every month
than were the previous month, we have to always borrow more
currency into existence than we are extinguishing
every single month or the whole thing
starts to collapse, and I'll show you what that
collapse looks like in a minute but first I'm going to show you the
base money, this is the these are the physical paper dollars
uh…
It's basically cash in circulation plus the deposits that the big commercial
banks have at the Federal Reserve uh… all of the banks have a checking
account at the Federal Reserve and their deposits are redeemable in
paper dollars so it's a measurement of how many paper dollars exist. It took 200 years to go from
zero dollars in existence to 825 billion dollars, then came along, came
the financial crisis of 2008 and it has only taken two and
a half years to triple that. We are now at about uh… 2.4 trillion dollars of base money from 825 just two-and-a-half years ago, so this looks like the currency supply
of the planet is just exploding when you look at this and most economists and newsletter writers
are talking about inflation, inflation inflation is right around
the corner, this is going to happen.
I believe that we're going
to have, I wrote in my book we would have the
threats of deflation followed by big inflation which we have already
had, that's what this is, followed by a real monetary deflation
which is the collapse of the currency supply: inflation, deflation are properly referred to as an expansion
or contraction of the currency supply prices follow but there's a delay, uh… and so uh…
consumer price inflation keeps your eye off the ball.
If you can look at what's
happening in the currency supply you're seeing into the future. And I believe that there's
going to be deflation first and then all of the
world central banks will start printing like crazy to
get us out of that deflation and Ben Bernanke will be
leading the charge, and so back in March of 2006 uh… the Federal Reserve hid the broadest measure of
the currency supply, the currency supply
that is M1, M2 and M3 uh… M1 is uh… cash in circulation uh… plus checking, checking accounts uh… M3 was the broadest measure that
incorporated the most different types of of bank deposits and so on, not at all the entire currency supply,
the entire currency supply is actually total credit so about 53 trillion
today and it's uh…
Stalled and started to shrink. But M3, they used to
publish it every month it was the uh… measurement of the
currency supply that most newsletter writers and uh… on the news
that they would report and the Fed hid it from us
in March of 2006 claiming that it was too expensive
to compile all this information and that it was useless anyway that you
couldn't glean anything from M3 that you couldn't get from M2. Now, here's the real kicker. There is a… uh… M3 is… you take a whole bunch
of different monetary aggregates that the Fed publishes and you add them
together and you get M3. The only one that they don't publish
I believe it's uh… uh… euro-dollars I can't remember,
I believe it's euro-dollars, it was 0.6 percent of M3 so you can still reconstruct M3
off of all the other monetary aggregates plus minus
0.6 percent accuracy and there are several companies that do this,
shadow stats, shadow government statistics or shadowstats.com, is one of them, it's by John Williams. He's
one of the people that does and all the people that do their data agrees, so I'm like 99.4 because is there a 0.6
percent plus minus, I'm 99.4 percent sure that this information is correct, and what you see here is that
there's a little collapse going on of the currency supply up here, and it's not huge we've gone from
you know this would be 15 so about 14.7 trillion dollars down
to just under 14 trillion dollars in M3, but base currency is a component of the M3 that red part
on the bottom is part of it, and they've been pushing
that up like crazy Why? Because there's a credit
collapse going on right now.
When you deduct the base money from the credit based portion of this part of M3, so the portion of what we
borrow into existence what happens is that it shows this enormous
collapse going on. This is M3 minus base money and there's a 1.7 trillion-dollar collapse of the currency
supply, it's about 13 percent, Now, there's no time in history that this has
happened, this goes back to nineteen sixty except the beginning
of the Great Depression, that was the last time the currency
supply contracted was, the beginning of the
Great Depression. Usually there's a time lag
between stuff like this happening and the public feeling it so the Federal Reserve is borrowing currency
into existence like crazy and they're now doing direct purchases
of bonds from… They don't even go through that open market
operations shell game, that keeps you from
seeing what's going on, they're buying bonds directly from the
Treasury, this is Quantitative Easing they're calling it and that means there's
an emergency going on.
They're telling us that
everything's fine, that, you know all of their emergency efforts cured
everything, and the economy is OK what the hell is this right here? why in just the past couple of months
this is part of the quantitative easing why is the currency expanding? from uh… 2 trillion to 2.4? If everything was fine, the Federal Reserve
would not be doing that! They're scared shitless,
so it's happening they're doing anything they can to
prevent this deflationary collapse that I predicted in my book uh… you know I first started buying gold
when it was 325 bucks an ounce, actually it was 315 uh… 326 for golden eagles uh… that was October 2002, by April 2003 I had discovered silver and I was all in. I can see, I was reading in 2001 and 2002 I was researching what was going on in
the global economy every single day, I was addicted to it. And by October of 2002 I
started making my commitment and by April of 2003
I was all in. In 2004 I started speaking on it.
In 2005 I incorporated goldsilver.com
and became a precious metals dealer and start writing my
book and that was published in 2008, so I didn't just bet my portfolio
on it, I bet my entire life on it. I can see that
there wasn't anything in history as far as finances go that
was as much of this sure bet, a sure thing as gold and silver accounting for the
expansion of the fiat currency supply.
Gold and silver are denominated in this fiat currency, these digital numbers
that they type into the computers and paper notes so they just run off the
printing press and it's all borrowed into existence. Periodically throughout history
for the past 2400 years they have done this. This is… the lower line is the value of
the gold held at the Treasury so the uh…
The number of ounces
of gold times the price. The upper line is the currency in
circulation, base money. And that this is from the
year 1918 and here we have the stock market crash in 29
and these are the bank runs of the 30 where people
were asking for gold. But they printed too many receipts for
gold. If you can go back to before World War One these two lines
would converge. They diverge there and we've
created this lie where we were creating all these receipts for gold,
these claimchecks on gold that didn't exist.
When people wanted it, Roosevelt had to make private ownership
of gold illegal because there was a run on gold, and in the United States
americans could not own gold. And then a year later they
unpegged the dollar from gold and the dollar's value plummeted, so that it took, it went from
taking 20 dollars to purchase one ounce of gold uh…it then required 35 dollars to purchase,
so they called it a change in the price of gold, they can't change the price of gold
when you're on a worldwide gold standard, and gold has, you know, it's got
a certain intrinsic value.
The dollar fell. And so… what's amazing is accounted for
the currency supply. This is the free markets in the will of
the public forcing the government hands forcing them to change the rules.
Here's the same chart again uh… but now I've taken the
dates out further, so you can see uh… World War Two, the expansion
of the currency supply then in 59 uh… Charles de Gaulle,
the president of France uh… says we want our gold, other countries
started jumping on board and gold started leaving the vaults. Then I'm taking it out further
because that one goes out to 1971 In 1971 we go off of gold
but there's another line here, a blue line. how many here would say the credit
cards are replacing cash in circulation? Credit cards are replacing
cash in circulation. I believe they are and when you sign
a credit card receipt and you paid that merchant, the merchant's checking
account does not know the difference between credit card currency
that you created and cash that the Federal
Reserve created.
It can't tell the difference and that
currency that you created circulates until somebody saves it up and
pays down credit card debt. And so uh… I add that to the currency supply. Once Nixon took us off of gold, and
gold became a separately traded commodity/currency uh… the will of the public and the free
markets drove the price of gold up until once again the value of gold
held at the Treasury exceeded the currency supply and there was
a year where we could have gone back on the gold standard and it also covered outstanding
revolving credit for an entire month. So all it was doing is the
same thing as it did in 1934 and in Weimar Germany and
hundreds and hundreds of times since the year 407 BC with the
first grade inflation in Athens. This is the same chart again but it shows Ben Bernanke panicking
over here and this is the increase of base money.
That's that first chart that I
showed you, not first chart, but one where there was a red area on the bottom, so that's the increase
in base money. Well, there's the outstanding
revolving credit piled on top of it, uh… here's gold and what this means is that gold has to
rise from here to way up there to do the same
accounting that it has already done twice in the United States and
hundreds and hundreds of times in history. This is a natural thing. It does this
automatically. The will of the public and the free market force
this to happen.
I'd believe that is there's absolutely no chance
in hell that this won't happen, right now it takes about 15000 to
20000 dollar a ounce of gold So, here is another way of looking at the
same thing, and it's a great way of looking whether gold is undervalued
or overvalued. If you take just the paper
dollars, that base money and you say there's a certain amount of
paper dollars, how much gold do we have as a percentage of those
paper dollars to cover them? And so gold is expensive when we've got too much gold,
more than uh… paper dollars, and it's cheap when we don't have enough,
and it's very cheap uh… when uh… when it's way down here. Well, this is where we are as far as just the paper
dollars. Here's when you add outstanding revolving credit. This is what a debt collapse or
currency collapse looks like. We borrow uh… two units of currency
into existence here uh… and uh… to do that we promise to pay back, we're borrowing
this currency into existence with the bond the bond is over here,
say you've got uh…
These two units
of debt plus interest, so you owe back more than you're borrowing into
existence but then each month you're going to pay off a small portion of that debt, and so the next month we go
on borrow more into existence and we pay off, we keep on hang
off that debt every month and we always have to borrow more into
existence than we're paying off, but notice something. You notice how the debt is now growing
faster? It was only fifty percent higher but now it's a double,
it's a hundred percent. It grows faster than the currency supply. There comes a day where
this is unsustainable. If the public gets scared and they
stopped borrowing currency into existence and they save
up and pay down debt, the whole thing goes
into a deflationary collapse. This is what I was predicting and this
is what is happening right now. Thank you. uh… This is how much debt we owe
compared to the size of our economy.
If you owe fifty cents and
your economy is a dollar you owe fifty percent of
the size of the economy. If you owe five hundred billion and your
economy is one trillion you owe fifty percent the size of your economy. It's the same either way so uh…
this what this chart shows, is how much debt
the United States has, the National Debt, compared to the size of its economy, and it goes back to 1792, which was
when the original coinage act of the United States was created, and there was debt leftover from the revolutionary war and,
so that's this debt here at the very beginning of the chart, right there and what you see is that it never
exceeded the fifty percent level, until World War Two, this includes the Civil War, World War One and the
establishment of the Federal Reserve, uh… the Great Depression. You see that during the twenties we were
growing the economy faster than the debt, and so the debt compared to the size of
the economy is a smaller and smaller uh…
Portion because we were having the roaring
twenties, the economy was growing and the debt wasn't
growing as fast, so on this chart the debt is shrinking
through the twenties but then suddenly in 1930 it goes up. Why? It wasn't because we were borrowing a
whole bunch of currency and going into debt, it's because
the economy shrank and our debt
stayed the same, so that was the last great deflation
that got us into uh… a deeper debt because we couldn't afford to
pay the debt that we owed, uh… the economy shrank faster then we do the deficit spending for
World War Two and we can exceed this level of fifty percent because now we
have this fiat currency system, where we could just borrow
currency into existence but when you do that a bond, bonds range from like a month to
thirty years out into the future that you're going to pay them back, that means we're borrowing prosperity
out of the future.
You remember how I said you save up some of the currency
supply and you can pay tax to pay the principle plus interest. So the prosperity that we're
enjoying right now, this moment is owed back in the future. We have to pay a principle plus interest
for the privilege now of having currency that we can use. Somebody is skimming off
the top basically, this is the way the banking system sort of skims
off the top, is through inflation there's people that get
rich off of this without having to do any work and putting their value into the
system, they get to skim purchasing power out of the
system through inflation. But every dollar that we borrow into
existence puts us in debt in the future, so we are every year borrowing
prosperity out of the future and we spend it today.
The average roll over for all the bonds
is about four-and-a-half years, so the prosperity that
we're enjoying right now we owe back uh… we've got to pay for
four-and-a-half years from now. And right now the taxes
that you're paying are paying for prosperity
during the Bush administration, We have already
spent it, it's gone. So then we started growing the economy
faster than we were doing deficits spending, so our debt compared to the size of the
economy goes down during the Korean War, in Vietnam, and then we have the end of the gold
standard and then Reagan says: "deficits don't matter" we can just go ahead and
spend as much as we want. uh… The debt increases. Just before
this era of the financial crisis, there's a little slope where it starts to go
down, that's the Clinton era.
They said that we had surpluses, it was uh… bullshit. If you look.. I don't look at the
government's accounting of whether or not they say we have a
surplus or deficit, what I look at is the National Debt. Did it go up? If it went up it meant we
spent more than we had. If it went down it means we had a surplus, we had excess
income above what we're spending and during the Clinton years
there was never a year where the actual national
debt went down. I don't know of the people in the United
States, from the United States here, remember when uh… Gore and Bush
were running against each other they're both telling us how they were
going to spend all this currency that was flowing in.
You know, they were each trying to compete on all the free crap they're
going to give us in the future, and uh… you know, that's how uh… actually that
isn't how Bush won… but that's another story. Anyway, These statistics are from the
congressional budget office. This is what our government is going to tell us,
is going to happen in the future, and it's not pretty. It's completely unsustainable,
it is impossible, it cannot happen,
you can't have debts that is ten times
the size of your economy. It's not possible. Everything comes
to a screeching halt first, and so something has to change. Right now, uh… I don't know if it got passed or
not, but the government I dont't keep up with the news,
I consider it all short term noise, it distracts you from what is
really going on, so I'm not sure did uh…
They settle on some sort of
budget and is the government gonna keep on running? Does anybody know this? Yes, they did? Did the republicans, who were trying to get
this thing passed whose gonna pay down the debt that they win? There's some sort of compromise. You see, it's deflationary. It would cost a financial collapse to try
and pay down this debt, you have to go into.. In order for us to maintain the levels we've
got and to maintain the prosperity Obama has to be a…
We have to be twice as far in debt when
he leaves office than when he came in. Or the whole thing is
starting to collapse. uh… so, more proof that we are
going into a deflation first. This is what a dead cat
bounce looks like. This is the stock market.
The stock rises uh… it peaks, takes a little dip, a bunch of investors come in, thinking
that they're scooping up deals and they start buying and it rises again and then
the crash continues because when they started buying it hadn't
reached fair value yet. It had just rollover taken a little bounce in
the market that's still uh… looking for a fair value so there's
the dead cat and it bounces.
There's the Nasdaq, so that's uh… uh… what a dead cat bounce
looks like. The initial crash on the Nasdaq was
38 percent. The total crash was 78 percent. This is the Dow in the 1929 crash
and the dead cat bounce, uh… the initial portion of
the crash was 48 percent, and the total crash was 90 percent, so in the first examples was
38 percent, 78 percent. 48 percent, 90 percent, so if
the initial crash is larger the rest of the crash
is going to be larger. We are going through a giant
version of the 1929 crash or the Nasdaq crash. We just had the biggest
crash in history: the Dow which is supposed to be the biggest,
safest, securest. The 30 largest companies in the United States uh… just crashed by 56 percent and we are in a
dead cat bounce, meaning that ultimately the total crash should be greater
than 90 percent from its high. This is the best way of measuring the value of a stock, and I'm sorry if I'm going
fast and this isn't sinking in, I've got lot of stuff here and
I've got to cover it, only got twenty minutes left, I gotta show you that the world's
stock markets and real estate bubbles have to continue crashing because all it is is that market trying
to seek fair value, it's trying to seek equilibrium, this is what the markets do, it is their job.
The SP 500, these are PE ratios,
how many here knows know what a PE ratio is? OK, how many do not? It's OK, raise your hand
and say that you don't. OK, it's the price of a share of stock divided by the earnings
of the company. So it's basically how much is this
stock costing me, compared to how much is the company making. And one of the best ways, the entire industry stock market, the
industry, the financial industry agrees that this is
probably the best way of measuring the true value of the stock,
whether it's overpriced or underpriced when you're buying it.
The S&P only goes back to the
year 1950 but professor Robert Shiller of Yale University uh… reconstructed the S&P and took the
500 largest companies in America and took it all the way back to the year 1880. So you have a hundred and twenty years or two hundred
and twenty one years of data here. Fair value is when PE ratios are about
12, meaning you're paying twelve times the
earnings of the stock, so if you buy a stock its going to…
if nothing else changes and the company continues making the same amount
every year, it's gonna take you 12 years to make your uh…
Money back and be in profit. Undervalued is anything under 10,
overvalued is 15 to 18, anything over 18 is a bubble, and so here's the data
going back to the year 1880 and what you see here is that there is no time in history that
we go from fair value to overvalued, once it hits overvalued, it does not stop, it bounces
on the way down, and visits undervalued, overvalued,
undervalued, overvalued, undervalued, overvalued, undervalued. The greatest bubble in history, the year 2000 PE is at almost 45, absolutely insane
investing in a stock and having to wait 45
years to be in profit. This was nuts and people were chasing
stocks like crazy. This is the tech boom and so on. Well, it crashed down the fair value
during the market crash of 2008 and it bounced back
into a bubble, where PE is about 23 or 24 right now. The stock markets seek equilibrium. They
seek fair value over the years. This is their job, that is what they do. There's a famous trader
named Bernard Baruch who said in the short term the stock
market is a voting machine, is like a stock machine, I mean, it's
a slot machine or voting machine it does what the public
thinks it should do.
The public chases after
something, it goes into a bubble, but in the long term
it's a weighing machine, it balances, its scales balancing each other. That's what the stock market is
always trying to do: seek fair value. It's only there for brief
moments in history, but the point is that every
time we are in a bubble, it visits severely undervalued and the
greater the bubble, usually the greater you overshoot fair value. uh… This is the second best way of
measuring a stock's value: the dividend yield. If you
buy a stock for a buck and that company pays you six cents every
year into your brokerage account you're getting a six-percent yield. I have inverted this chart because uh… the higher the yield the more
undervalued the stock is, the lower the yield more overvalued it is. So I inverted it, so
the bubbles are up and undervalued is down, uh… so fair value is uh… four and a half
to almost six uh… so there you see the
same pattern as before, but here's what's alarming.
It's that there is no time in
the first 118 years of data that we have been
in a bubble this large. This is absolute insanity
and it can not last. There are two ways that the
market can seek equilibrium. One: the market goes sideways for a decade
while we have raging inflation that will balance this out and then bring
dividend yields and PEs back into line. Two: it crashes, the markets go down, the currency supply is collapsing, therefore this has to be a
deflationary collapse, this can't be an inflation in what they
call an invisible crash.
Uh… these are the
world stock markets, so there you have the US stock market,
the England stock market, Germany stock market, this is Singapore and Japan. Notice that before the year 2000 Singapore and Japan used to trade in
different direction than the United States. The United States could be going up
while their stock market was going down. But before the year 2000 all of the markets
of all the major economies trade in the same
direction at the same time. Here is Brazil and here is Russia and in about the year 2003 they started trading in the same
direction and since the market crash of 2008 all markets,
all world markets go the same direction
at the same time. The S&P, the Dow they're way,
way overvalued in a bubble, we're having a deflationary
collapse of the currency supply, the markets have to go down, when they do, the rest of the world's,
where the United States goes so goes the rest of the world. These markets all have to collapse.
Now, we have some real estate bubbles going
on. The real estate bubble in the United States uh… took it basically burst in
the year 2007-2008 and it's been falling but I measure something
called the mortgage rent ratio, uh… fair value on a home is
if you're paying about a uh… uh… a dollar to a dollar five for the mortgage, the monthly
mortgage on a thirty-year mortgage plus your carry cost
like insurance and stuff, for each dollar that you can rent the
house for, if you were going to rent it.
We went into a bubble of a buck
twenty five in 1989-1990, fair value is about a buck five, and then we had the recession and it
went to ninety cents, on national average in the year 1995 uh… real estate cash flow by ten
percent, a single-family medium price home in the United States except you couldn't get a loan
back then, credit was tight, the economy was lousy, then we went into this real estate
bubble that was the greatest bubble in world history, where people are paying a buck
eighty-five, a buck ninety, almost two bucks for each dollar they
could rent the house for. uh… And then that bubble popped, and it came back down not to fair value but
to a buck twenty five and bounced, so it came back
down to the height of the previous bubble, it bounced, and we are right now at a buck twenty
five, so valuations on real estate are still as high as they were
in the bubble in 1989.
They have to come down or rents have to go up. This is all deflationary, which means
that rents are not going to go up, real estate is gonna come down. All of this travels
together, like I said. Now, when the world
stock markets crash, does anybody know about the bubbles that
are going on, the real estate bubbles that are going on in
the rest of the world? How many here are watching the videos
that we produce each week on Youtube and so on? OK, do you enjoy those videos? Yes, good. Are they informative? Yes. Do we try to sell you anything? No. All we do is we educate. So here is a video that we made in
Las Vegas uh… this is our driver very well-informed
man, very educated. uh… he was very informed on world
finance, the stock markets, real estate, he really knew what
was going on in Las Vegas and behind him there is a
uh…
Big casino project I can't remember the name of this one uh… there's the… Venetian in the background and
there's a building going up in front of that. this is the the casino project
that they were developing uh… and that's another shot of it. See that tall building behind it? That's a hotel called the Fountainbleu. If you go to the other
side of the Fountainbleu what you notice is that there's a bunch
of windows that are boarded over, this thing is skinned on the outside,
it's not finished on the inside, they've got a billion and a half into
it, now looking for another three billion dollars to finish this thing, and this stuff is all over Las Vegas, it's not
just in Las Vegas, it's all over the world.
This is in Moscow, this is a development called
Moscow's City Center, there's the project, you can't read it
unless you read Russian, uh… but all of these beautiful
buildings here, there's nine buildings one of them was completely in the
framing stage, another one was uh… half way completed of the others there are two that are
occupied and one that is one-third occupied, the rest are just skinned over, and they're not
completed on the inside. The project is at a standstill, uh… and then in front of this project there's
this giant hole in the ground and this is where the centerpiece
was supposed to be. This was Russia's bragging rights, this was going to be the
tallest building in Europe, Federation Tower, and it's
a hole in the ground, and it'll remain a hole
in the ground, that will never be finished.
Does anybody know what the Singapore
flyer is? I've only got ten minutes and I'm not gonna be able
to finish this thing, It's a big ferris wheel in Singapore, it's
one of the tallest in the world if not the tallest, I think it is the tallest, and here I am looking at
their real estate bubble and if you noticed there's cranes on top
of all these buildings here, uh… there's cranes everywhere. Look at
all those buildings being built uh… All bubbles burst, we are in
a worldwide credit bubble, when these markets rollover the giant real estate bubbles that were going up and then took a
little breath when our markets crashed their bubbles kept on going after
pausing, when our real estate bubble uh… popped and started
reverting back to fair value. The markets are just trying to seek fair
value, that's all they're doing. But people and the world
central banks go: "Oh, my God!" every time there's a little crash "we gotta do something about it!" It doesn't feel good to be in a recession
so they try and pump everything up but they don't realize that they're
just making everything worse later.
Everything they do is gonna come
back to haunt them as more uh… inflation eventually uh… or this deflation I'm talking about
is the expansion of credit contracting. Here's another thing that is going on that is going to mean that this decade
is different than anything else that you have known. uh… People don't realize
that every 30 to 40 years the world has an entirely
new monetary system. It changes every 30 to 40 years. In 1873 Germany started
the Classical Gold Standard uh… and by 1900 pretty much every developed country
on the planet was on the standard where every note in circulation that was
put out by their treasury was backed by an equivalent amount of gold, so it was 100 percent backing, uh…
Then World War One happened, all the combatants in Europe went
off of the Classical Gold Standard and started printing, and between the wars we had something called the gold
exchange standard where it was a mixture of debt and uh… gold backing the currency uh… then that was a very poorly
constructed man-made system, and anything man-made
cannot last, so basically they were uh… the Federal Reserve, under the Federal
Reserve Act there was a 40 percent reserve ratio and they were allowed to put uh…
A fifty dollar bill into circulation
for each twenty dollars worth of gold that they had
backing the fifty dollars, so they're putting claimchecks on gold
in excess of the amount of gold that they actually had. Ever since the Federal Reserve was born
we have been living under a lie. And if people say that we've got free
markets in the United States, they're wrong. You cannot have free markets
without free market money. Your currency is fifty percent
of every transaction, all of the transactions
are the free market. If there's a small group of men
deciding what currency is and how much the cost of currency is
going to be, the interest rates, that isn't a free market.
We do not have free markets,
we haven't had since the year 1913, then we have uh… something called the
Bretton Woods system, the Classical Gold Standard broke down, the Bretton Woods
system was from 1944 where uh… all of the world's uh… currencies would be backed
by the US dollar at 35 dollars an ounce and foreign
central banks only could exchange those dollars
for gold at the New York Fed, for 35 dollars per ounce, so all the world's currencies were
pegged to gold but through the US dollar. uh… All of these countries started
asking for dollars and gold flowed out of the vaults and Nixon had to take
us off the gold standard in 1971, so you've got 30 to 40 years,
30 years, 28 years, 39 years plus what's next? In this decade there's going to be an
emergency meeting of the G7, of the G20 countries, and there going to be trying to hash out a
new world monetary system and they're already working on it, they're trying to figure out what they're going to do
when the dollar collapses.
Uh… Here's the differences between the seventies bull market and today and
this is the reason I say that you really can't compare them,
their isn't any comparison, and remember in eight years gold went up 24 times its price
silver went up 36, these are enormous winnings in such a
short period of time. uh… In the seventies it was basically
North America and Western Europe, that drove the price
of the precious metals, the exchanges were the
London Metals Exchange, and the Commodities Exchanges
in the United States, that's where the price of
gold and silver was set. All of the USSR they could not participate, there were no
exchanges there, there's no market for gold and silver and even if you could buy some, it was on
the black market, so your investment did not affect the worldwide price. Those
people were excluded in participating in this bull market and driving
the price of gold forward.
China under Mao, same thing, first of all everybody was making a
subsistence living, very few people even had electricity let alone being able to
go and invest in gold. India, Mexico, South America, these
countries were all very poor at that time, the world's richest man is Carlos Slim, and uh… he lives in Mexico City, uh… you have massive investors in all
of these countries now and in Shanghai investing is a sport, people will sit around in a room like this
and watch tickers go by and make their bets, uh… the rest of the world,
Africa, I mean, pretty much the whole rest of the world was excluded in
that bull market and gold went up 24 times and silver 36. So what…and back then too, news traveled very slowly, you turned on that old vaccum tube
TV set waiting 60 seconds for it warm up and then Walter Cronkite would
come on give you the price of gold and or you open the newspaper
the next day and uh…
Get your news 24
hours after it happened, and then you pick up the telephone and call
your broker and if you were lucky he can get an order onto the floor of the
exchange for you the same day, but possibly the next day. So, news and reaction
time was very slow. uh… Also the development
of the investor mindset. before the Arisa Act and before
Nixon took us off of gold, before 1971 when Nixon
took us off of gold if you went to work between your
late teens or mid twenties, depending on whether you went
to college or not, you could expect that if you saved ten percent of your
income every month then when we got into your sixties you can
retire and live off the interest in your savings account.
Can you do that today? Nobody
can live off the interest of its savings account, unless he got
twenty million bucks sitting there, fifty million bucks, that's the
only way you're going to get by. and you wouldn't leave in the savings
account because you're losing to inflation, your principle is
getting whittled away because of inflation. uh… So, my parents' generation were savers not speculators and investors. uh… What's different today? Today, the entire world
can participate. It's roughly ten times the
populations that can participate in this bull market. News travels at the speed of light over
a tremendous variety of media outlets. You can get the news on your cell phone, on your laptop, uh… And an investor crossing the Sahara, we're out filming in front of the
pyramids and there's this Bedouin guy sitting on the ground and he's
got some sticks and he's starting a fire to make some tea, and he's on his cell phone.
This guy crossing the desert can take his
Apple Iphone, check the price of gold and place a trade right there. Is this a different world or not? Yes? OK? uh… Then you have the development of the
investor mindset. Along comes the tech bubble, and Nasdaq and everybody got themselves a
trading platform and became a day trader, uh… and then they got
punished, the market crashed. Then you've got a real estate bubble that
happens and everybody starts chasing real estate, and then they get
foreclosed on, on real estate, the bubble popped at least
here in the US and England, the bubbles are still going on all down
the coast of China and Australia and New Zealand, those bubbles are massive and
they're about to burst.
Uh… And so they got punished, nobody has been punished on
precious metals for 30 years. Our memories just aren't
that long so the next great bubble is absolutely
destined to be precious metals. Nobody has been burned out on it, you
know, nobody that's chasing after an investment to either secure their retirement or to
buy them that new Lamborghini. uh… And so the development of the investor mindset,
this is really critical to try and figure out.
How many units of currency around the
planet are gonna come chasing the same tiny little pile of gold and a
pile of silver that's about one fifth the size that was in 1980? uh… It's at least ten times the
eligible populations, each one of them has at
least ten times the currency, and, you know, as I think about this it's
probably greater than these figures I was saying that there
was somewhere between ten and one hundred times
more investors but think about this: In all of the USSR and China, more that
half the world's population, there was not one investor, not one and today it's the sport in Shanghai.
So i think this is probably over a
hundred, it might be a thousand I don't know. So you can take these figures and
possibly add a zero to them and that's the potential amount of units of
currency that can come chasing the same… I mean we had 2 billion
ounces of gold back then, uh… on the markets, and today there's
2.2, so it's 10 percent more gold, but silver there's only about
600 million ounces of silver on the exhanges, 500 million
ounces, 600 million ounces. uh… Here's the 747, and here's a little man with very strong
legs that just dropped out of the sky, this is for scale, and if you took all of the
silver ever mined in history it would fit into a cube about that size
on the scale and all the gold ever mined in history would be a cube about that size,
however, gold has two basic functions: money and jewelry, and that's a pretty much it.
Only 5
percent of gold production gets used in industry. Silver is the second most useful
commodity known to man, oil is the first with about 30.000 uses, silver is second with about 10.000
uses but we use it in microscopic amounts. When you type on the keyboard you're
typing on silver, when you look at a DVD or a CD you're looking at silver, when you look
in the mirror, you're looking at silver. When you look through a thermal pane
window, you're looking through silver. It's everywhere, it's a biocide,
it's going into superconductors, it's going into RFID chips, but you know what?
None of that matters.
What's going to drive the price of
silver is investment demand, it's the public rushing into this and
when gold gets too expensive for the public, they switch their preference to
silver, this is what happened back in in late 1979 and early 1980, silver lagged gold and then uh… silver
just exploded because gold got too expensive. But silver has already been
outperforming gold, and there will come a day when there's
commentators on MSNBC, Fox News, CNN they're going to be showing with… Whenever you're in a bubble,
whatever is in a bubble and the public is chasing, they want to hear about,
and the news accommodates, they give you whatever you want to hear
about, they don't tell you what they should be telling you, they tell you what
you want to hear.
And there's going to be
people on air like me showing charts and saying: "Of course,
silver has been outperforming gold, there's less of it". "There's five times more gold for
investors to buy than there is silver" that's the reason is been outperforming
gold so, is it possible that silver could actually exceed the price of gold? Sure, it is. All you have to do is look at
these insane bubbles that have happened in the past like
the tulip mania of 1637. I don't know if it will, I don't
actually expect it to, but it definitely could because it's
more rare and the markets do something called the price discovery
mechanism where they try to find out, uh…
they set the price based upon
the equilibrium that's determined by the rarity of the two items. uh… That's been going
on for centuries, the price discovery mechanism
is not broken, it still works, uh… and I expect it to work, so we use up
the silver, so the result is, this is what they look like today. Now, cubes are deceiving that so
the gold cube's actually about four, five times larger than the silver cube. If you take a cubic foot,
that's a foot by a foot by a foot. And if you make it 2 feet by 2 feet
by 2 feet, it hasn't doubled, it's now 8 cubic feet. So, uh… as you double the measurements on
a cube, it goes up in volume eight times, so there's actually about four, five
times more gold than there is silver on the exchanges that
investors can buy, so when people come flooding into this,
I do expect this…
Right now silver's value is 1/35 of gold. I expect it to outperform gold
by at least a factor of 3.5, I'm expecting a 10/1 ratio
at an absolute minimum. uh… Silver being 1/5 of
gold's price is perfectly logical, if it's going up slow and it hits gold's
price then all the industry will just switched to gold because that's the
only other metal they can use in most of these instances. They can use platinum, rhodium,
paladium and gold but they only mine 5 million ounces each per year of
platinum, rhodium and paladium. They use 900 million
ounces of silver so there's not enough of those other
metals, the only alternative to silver in most of these applications, like
keyboards in electronics, is gold. uh… So if it was going up slowly and
it did hit the price of gold, gold can stop it in its tracks, if there's a
rush gold can go past, however silver is much cheaper to mine than
gold and it wouldn't stay there. uh… We are always trying to figure
this stuff out at our company, trying to measure it and see
when to buy, when to sell.
Now… Can you roll that… This is a clip from one of our Youtube videos,
and this is the insiders video that uh… our customers at Goldsilver.com,
they got to see this two months ago and then we just released it, and so this is the type of
information that you get, and when we're nearing a top, our
customers are going to be informed on what we are doing, so, can you roll that video, please? And what you see is that when you're
coming off the bubble, when it's overvalued it has never in 130 years, just gone back to fair value and gone
back up into a bubble, it always continues on its uh…
Way down in a
bear market until it goes to severely undervalued and then a new bull market
starts again and it start rising. Well, we are in a bubble, it has to seek equilibrium,
it's probably gonna blow right past it and go to severely
undervalued, just like it has every time for the
past 130 years. So real estate and stocks are
doing this at the same time, while we're in a bull market for
precious metals and there is a problem with currencies.
So we are going to be measuring all
these things very carefully, and then using some confirming
indicators that should flash to us when to get ready to sell and
we're going to be letting you know, so thanks a lot, I hope you have some
great holidays, I'll see you later. I was standing in front of a green screen just sort
of drawing this charts out of memory and our animator Adam had to sort of flow the charts
in front of me and move them around to match them up with my finger, but uh… uh… that is what you
get as a customer, it's on the Youtube channel "Why Gold
And Silver?" so if you do a search for "sell silver Mike Maloney", because it's when to sell your gold and silver
so "sell silver Mike Maloney" you'll get that video in its entirety,
and there are dozens of videos on "WhyGoldAndSilver" "GoldMikeMaloney" and "WealthCycles".
So those are the 3 Youtube channels that you can go to, and each one of them
has a few dozen videos on it. uh… This is the gold panic
in 1948 in Shanghai, if you wait until the last minute, I'm not very good at swearing,
Robert Kiyosaki is great at it so I usually don't swear much on stage, but if you wait until the last minute,
you are shit out of luck, up shit creek, without a paddle in a
barbed wire canoe, fucked! Thank you! Unlike the second
to the last frame here, here's one thing
people do not realize. It does not take Ben Bernanke to print the dollar
into oblivion for gold to go to 10.000 dollars an ounce,
50.000 dollars an ounce, 100.000 dollars an ounce. All it takes are a few very wealthy investors
to try to get theirs before the masses wake up
and the herd comes charging in, but this is the masses,
this is the people waking up out of their beer-and-football
induced comas, coming in at the last second, well,
this is sort of a different situation, because their currencies were going to
to go to zero because of war, but basically, you've to get in
ahead of the trend, and then get out when everybody
else is panicking like that.
Like I said, this is the greatest
wealth transfer in history, but you have no idea
of the scale until you think. If we do have a change
in our monetary system and if we have to go back to
some sort of asset backed currency that means that the people that are
holding non asset backed currencies, which is all the currencies
on the planet today, their wealth is transferred to
the holders of precious metals. This is the greatest wealth transfer in
history, therefore it is the greatest opportunity in history. By the way, is Stephanie Wing here? Stephanie stand up for just a second.
Stephanie's grandfather's sister was the Secretary during the
roaring twenties and through the stock market crash and then
in the depths of the Great Depression, she started buying stocks
when everybody else was selling and when stocks were like the bad,
and the poisoned investment that you did not want
to get involved in. Stephanie's grandfather's sister
started buying the stocks, she is an example of wealth cycles, she rode this stocks up and I
don't know exactly when she did it, but she must have sort of innate sense
that the stocks were overvalued, and she sold the stocks and bought real estate.
If you go to the French Embassy in Washington DC that was her hotel, thank you, Stephanie.
So, thank you very much, we'll see
out in the lobby where you can get Free 100 trillion bucks from us, thanks! So, I just came off
stage of the event, and you know, it's great, the event went great, all the information
was very well received, it was a great audience, but, you know? Even though it's so rewarding to talk to the people live
and hear their reaction still reaching a few hundred or a few thousand people at a time. It's not good enough any more,
we're really in an emergency and we need to start reaching
millions of people at a time, and that's why I'm trying to go more video oriented, than travelling around the planet
like I have been, country by country, telling 400 to 4.000 people at a time. So, you know, hopefully I'm hoping that I don't
have to make any more personal appearances, that I can just produce videos, write books
and get the information out there as fast as possible and reach millions instead of thousands.
Well, we've been working on a
documentary and we have been around the world, Taiwan, Singapore,
Australia, New Zealand Colombia, Peru, Ecuador, London, Saint Petersburg (Russia), Moscow Germany, Rome, Paris, Athens (Greece), and we shot in front of the pyramids in Egypt,
it's been a spectacular trip, trying to put together this documentary and I think that's going to be really enjoyable
for people and highly educational. No chance in hell that
it's gonna happen, as far as a one world currency
that everybody is going to use. But what you see here
is that in the XAU since the early eighties, on the average, gold and silver outperformed the
stocks, on the average. …you've gotta get started, that'why…
the free markets always overwhelm manipulations, it's a doomed plan, eventually it will fail, but, they've got to position so accordingly,
they've got to be ready, you can't wait… because you can see 200, 300 point gap days for gold.
Basically,you know, one
thing you find out is that all fiat currencies eventually
fall to their intrinsic value, because they ruin it by puttink ink on it.
It's the amount of energy you can extract from it, the amount of the BTUs, from combustion, when you burn it, and you saw
that during the Weimar hyperinflation, people used the currency as fuel to heat the house.
Currencies have been backed by oil, by gold and silver by land, but as soon as you remove
some things that you can't, some things that put financial constraint, where
you just can't print as much currency as you want, the currency is pretty much doomed. It's beyond astonishing… If it
wasn't for the horrific effects, it would be more ludicrous, it would be actually comical,
that we can stop and have some fun with, and it's actually horrific, if you look back
in history in the last 3000 years, every episode of this kind of silly crap ended very very badly…
Retirement Planning FACTORS | Age and Income
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
what to look for when selecting the right
retirement plan so age is a big factor when it comes to deciding which plan is right for you
if you're offered a pension that's fantastic not many companies do offer those nowadays however
if you have the benefit of getting one then yes take it but I also think you should also have a
retirement plan in addition to your pension just to diversify your savings another situation to
consider is your financial situation so someone with a higher income level is most likely going
to want to prefer choosing their own retirement plan because then they're going to be able to
not only write off those contributions but also distribute it later in life so it maximizes their
potential to not incur penalties or other taxable income kind of situations essentially the more
money you make you're looking for more write-offs you're looking to claim less you're looking to
you know have security but you got to be a little more deaf and clever in how you're taking your
distributions so to not trigger taxable events
The Ultimate Retirement Plan | Wade Pfau | Ep 63
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
[Music] welcome to the market call show where we discuss what's happening in the markets and the impact on your Investments tune in every Thursday on Apple podcast Google play Spotify or wherever you listen to podcasts hi Wade how are you doing I'm doing great thanks for having me on the show you know I'm so happy to have you here if you're in the retirement income planning business or if you're a financial advisor or a money manager somehow managing money in the space for retirement income planning everybody has heard your name you've been around in this field for a long time and as I was looking through your uh resume from various sources it's like okay well what are we going to exclude you know there's because there's so many things that you have done but I thought I would just kind of just fill in for viewers that don't know you a little bit about you um you know you're an active researcher and educator about retirement income strategies you know you do a lot of speaking I know you're going to be speaking here in Denver uh pretty soon uh you are a professor are you still a professor of retirement income at the American College of financial services I am currently yes and the director of Retirement Research for McLean asset management and in-stream uh you did your PhD in economics from Princeton and you did interestingly you did a dissertation on Social Security reform which we hopefully we'll talk a little bit about later uh you're also a fellow CFA Charter holder like myself um and you've got lots of AD you know accolades and some great books in particular one that I really like that you've done is a retirement planning guidebook uh 2021 uh and then you have that safety first retirement planning how much can I spend in retirement etc etc you've done some stuff on reverse mortgages The Unwanted stepchild that actually is a useful tool for many people yet not quite known by many so uh with that said I I was just curious tell me a little bit about your background where did you grow up so uh well I was born outside of Detroit I lived there until I was 15 moved to Iowa after that my my mother is originally from Southwest Iowa so I graduated high school in Des Moines Iowa and then went to the University of Iowa after that so pretty much midwesterner lived a number of different places afterwards including New Jersey Pennsylvania Tokyo Japan for 10 years and then now I live in Texas you live in Texas now yeah actually these pictures behind me and all are all the places I've lived over the years so it's so so you so you grew up in Detroit mostly it sounds like but moved all traveled a lot um how did you go from you know studying what did you study Finance initially when you were in college in undergrad economics and finance economics okay so how did you go from economics and finance to just being so focused it seems like you're focused on retirement income planning well yeah I mean uh financial planning as an academic field is still pretty new and even I entered the PHD program uh in 1999 and actually Texas Tech University started the First Financial Planning PhD program in the year 2000 so it wasn't even an option at that time but academic economics is very mathematical and theoretical and I was always looking for ways to apply to more real world type activities and that's ultimately how I made my way into financial planning indirectly you mentioned the my dissertation on Social Security reform that was testing how in the early 2000s there was a proposal to create personal retirement accounts to carve out part of the Social Security tax and put that into like a 401k style account and I was simulating how that might perform and ultimately that's the same sort of thing I've made my career on at this point which is just writing computer programs to test how different retirement strategies perform in looking for ways to get more efficiency out of one's asset base for retirement now that was during the bush 2 Administration if I remember correctly wasn't it and so and uh what were your findings in that what was your general thesis or not thesis but your general conclusion well at the time what I determined was that it could be made to work but it wasn't obviously a better approach and now in hindsight I realize more and more that there's so little in the way of protected lifetime income that carving out more of Social Security which is that inflation-adjusted protected lifetime income and exposing that to the market as well uh probably would lead to worse outcomes for many people than we do need some risk-fooled income and so now that traditional pensions are going away Social Security is one of the last holdouts and so it probably wouldn't be the best idea to private or not privatize but uh create personal the defined contribution 401K style accounts out of those Social Security contributions very interesting and we'll we'll touch a little bit more I have a lot a few questions on Social Security uh in general um you know from a macro perspective and also a micro perspective personally for uh people so um one of the things that I really like about what you've done is that you kind of take more of a approach that I'm kind of used to like more of an asset liability management approach when you think about funding ratios rather than the traditional way that you hear financial planners talk about it I really like your overall framework and one of the things that I I think is very helpful is your retirement income style protocol your resubm Matrix can you explain a little bit uh to the viewers about your ideas there and and what how that helps an individual determine their overall approach to how they should tackle their retirement income plan yeah absolutely and that's really one of the the confusing aspects of retirement income is there are different strategies that people can use and unfortunately just there's a lot of disagreement and arguments about one strategy is better than all the others and and by what I mean by that is you have What I Call Total return which is just a you build an Investment Portfolio and you take distributions from it throughout retirement you have different bucketing or time segmentation strategies and then you also have strategies that will focus more on having protected lifetime income through annuities or other tools to cover your Basics before you start investing on top of that and they're all viable strategies at the end of the day and that's an important point that Advocates of Investments only don't appreciate how powerful the risk pooling that annuities can do to offer more income how that is competitive with anything that the stock market might do and so people really have options about what they're most comfortable with and that's what the retirement income style awareness is about developing a questionnaire to help guide people in the direction as a starting point which of these different retirement strategies resonates best with your personal Outlook and preferences you may not ultimately choose the the strategy coming out of that but at least it gives you a starting point to say okay it seems like I might look here first as a way to build my retirement strategy and ultimately if that helps me connect to a strategy that resonates and that I can stick with through thick and thin in retirement that can help give a better outcome because they're all viable strategies but where a strategy doesn't work is if you're not comfortable with it and you don't stick with it and you you bail on it during a market downturn or something like that that that's what the retirement income style awareness is really designed to do is just provide that initial talking point on which kind of approach might work best for me to to think about as a starting point yeah I like that because what it's doing is it's basically more holistically looking at how you would can solve the problem and typically you'll find advisory firms that will will overweight if you will one over the other they're like I'm a Time segment guy or I I hate annuities it's all Total return annuities are a scam or uh you know I will never buy an annuity or uh you know Etc et cetera and risk pooling is is something that's really important but it's also very complicated and I think that's why a lot of people have shunned annuities and annuities have changed a lot over the years um and you know coming from my background you know which is more of a total return approach that's great if you have a lot of money but in in other cases you know I think that you can you can you can look at the problem from a optimal way of doing it or you can look at the problem from a way that's actually going to get implemented and work and what I like about Risa is it's practical pretty much all the stuff that you're doing is practical it's not completely theoretical one problem though with that is that you can have somebody who has a safety first for example mindset but their situation is such that if they have a Safety First with 100 of their Capital that they're very unlikely to be successful can you can you expound a little bit upon how you would think about that in terms of giving advice to people in that scenario yeah so that scenario is probably more they do have a safety first mindset but they've been pigeonholed into a total return strategy but they're ultimately not comfortable with the stock market and therefore maybe most of their Holdings are in cash or in bonds which doesn't support a whole lot of spending power and that's you kind of there's three basic ways you could fund a retirement spending goal the first is just with bonds or with cash not really offering much yield on top of that and then to try to spend more than that the um the probability base perspective is invest in the stock market and the stock should outperform bonds and that should allow you to spend more throughout retirement the safety first approach is more now let's build a floor of protected lifetime income that then brings in with an annuity the the risk pooling the the support to the long-lived helps provide more spending power than bonds alone as well and people have that option and it's when the safety first person gets pushed into a total returns probability based strategy and just doesn't invest in the stock market they're ultimately left with bonds which which is the least efficient way to fund a retirement spending goal over an unknown lifetime very true and you know I guess a lot of people did take that approach probably when I first got in this business 20 over 20 years ago there was a lot of people that were doing that who were retired back where the municipal bonds were paying it was it was conducive the market was conducive for that we had high interest rates that were in the long-term secular decline so you had capital appreciation from those bonds he also had reasonably good uh tax-free interest yields that were working for people and inflation was falling um and so now we potentially could be in the opposite inflation Rising who knows how yields are going to work themselves out but um it when you're looking at this um you you bring up this concept of some of the retirement risks and and you have like these uh longevity sequence of returns spending shocks Etc of of the risks that you're seeing out there which one would you say has had the largest impact negative impact on people that they really need to solve for you know longevity sequence of returns spending shocks and surprises well longevity in a way it's the overarching risk of retirement and it's misnamed because it's a good thing it's if you live a long time it's just as an economist will point out that the longer you live the more expensive your retirement becomes just because every year you live you have to fund your expenses for that year so the cost of retirement grows with the length of retirement and then it's when you live a long time not only is there that issue that you're having to fund your budget but then there's just more time for all those other types of risks to become a problem as well with the macroeconomic environment with changing public policy with inflation even a lower inflation rate still is slowly eating away at the purchasing power of assets and then the spending shocks are things like big Health Care bills helping adult family members having to support a long-term care need to to pay for care due to declining cognitive or physical abilities and so forth and so so it's really that longevity is if you don't have longevity there's not really time for the other risk to disrupt your retirement too much and that's why longevity usually gets listed as the primary risk of retirement interesting I hadn't thought about that so a lot of the other risks are kind of correlated to the longevity element um so so really tackling that that that could be one of the biggest parts of all the surrounding risks around that you you talk a little bit in your book a retirement planning guidebook you talk about quantifying goals and assessing preparedness and I I had mentioned before that I like that you're taking your approach more like a Alm or asset liability management type of of an approach which basically that's what it is um and uh and I don't think the average person thinks about it that way they tend to think about it as like I have so much money and I'll be able to with draw so much from it sometimes there's unrealistic expectations about it but one of the common things that I've seen is that most people are not spending the time they need to do on budgeting really to actually even come up with a number or help come up with a number of what your present value of assets need to be to be prepared do you have any kind of practical tips for people and their advisors on how they can actually think about and execute a good budget not only just you know come up with one but actually implement it well now that technology can really help with that and so if people are comfortable with some of the the different websites or software that Aggregates all of your different expenses different credit cards and so forth into one Excel spreadsheet that's a very easy way to to start budgeting now for people who mostly pay in cash that can be a lot more complicated these days I don't use a lot of cash so I just simply when in the rare case that I have an ATM withdrawal I'll just kind of call that a household expense for that time period and not worry about breaking that down much more but uh when you start having those credit cards or debit card type expenses now the the software may not categorize them in the way you desire and so I usually try to not more frequently than once a month but maybe once a month once a quarter download the expenses while I can still remember well enough if I have to change some of these categories and so forth to then be able to keep track of all my expenses and know exactly then pretty much to the scent almost what I spent that year and then to start thinking about well were there any anomalies of course there's always going to be anomalies and to make sure you budget in that sort of thing but that really once you have a few years of expenses down and once you think about bigger Big Ticket items like car purchases and things that can really give you a foundation to start projecting ahead at what your expenses may be in the future as well and then then you have a way to start thinking about well how much do I need to fund those expenses and that's the whole idea of that asset liability matching do I have the resources necessary to fund your expenses are just your liabilities and do you have the resources to be able to fund that with a level of confidence that you feel comfortable with hmm interesting so I I had a meeting with a client actually who was forced into early retirement and a former engineer and keeps meticulous records has for years and uh he gave us the actual numbers for the last three years and I I figured out what the compounded rate was and it was a lot higher than the inflation rate reported by the bl by the government so um I I think there's some disconnect there between you know how we model and reality um you know uh when you look at financial planning software and you look at the assumptions that are the number of assumptions that are involved in the financial software and you know even if you're not taking Point estimates if you're doing Monte Carlo or whatever stochastic process it's very difficult to come up with a robust plan so I'd like I'd like for you to give me some and I know this is kind of a big general question do you have any general tips to people who are doing this modeling on how and for and for clients actually for for individuals and how they can make their retirement more robust to be able to deal with all the changes that can happen in the world like you said public policy changes Market changes Etc yeah you will have to revisit things over time and and as you get new information about your spending make revisions to the budgeting but uh it's still just a matter of when you're like round up your expenses or be conservative with some of your projections there's some categories that are challenging as well like healthcare and when someone switches to MediCare at age 65 that could lead to an entirely different set of health care expenses and with all your expenses on Health Care in the past you might have to completely upend that and and and do a reset there so it is challenging but if you're trying to build in conservative projections the default is usually whatever you believe your expenses will be you just adjust that for inflation every year and most people don't really do that they tend their expenses don't tend to necessarily keep up with inflation over time now that can get complicated but the way I describe it in the retirement planning guidebook is you'll have one particular budget through ajd and then you'll have another lower expense budget after ajd but also building in what if there's a long-term care event and so forth how much additional Reserve assets would I like to have set aside for out-of-pocket expenses that sort of thing and then it's not going to be perfect and it's going to need revised over time but I think you can start to get fairly confident like I've sort of done these exercises I'm still far away from the retirement date and of course I may be wrong but I I think at this point I have a sense of what my expenditures will be or what they can be at least uh over the longer term Horizon of course subject to new technologies new inventions everything else that can happen uh that would change your expenses but at least roughly speaking I think you can start to figure these things out yeah um I guess I'm coming from a practitioner who's been doing it for you know 25 years and seeing the the the conventional wisdom by the best experts at each point in time and looking at how people have actually fared without advice and what I've found consistently is that changes in in particular with government policy has led to uh sub-optimal choices for people who are trying to optimize to the typical cfp advice so and let me let me uh back that up a little bit with with uh some some examples um education planning what was optimal has changed in my career probably four or five times um let me just put it this way I I have put more emphasis in tax diversification and diversification and stuff in how you do things now because what if you if you over optimize in these scenarios it's sub-optimal does that make sense right if like if you designed everything to handle one particular public policy and then it changes on you like right now Roth IRAs or Roth accounts are incredibly attractive to have Assets in but something could change it could just be not that they might necessarily ever tax a Roth distribution but they could add a required minimum distributions or they could count it in the modified adjusted gross income measures used to calculate taxes on Social Security benefits or to calculate higher medicare premiums and so forth and so if something like that happened and you'd been doing all these Roth conversions to get everything into the Roth account yeah that would be overdoing it and subjecting you to that particular risk so I do think tax diversification is is quite important so that you still have flexibility and options because the the uncertainty is the rules will change and we see that every couple of years we just in late December 2022 secure act 2.2.0 came out and that has changed a number of different public policy matters related to retirement income it's gonna and that will continue to happen over time so so be flexible and part of that is just not overdoing things making sure you stay Diversified with with how you're approaching planning yeah in today's environment what we see a lot is is people that have taken the advice of Max 401K uh you'll get a lot of tax deferred and and what's happening is is they're coming to retirement with a large very large 401K plans and things like that and then they just get nailed in taxes and in fact I'm finding a lot of people pay more taxes when they're retired than they did in some cases than when they were not retired um and uh and and it becomes an issue it becomes a real issue then they have estate planning issues and things like that so um uh I just I'm glad that you said that about the the tax diversification I think more than ever especially given our our current you know country's economic condition there's a lot there's we're going to have lots of changes and they could be very large changes uh in particular if you considered quote unquote rich um so I'm sorry I put my little uh two cents in there but getting back to your book uh you have this concept of the retirement income optimization map um again going back to the assets and liabilities and all of that and when you're you when you're you talk about optimizing that's that's why I brought up the the concept of optimizing I I think there's optimizing within ranges one of the concepts that I've kind of looked at and you talked about you talk about different people's retirement styles um one of the issues that you can look at is like matching the duration of your expected liabilities up for a certain period of time so let's say you have a certain percentage of your portfolios in a total return portfolio and then and then another percent that you're you're cash matching or your duration matching matching for one to five years or whatever uh I think some people call that time segmentation you can call it many different things if forget about psychology and how somebody feels if you are just a rational investor a rational person what would you say the optimal length of time is on average for somebody retiring 65 say to cash match or to duration match uh you know their near-term expenses at one year is it five years is it 10 years I know that's a a loaded question but if you forget about forget about psychology and just go pure rational mm-hmm well pure rational the the total return investing approach which has less emphasis on trying to duration match uh can work and also if you then use a an income protection or wrist wrap type strategy you you have that income floor in place that is lifetime so it's already kind of duration matched to your liability so time segmentation is certainly a viable strategy in terms of my personal preferences it's my least favorite strategy so the whole behavioral point about time segmentation is if I have five years of expenses in in cash or other fixed income assets I don't have to worry about a market downturn because I feel confident that the market will recover within five years and I'll be fine and that that story that's a behavioral story and it just doesn't resonate with me personally I I can understand it resonates with others but it doesn't resonate with me personally and therefore I don't necessarily think about what sort of like front end buffer you need in place too to somehow be rational or optimal also that's where something like a reverse mortgage can fit in in a really interesting manner because if you set up the growing line of credit on a reverse mortgage that can be the the type of contingency fund that you can draw from so that you don't necessarily need to have as much cash or other assets sitting on the sidelines to fulfill that role so I would look more at some other of course you need some some cash but I tend to say less rather than more and maybe look at some other options as well about how to have that liquid contingency fund that's great so so basically the in in the guaranteed income sources plus plus reverse mortgage could uh provide a buffer provide a floor so that you could have uh less cash and and you're generally getting a higher expected rate of return on the annuity than fixed income securities and your at at least at the present time a reverse mortgage line of credit grows at a faster rate than the cash which can be used tax-free when you need the money uh so you can see that Evolution that Carol davinsky is one of the famous planners and researchers in this area and in the 1980s he talked about the five-year Mantra which was have five years of expenses in cash now cash you create drag on you're not able to get as high of potential returns with the money you have in cash so he gradually lowered that down to two years in cash and then when he came across reverse mortgages and in subsequent research and and descriptions he talked about having six months of cash alongside a reverse mortgage growing line of credit so I think that's an example of I I think something like that sounds pretty reasonable that's that's that's that's really helpful so and I want to Circle back to reverse mortgages here but before we do if you don't mind I'd like to talk a little bit more about social security uh so we're kind of getting into the realm of the the guaranteed side of things not the total return side of things um or or I more more knowable income sources um I was just looking at the kind of the statistics right now total debt in the United States is really huge um we're running very large deficits project to be like 2 trillion we have a Pago system right now in Social Security and even if we taxed it's been argued by many people even if we taxed every billionaire 100 that would barely make a dent in our current situation so we have huge unfunded liabilities off balance sheet uh type unfunded liabilities how can we really expect Social Security to keep up with inflation and will it be there for quote unquote you know what I'm saying well it will need reforms it's very unlikely to Simply disappear for my own personal planning I I assume I'll get 75 percent of my presently legislated benefits but for people who are younger as well further away from their their 60s uh the social security statement they receive assumes the zero percent average wage growth as well as zero percent inflation and the reality is there's probably going to be a positive real wage growth over time so you're presently legislative benefit could be a lot higher than what your social security statement is implying and therefore when you offset a benefit cut with the uh the wage growth that can be expected over time you may not have that much less in terms of what you're going to plug into your financial plan but yeah I certainly we don't know how the reforms will shake out but if nothing is done sometime in the 2030s Congress would have to legislate a benefit cut and to keep the system so that enough payroll contributions are coming in to cover exist current benefits that cut would have to be somewhere in the ballpark of 20 to 25 percent so I just simply assume I'll get 75 percent of my presently legislated benefit as part of my financial plan is is it fee Is it feasible feasible to actually get Social Security in a funded situation or is it gonna is it most likely going to stay Pago in your if you had a crystal ball oh it yeah it's always been pay-as-you-go and right so the buildup of the trust fund was an effort to just build up some reserves in anticipation of the changing demographics where there's more and more retirees relative to the workers paying contributions uh they try to keep Social Security funded over the 75-year time Horizon and so it's never permanently funded but yeah with a 25 20 to 25 percent benefit cut that would be sufficient to get the system to be expected funding funded fully over the subsequent 75-year time Horizon that's that's really helpful um thinking about it that way in terms of just potentially a 25 less is a reasonable way to look at it I think um the that part of it's not so hard what's harder to understand or to get a grasp on is whether or not that's going to be what that means in real terms for for a retiree um if we continue on a certain path and inflation is is in a different scenario in the future how how do you think about scenario when or inflation when you're when you would set up a plan or a retirement plan what how would you what kind of what kind of uh of Monte Carlos if you will would you put on on your inflation expectation so I do well I tend to just try to think of everything in today's dollars so that the inflation's factored out of it but I the way I think about long-term inflation is the markets tell us what they expect inflation to be if you just look at the difference between a treasury bond and then a tips treasury inflation protected security with the same maturity uh the difference between those two is what the markets expect inflation to be in if they thought it would be different they would invest in one or the other to get that aligned inflation is coming down now and even over the next five years at this point markets are only factoring in an average inflation rate of about 2.1 to 2.3 percent so it seems like markets really expect inflation to come over to come under control even over 30 years right now the markets are building in about a 2.3 percent average inflation rate which is below historical numbers and in terms of if I'm building a Monte Carlo simulation right now I'd to be a little more conservative there I'd base it around a two and a half percent inflation rate with historical volatility and inflation is around four percent so so you're basically an average of 2.4 or 2.5 and then uh standard deviation is like four basically okay so uh that that sounds reasonable um I I guess what is interesting about that is I guess if you assume that we have typical real rates of return for different asset classes that that all works itself out if you put it in present value terms um but if that's not the case and and it should stay that way ultimately it should stay that way but you could have major moves in markets in people's uh time Horizon when they retire which leads us to sequence of returns conversation uh when people retire you can have these you can have these big shifts in markets things things are rough right when somebody retires uh we uh remember I told you about that engineer we had a conversation with forced into early retirement right when the market topped uh the good news is is he had two types of annuities that worked out perfectly for him in the sequence return can you explain sequence return risk for listeners and and what it means and how to you know strategies to mitigate that a little bit more and just one quick last comment on the inflation too like if you thought when I said these low inflation numbers that that's ridiculous inflation would be much higher well then you'd benefit from investing in tips because they'll provide you a real yield plus whatever inflation ends up being and so they'll perform better if inflation is higher and they've already discounted that that was one of the best performing uh fixed income markets uh in the last couple years so but anyhow but but yeah a sequence of returns risks so that's it whenever you have cash flows going in or out of a portfolio the order of returns matters and it's when you start spending in retirement that it matters a lot more so it's like the market could do fine on average over the next 30 Years but if the market goes down at the start of my retirement I'm not having to sell more and more shares to meet my spending needs and sell a bigger percentage of what's left to meet my spending needs such that when the market subsequently recovers my portfolio doesn't get to enjoy that recovery and so it can dig a hole for the portfolio and the the average return could be pretty high but if you get a bad sequence of market returns right at the start of retirement it can really disrupt that retirement and lead to an implied much lower average rate of return than what the overall markets were doing over your retirement Horizon yeah so and in terms of actually uh let's say you're coming up on retirement so this is a common scenario you're retiring in 10 years or five years what should an investor be thinking about doing to transition from that accumulation to distribution phase to kind of mitigate that sequence of return risk so when people start thinking about retirement I think that's where the first step take that retirement income style awareness to get a sense of what sort of retirement strategy might work for you because that's where you then have um different options if you're more of a total return investor that's the whole logic of the target date fund and so forth is just start lowering your stock allocation but still investing in a diversified portfolio as part of that transition into retirement if your time segmentation the easiest way to think about the transition is instead of holding those Bond mutual funds you start exchanging those in for holding individual bonds to maturity like if I'm 10 years before retirement every year for the next 10 years I could start buying a 10-year bond and then when I get to my retirement date I have the next 10 years of expenses covered through these maturing bonds if you have more of an income protection or risk draft strategy the the options would then to be thinking about well if I have an income gap I'm trying to fill where after I account for Social Security or any pensions I'd really like to have more reliable income to meet some basic expenses well you could start looking at purchasing annuities that would turn on income around your projected retirement date as a way to have that transition into retirement and so they're all viable options and it's just a matter of taking the the route that you feel most comfortable with very good that's really really helpful um now I I guess at least is a little bit into the what I would call the traditionally unloved unwanted stepchildren annuities and reverse mortgages uh you know they've gotten a bad a bad rap for so long but they're so useful in in as tools I would say probably the reverse mortgage is the least understood and uh and and one very helpful um tool I think maybe because of just the history of them and how they used to be structured versus how they're structured now um can you give me a sense about how to think about reverse mortgages for people is it only for people who are you know can barely get their their plan together with their assets or or does this also work for people who have a cushion but they should still do a reverse mortgage more yeah I mean the conventional wisdom a lot of times is that the reverse mortgage is a last resort consideration after everything else has failed and maybe then just a way to Kick the Can down the road a little bit but ultimately that retirement wasn't necessarily sustainable since about 2012 that really the focus of the kind of research retirement planning financial planning type research was looking at how reverse mortgages can be used as part of a responsible retirement plan and so it's not that a lot of advisors may just think the reverse mortgage is only for someone who's run out of options but but that's really not the idea it's we have different assets and it's back to that real map the retirement income optimization how do we position those assets to fund our goals and the reverse mortgage provides a lot of flexibility about how to incorporate our home equity asset to help fund our retirement plan and it can lead to a lot more efficient outcomes than just simply say leaving the home sitting on the sidelines and saying well I've got the home if I have long-term care needs I'll sell my home to fund the long-term care something like that otherwise I'll just leave the home as a legacy asset for my beneficiaries there's much more efficient ways to incorporate home equity into a retirement plan and that's what the whole discussion around reverse mortgages is how can I I use a reverse mortgage to help build a more efficient retirement plan and not as a last resort but as part of a responsible well-funded retirement plan it's just another Diversified tool to a source of source of of assets that you can use that's not just sitting there I just had a conversation with a client yesterday that is about to retire in a few years and uh that is exactly what he said that other property that I have in that other State uh I'm just gonna keep that as a that'll be my I'll sell it if I need to you know there was a conversation about health care contingency and um uh long-term care and things like that and that was his rationale um and and in discussions with clients there has been a a ton of resistance you've been really good at putting out information that shows why it makes sense to have it as a potential use so can you explain a little bit about the the line of credit portion of it and how that how use how that could be advantageous yeah and it really it goes back to this idea of sequence of returns risk and if you look at a reverse mortgage in isolation it may look expensive or whatever else but it's how does it fit into the plan and by reducing pressure on the Investments it can help lay the foundation for a better outcome and the the growing line of credit is one of the most misunderstood aspects of the reverse mortgage and I think it was partly unintentional and it may sound too good to be true in a way it probably is and we saw in in October 2017 the government put some limitations on the growing line of credits so it was incredibly powerful before then it still quite powerful not as powerful as before for new uh anyone who opened a reverse mortgage before October 2017 was protected to have those Provisions in place for the entire life alone but if you wait and then after October 2017 you still have the growing line of credit it's not as powerful but but the idea is I believe the government assumed people would open reverse mortgages because they want to tap into the funds but financial planners realized with the variable rate not with a fixed rate but with a variable rate home equity conversion mortgage you do have to keep a minimal loan balance of say 50 to 100 dollars but otherwise the rest can be left as a line of credit and that line of credit grows at the same way the loan balance would grow and so you can understand why if you borrow money the what the loan balance will grow over time well it just happens to be the case that the kind of neat planning trick is if you open the reverse mortgage and 99 of it is in the line of credit the line of credit is growing over time at the same rate that the loan balance would have been growing and ultimately this improves the odds dramatically of having a lot more access to funds over time if you open it sooner and let the line of credit grow versus just waiting to open it at the time you might actually want to start spending from it yeah how has it been limited uh limited versus the way it used to be what what are the limitations well they increased the initial mortgage insurance premium which is not directly to the line of credit but then every every so often used to be more frequently we're now getting overdue at this point with it's been over five years but they revised the tables that determine the principal limit factors of what percentage of the home value can you borrow and so as part of that 2017 change they uh lowered the the borrowing percentages and also they lowered I mean this this part's a good thing but they lowered the ongoing mortgage insurance premium that would cause the loan balance to grow at a slower rate but it also in turn caused the line of credit to grow at a slower rate so it before that change I was running simulations where if you opened a reverse mortgage at age 62 there was like a 50 chance that within 20 years the line of credit could be worth more than the home and that's no longer the case it's still there's still a probability that the line of credit could grow to be worth more than the home but it's not nearly as dramatic as what I was Finding before the rule change that's very interesting because the line of credit growth rate is tied to interest rates and home prices have somewhat of an inverse relationship to interest rates to some degree but it's basically positively skewed so it's not it's hard to know but uh uh but yeah that's that is a great planning tip and it's interesting because we have had a lot of friction with this discussion with uh clients uh mentioning to them because they just have it in their head that I'm going to lose my home and I'm going to there's all these things that can go wrong and then you have to explain it's a big education process and of course they are required to do education as well no we don't sell reverse mortgages but we always you know if we if we you know we mention it to people as a source and you know having it there makes a lot of sense uh and and the same thing with the annuities um you know I have a love hate relationship with annuities but I'm becoming to love them more and let me tell you why before it was all commission driven you know and we're fiduciaries we don't do commission stuff now with the Advent of finally the insurance companies have really gotten to the point where there's at least enough of them now doing products that make sense with the guarantees I mean there was always companies out for a long time there's companies out there like Americas Etc that had just pure plain vanilla uh va's variable annuities that had just lowered your expenses and maybe eliminated a surrender or something but the guarantees is where the real there were folks too much on tax deferral and not enough on guarantees what were the guarantees is really really what we're really looking for here uh and the only way you could even get them you guarantees would be if you did a commissionable product so we'd be handing you know we would be referring people to Insurance guys who were selling commissionable products and then sometimes you don't know what's going to happen after that happens uh with that client so now thank God we have uh we're in a scenario now where the where the financial industry has finally caught up to what needed to happen with annuities yeah the only annuities yeah yeah the only annuities and there's it still has a lot more to be done it's it's you shouldn't be overlooked and I think what happens one of the reasons that I think they're so helpful uh for people is that risk tolerance is time variant people say their risk tolerance is X and then as soon as you have a market decline then their risk tolerance is all all of a sudden why which is more conservative and and uh these annuities can help people psychologically overcome that right you can always look to something that is either staying equal or growing and you can also have growing income streams during the Gap we see that a lot there's a gap between uh when they get Social Security and when they retire and it kind of fills that Gap and it's funny when I was when I was I actually had my assistant who's also a CPA excuse about my financial planning system I had to read this book first and she uh she said it sounded like like you uh were like in the room with him uh because there's so much stuff in here that you and I agree with it's amazing uh before not even knowing you so and I think it might have to do more with the approach of taking things more from uh your academic background and your CFA background it gives you a different perspective than what kind of the traditional financial planners had who had come more from a sales background and now what's happening is is we have uh the whole industry is now moving in the I think moving in the right direction and I think you've been a big uh reason why that's happening so I I really want to thank you for that all your work is really making a difference I want to talk a little bit about Medicare if we can and health insurance this is probably one of the most the hardest part is the medical the medical discussions in some ways um people don't want to think about long-term care people don't want to think about health costs I was looking at some of the statistics you know long-term care statistics is how much it costs it's a big number how would you how would you model the contingency planning you know for let's just start with long-term care how would you model that would you model it as a present value number or would you try to put it as a as something that's over time how how would you how do you approach that yeah actually so I did try to make the retirement planning guidebook as comprehensive as possible and and so I as part of that developed a long-term care calculator and the the basic logic of it is develop a scenario that you would feel comfortable that if you could fund that scenario uh you'll feel like okay things things will work out whether that's three years in a nursing home whatever the case may be but develop that scenario where you're saying okay at age 90 I will spend the next three years in a nursing home right now in the United States the average cost for a semi-private room in a nursing home is a little bit under a hundred thousand dollars I'll say in today's dollars a hundred thousand dollars a year but then I'm gonna plug in the the math gets complicated but you've got what's the inflation rate in long-term care what's the overall inflation rate and then back to this whole idea of the asset liability matching like what's the investment return discount rate you're comfortable assuming as well and also recognizing that if I do go into a nursing home I don't have to also fund my entire budget of a like if I thought I was going to spend 80 000 a year well I'm not going to be going on any sort of trips I don't have to go to restaurants or anything uh a lot of my other expenses would reduce not not 100 but they would reduce so plug it in what I think is a reasonable reduction to the rest of my budget and then you get calculated a present value of here's how much money I'd have to have set aside as a reserve asset to feel comfortable that I would be able to fund this long-term care need and and be able to have a successful retirement and for people who are worried about and who may be paying out of pocket for long-term care that could be several hundred thousand dollars to be blunted on average that's what it comes out to I actually had a coffee with a gentleman and he said uh what is it just tell me what the number is I said well it depends on your age he says no just tell me what the number I said it's roughly about 300 000 roughly on average it could be more it could be less uh you know uh okay and and there's there's there's different ways you can fund it right you can do long-term care insurance uh traditional Standalone you could do um you know life insurance policies that have embedded features you could do if you can't like qualify for um you know you know get a policy you can maybe get it embedded in an annuity of some sort you can sell fund um so it's not an easy thing that you can uh solve it with a quick answer um but but it's important to have in a plan and I and I like the fact that that uh you've emphasized that a lot in your work um it's just it's just great that that people are thinking about it from that perspective I want to switch gears a little bit um and talk a little bit about tax efficiency uh you know taxes are such a huge part of the impact of a plan and there's so many different angles to it and and the tax rules change so much um I'll tell you one of the challenges that I have asset location the concept of balancing you know where you put a certain asset according to us is tax efficiency versus keeping an asset allocation in line right up you know operationally keeping it in line with the objectives and then as money is being spent taking it from the right place it's a challenge even with excellent software and then sometimes I'm finding that it doesn't actually work out as planned so can you can you give me some practical tips on how to deal with asset location well the the basic logic of asset location but yeah I mean in practice it gets incredibly complicated as you're spending from these accounts to think about also rebalancing and making sure you're keeping the right asset allocation between stocks and bonds and the NASA location is where do you keep these things but generally just is a basic guideline your taxable brokerage accounts of course you want some cash there for your liquidity but otherwise that's your most tax efficient stock Investments so if you own stock index funds and so forth the on a relative basis they're most likely to be best off in your taxable account because a lot more of their returns will be those long-term capital gains that get the preferential tax treatment then with like your tax deferred IRAs and 401ks that's more of a place where less tax efficiency so bonds and so forth maybe lower returning type asset classes and then for your Roth accounts the Roth IRA and so forth that's where less tax efficient but higher expected return type asset classes could go the Emerging Market funds and small cap value and that sort of thing and that does also work with distribution ordering as well because the Roth will be what you tend to spend last and so also having these uh riskier asset classes that may have more growth prospects over the long term that can be a good place to set them aside since you're not likely to be spending from those accounts until later in retirement okay yeah it I think for a lot of people it's a little bit of a daunting thing and in practice it can be with contingencies and things like that can be hard to to do correctly and keep managed and I know there's good news is there's good software now that that helps with that um as far as tax efficiency the other you mentioned the order of withdrawals I mean traditionally you know you have the you know your traditional order of withdrawal that you would you would uh do in in the past a lot a lot of recommendations has been you know you want to take from your taxable accounts first right let those tax-free tax deferred accounts grow and then and then you start taking from those other sources but you make a really good point that that's not always the best thing to draw that taxable account down too fast can you expand upon that a little bit well the yeah the the basic tax efficient distribution is spent down taxable assets than tax deferred like IRAs and then tax exempt like Roth against last but you you can do better and so the the better approach is to have a blend of taxable and tax deferred until the taxable account depletes and then a blend of tax deferred and tax exempt after that and as part of that blend you can do rock conversions to in the short term pay higher taxes if that can better position you to pay less taxes over the long term and to have a higher Legacy value from assets over the long term yeah and then getting more specific than that it's there's no you really got to run the the individual numbers on a case-by-case basis but generally there's the opportunities to sustain your assets for much longer by having a more tax efficient distribution strategy that digs into that taxable plus tax deferred and then later tax deferred plus tax exempt exactly and and that's why it's important while you when you're an accumulation phase make sure you have some tax diversification if you can yeah have Assets in all those different types of accounts yeah so that you're not nailed so bad uh later on uh and then there's a lot of complexities that can happen with happen that we see quite a bit with concentrated stock positions and things like that which is probably outside the scope what we're talking about today so um and lastly here last last topic here non-financial aspects of retirement this is a huge huge huge thing uh it's funny it was the last towards the end of your book and I'm glad that you talked about it uh because uh there's I can't tell you how many times um you know you see people think that they're going to be happy sitting on the beach and then they they do that and they're miserable uh or or spouses that wind up hating each other for some reason can you tell can you give us some ideas about um like what should people be doing like say they're five years into retiring or ten years into retirement retirement What should people be thinking about doing to kind of get their their overall lifestyle satisfactory when they actually do retire yeah and and that's this is in some ways more important than any other Financial stuff because with the finances it's easier to adapt but work does so many things in a person's life it's not just that it provides a salary and you need a way to replace all the other aspects of work such as structure to the day camaraderie feeling part of a team feeling like you're creating value for a society all these different aspects that you need to be able to replace with something that gives you motivation to wake up in the morning in retirement and so to say simply it's not the best starting scenario if you retire because you hate your job you want to be able not to retire away from something but to be able to retire to something you want to have and it gives you purpose and passion and meaning to give you the motivation to wake up and and have something be active each day because in all too many cases people just they start doing passive things like watching too much television or surfing the internet too much and that can lead to a really miserable and unsatisfactory retirement wow that's huge that's interesting have something to retire to so uh and and start figuring that out sooner rather than later right not don't wait till the very end and go yeah what am I doing uh and sitting there staring at your wife or your husband yeah that's the idea that there's all these things you you want to get done but you just think well when I retire then I'll have more time to do it well if it's something you've been holding off on doing for the past 40 years it's not likely that just having more time in retirement is what you need you may just simply either not be interested if it's a hobby like oh I want to go back to playing the guitar or something if you're waiting for retirement to do that sort of thing there you go that retiring may not be enough and then people might start feeling bad that you no longer have the excuse and that's where if that sort of bad feeling compounds it can create a spiral like a downward spiral where people just become less engaged and less positive and it can even impact Health which then in turn makes it harder to be engaged and involved and and can lead to downward spirals it's really important to try to avoid that and as part of that not waiting for retirement to to consider all these other aspects of your life outside of work but making sure you're nurturing relationships and having hobbies and having things outside of work so that it will then be easier to transition into the retirement yeah that's great so is there anything as we close here is there anything that you're really excited about that you're working on right now that you want to share or is there at all right now I am just trying to get the updates done for the retirement planning guidebook and where we're doing the best we can to build out that retirement income Styles ideas uh something that people can benefit from and uh the other main research area is with the tax planning as well that I think this will be a Hot Topic and I've already done a lot of work in that area but it is such a complicated area that just trying to push forward as well about like Roth conversion strategies and and how to best Implement those in a most of the work in that area just assumes a fixed rate of return and with the reality of not fixed rates of Returns on your Investment Portfolio that also dramatically complicates some of those tax planning decisions so I'm continuing to push ahead in those areas interesting so more stochastic modeling in your future yes stochastic modeling and now you're probably going to be uh that Technology's got to be in there somewhere too any plans uh that you want to announce or share with new technology that you're going to be coming out with or software programs or anything like that or I mean I just have this Vision in my head if I were you I'd be doing something like that but I mean I'm just saying yeah don't Envision creating tax planning software but uh the retirement income style awareness that's where I'm putting on my efforts in terms of having software and that's an easier problem than the tax planning problem definitely yeah there's a lot of changes always yeah you'll be coding to your uh blue in the face all your staff would be so uh the uh it's interesting I I I'm actually going to be diving into that that profiling software that you have um I had a conversation yesterday about that so that's very good so where would people uh would you like people to send you see learn more about you um anything that you're up to oh yeah uh so my website retirementresearcher.com all one word retirement researcher and if you go there you can sign up every Saturday morning we send out an email with different articles and things and then my retirement planning guidebook is on Amazon or any other major book retailer and also I do have a podcast as well they're retire with style podcast with Alex mergia who's my a co-co-researcher and and co-founder of the retirement income style awareness excellent all right Wade thank you so much appreciate you coming on it's been a pleasure thank you the information in this podcast is informational and General in nature and does not take into consideration the listeners personal circumstances therefore it is not intended to be a substitute for specific individualized Financial legal or tax advice to determine which strategies or Investments may be suitable for you consult the appropriate qualified professional prior to making a final decision wealthnet Investments is a registered investment advisor advisory services are only offered to clients or prospective clients where wealthnet Investments and as representatives are properly licensed or exempt from licensure [Music] foreign
I Turned This Cash-Only Savings Hack Into An $850K Business
Jason 0 Comments Retire Wealthy Retirement Planning
I just remember, like,
wondering how I was going to make it through the
next month. Like had a degree, no
job, student loan debt hanging over my head,
credit card debt hanging over my head. And
January 1st came and I was like, I will never
be in this position again. And that's when I
started researching ways to budget and I found
cash budgeting. I started budgeting at
the beginning of the year and started throwing it
on social media to keep myself accountable. I started the business
after my tiktoks went viral. I was like, okay,
well, people are actually interested in this
because finances come off really boring to me and
for some reason people were engaging.
Our
internet will be receiving $20. My name is Jasmine
Taylor. I'm 31 from Amarillo, Texas, and my
business brought in over $800,000 last year. You implement cash
stuffing with it by budgeting the money
literally and physically with the cash. So that
means you start to budget with whatever your
paycheck number is and you give every dollar a
place down to zero. The first product we
sold was just a simple budget binder so you
could buy a binder, pick your cover, add your
name, and then choose six categories. And then we
moved on to adding in different savings
challenges. This one's pretty cute with the
piggies and the wallets, and I also like fries
before guys, we are out of stock a lot and out
of stock on our website doesn't mean that we're
out of stock in our warehouse. We stock enough items
that we can pack and ship out that same week. People are literally
waiting on the site at midnight on Saturday
night like waiting for the restock. Last week,
our $1,500 savings challenge sold out in
like six minutes.
I honestly didn't have
any expectations. I just went into it
hoping that I would make my money back. But I had
no idea. Even to this day,
sometimes I wake up and I'm like, What is
happening? I believe that my mindset changed in
December of 2020. I had just got through
Christmas and my sister died probably four years
previous, so I've been full time taking care of
my niece that works with me now. I was working at
the freestanding emergency room and then
I lost that job actually over the holidays. When you finally get
access to money, at least in my circumstance,
everything I wanted, I wanted to buy it. I have
bipolar disorder. So at the beginning of
my journey, I understood that a lot of my impulse
spending was tied to that.
I started tracking my
expenses and being really diligent about budgeting
and cash stuffing. I was not only able to
change my finances, but I was able to change my
mindset and my relationship with money. I have a bill checking
account. Right? So in that
checking account, there's already next month's
bills. So when you see me cash
stuffing on camera, that's for the next
month. So the first day of the
month, I go and deposit everything I've cashed
up into the bill account. And as the month goes
on, everything is direct deposited. The first
time I had been able to save $1,000, like I'd
never been able to hold on to $1,000. It really empowered me
more than anything else was. Okay, well, you did
that. What else can we do? It went crazy viral. And I was like, well,
I'll be back tomorrow with another one. I knew the stimulus
check was coming and I literally just went for
it. And so I went and bought
me a cricut and I bought the supplies for the
cricut, the mats and stuff like that.
And I
put the rest into inventory, into
purchasing my Shopify plan for the next couple
of months, some shipping supplies and that's it. It was pretty much gone. So in February of 2022,
I realized we needed help. We were working
like 18, 19 hour days trying to get custom
orders out, and we were burnt out. And it got to
the point where I couldn't hardly restock
the site because we couldn't keep up with
the orders. Right now I have three
contracted employees and they do crafting, so
they help me make envelopes. They help
make savings challenges as well as one of the
ladies comes here and she helps me pack orders
because we're now packing 700 – 800 orders a week
and it is pretty tedious. For example, our
customers can pick the cover that they want and
then they customize the envelopes inside to fit
their needs. So different people
choose different titles. You can pick the color,
the font on the envelopes. Monday
through Friday I pretty much come in admin,
catch up on anything that's happening that's
crazy that I need to fix.
We go to the back pack
orders, unbox inventory and we do that until 8
or 9 and then I come up here and if I'm going to
do lives or whatever, I do those if I need to
film YouTube content, I'll do that. Saturdays
and Sundays we all come in and we heavily pack
orders. A lot of the income that
I was making. I was very diligent
about throwing it towards debt. I invest some in
my future and the form of a 401K, pay my bills
with it, give myself spending money and put
some towards savings challenges.
So the same
stuff that I teach my audience I still use in
my daily life. We don't have an issue
bringing in customers. Our issue is honestly
that we can't fulfill more orders. We are shooting for $1
million at the end of 2023 and we are going to
get it. I'm believing that we're
going to get there. I've never had a problem
betting on myself.
You've got to be willing
to bet on yourself. If you don't how can you
expect anybody else to?.
The POWER of GOLD & SILVER IRA’s 💰🏦 #gold #silver #retirement #investing #preciousmetals
Jason 0 Comments Retire Wealthy Retirement Planning
if the IRA or 401K that you currently have has open positions those positions would have to be sold and then settled into a cash position in order for you to transfer that cash into the new precious metals IRA account.
THE WEALTH OF NATIONS | PART 2 (BY ADAM SMITH)
Jason 0 Comments Retire Wealthy
As promised, here is the second part of The Wealth of Nations, one of the most influential books ever written about economics If you haven't watched the first part yet I'd advise you to do that now, as some of the takeaways here build on those from the previous part Let's continue where we left last time … Takeaway number 6: Accumulation and employment of capital What's the similarity between Michael and a country like the US, China or Sweden? It is that they get wealthy in the same way Allow me to introduce The Swedish Investor's "Stairway to Money" All copyrighted and original content, of course Each different step represents a category that an individual can spend money on To become wealthy a person wants to spend money on the higher steps and not the lower ones At the bottom, we have services meant for consumption These are the worst things that you can spend your money on, as you'll consume them instantly Vacations, dinners and video on demand all belong to this category The next worst thing to direct your money towards is products meant for consumption Products depreciating value from the time of purchase, but at least they're not as bad as services because you will still be able to sell them at a later stage, even though it may only be at a fraction of their original value Cars, clothes and phones belong to this category Then we have products that do not depreciate in value and that often keep their value through inflation Important entries in this category are collectibles and a house to live in And at the top, we have investments This is a very broad category indeed, and anything which is expected to generate more cash in the future than the outlay of money is today, plus a reasonable return, belongs here Therefore – starting a business, educating yourself, investing in the stock market, or renting out properties all belong here It's the same with countries If a country buys services from another country, money flows right out from it without being replaced with something else that is valuable If a country buys products from another country, at least some of the value is still preserved as products can be sold again at a later stage It is similar with a third step in our Stairway to Money A country gets rich by increasing its own productivity by starting businesses there, by educating its people so that their skill and dexterity increases, or by buying productive assets from other countries BUT …
… and this is unimportant but Neither people nor nations should be afraid of having expenses just because of this Both people and nations, if they want to acquire wealth, should focus on what they are naturally good at and then outsource the rest This is what we shall focus on next Takeaway number 7: Globalization – the shortcut to increased wealth Here we have. Michael Lewis, a 32 years old engineer He's working at a job where he's paid a base monthly salary, but he's also compensated for overtime For overtime hours, he nets approximately $30 per hour Given this, here comes a few questions for you: Should michael cook his own food? Should michael clean his own house? And, sorry now i'm getting a bit silly just to prove a point here, should michael build his own phone instead of buying one from apple? From a wealth standpoint the answer is no to all of these questions It makes sense for Michael to do what he is best at, earning money from that and then hire other people to do what they are best at for everything else that he demands Perhaps Michael can cook his own food, but it takes him about an hour to prep a single meal, which means that he does so at a cost of $30, because he could have spent that time working as an engineer Therefore, it doesn't make sense for him to do it as he can just buy a meal outside for $15 Similarly, he can clean his own house, but it takes him 2 hours to do So that's $60 for Michael, while he can hire someone to do it for $40 And as an engineer, he is capable of building his own phone, but it might take him something like 200 hours plus $200 in materials That's a $6,200 phone! Why not just go buy the latest IPhone for $1,000? If it doesn't make sense to do something at 6 times the price it doesn't make sense to do so at 2 times the price, and probably not at 1.5 times the price either It is the same with nations For nations to increase their wealth, they should be focusing on the things that they are really good at, and then hire other nations to do what they are best at For example ..
The US is obviously a leader in many different businesses, but among others, in the fast food and entertainment industry China is incredible at producing most products at very low prices And in Sweden, we are quite good at producing furniture … … sorry, I mean at making everyone else produce furniture for themselves, of course Now, should Sweden try to produce the same products that China can produce much cheaper? No. Should China compete head-to-head with Hollywood? Probably not. Should the US have everyone produce furniture for themselves? Definitely not! All these countries can be more productive, and in that increase their wealth, by simply doing what they are best at, and then trade goods with each other Also, to make another comparison between individuals and countries in their quest for wealth: Both of them will earn more by having rich neighbors or acquaintances People know that if they want to be rich, they should move where other people are rich And probably even more importantly – they should acquire rich friends It's the same with nations A country should want their neighbors and trading partners to be wealthy, because eventually that wealth will spill over to them, too Just look at this map But we've been getting this backwards for centuries now In the 18th century, Great Britain and France, probably the two wealthiest countries in Europe at that time, did everything they could to make business miserable for each other instead of cooperating They even went to war with each other! Today, let's hope that the two most important economies of our time, the US and China, don't make that same mistake Takeaway number 8: Why free trade is superior, and why governments shouldn't interfere As we talked about in the previous video – in a capitalistic society, money will naturally flow where the returns are higher and disappear from where their returns are lower In a society where the government does not interfere, two rules will guide capital – Capital is naturally employed where it can produce the greatest returns This is actually a good thing, because businesses like these are more sustainable than anything else They will employ people where there is demand and a real competitive advantage – Capital is also naturally employed in the home market, as this comes with less risk This is also good, because it creates working opportunities in the own country For these two reasons, it is totally unproductive when governments interfere with the market Just as an imaginary example: Say that we, in Sweden, would do something as silly as setting up a ban on movies created in Hollywood What would happen when such a ban is introduced? Excluding potential retaliation, it will yield higher profits for the film industry in Sweden than what would naturally be the case Therefore, more capital will be incentivized to flow to this industry But this business still isn't competitive on a global scale.
Everywhere else than in Sweden, people will still watch movies from Hollywood! Moreover – the capital in Sweden which goes towards the creation of film is capital that could have been directed towards something where Sweden is competitive on a global scale, like the previously mentioned furniture Generally, politicians must have a small dose of God Complex if they think that they are smarter than the aggregated thinking of the market when it comes to capital allocation decisions in businesses There are two examples when it might be necessary to introduce duties, bans and tariffs though: – For goods that are important for the defense or survival of the country – And when a tax is imposed even on such domestically produced goods You don't want to shift the favor to the foreign goods, at the very least Apart from that, governments should probably stay away from using duties, bans and tariffs on foreign goods They should not incentivize certain industries or disincentivize others, because the market is likely to do this very well on its own, thanks to the before mention two There are a few areas where a government is absolutely necessary for the wealth of a nation though, and that is what we shall cover in the next takeaway Takeaway number 9: What is the purpose of a government? According to Adam Smith, there are some tasks in a society that the market and private people have little or no interest in solving The four that Smith discusses are: – The defense of a country – The justice system – Some type of infrastructure – And basic education The defense of a country is absolutely necessary for its wealth to increase Interestingly enough, a country is more and more likely to be invaded the richer it is Or so it was in the old days at least ..
Consider the raids of Genghis Khan and his Mongolian savages of the much wealthiest cities of China Or how the vikings invaded many much more established societies in Europe The savages actually had the advantage at this time, as they were much more skilled fighters But that all changed with the invention of the firearms Firearms were expensive to make, and no matter how skilled an army of spears and bows were, it couldn't beat one equipped with firearms And so, the odds changed in the favor of the wealthy nations, who could afford these supreme weapons Anyways … A nation must be able to defend itself to sustain its wealth And as this benefits everyone in a society, it does make sense that a government has the responsibility of this task Justice, is similarly an expense that benefits everyone in a society In the old days, justice was often exercised by those in power, but one can easily understand how such a system can be very corrupt It is essential that justice and power are separated.
Otherwise – who should bring justice to those in command? Similarly, a justice system that is based on profits tend to be very corrupt too, so it doesn't lend itself well to the free markets It used to be like this too, everyone that wanted justice had to bring a gift to the judges As you can probably imagine, the person who brought the greatest gift tended to get a little bit more "justice" than everyone else … So to speak. Therefore, the task of bringing justice to its people should be paid for by a government But those that use the justice system often should probably pay extra for that Infrastructure, such as the most important roads and docks used for commerce of a country, is something that benefits everyone too But it doesn't invite the same conflict of interest as the justice system does, and should thereby often be held privately Infrastructure should be financed with revenue from the commerce which can be carried by means of it. Because in this way, money will much more seldom be wasted on infrastructure projects Some infrastructure projects can be important without being profitable, but in that case they should often come with a local tax, not a national one Without some type of basic education being free and probably also mandatory, some of the country's inhabitants, those that are born into poverty, will most likely never learn how to read write or count Such inhabitants are unlikely to increase the productivity of a nation Therefore, we want to avoid that this happens A benefit such as learning to read, write and count benefits everyone and it should be one of the purposes of the government of making sure that this is done Takeaway number 10: How should a government be financed? So ..
With defense, justice, infrastructure and education, a publicly financed government seems to be the most fair and logical solution But there are many different options of financing something, and some are definitely better than others Here are 4 principles for creating good taxes: Equality Each person should contribute in proportion to his or her abilities and in proportion to the revenue which he earns under the protection of the state It is difficult to make sure that the wages, profits and rents (the three sources of income which we discussed in the previous video) are all taxed equally, but they should at the very least be taxed equally individually Certainty Time, quantity and manner of payment must always be clear This is probably the most important principle.
A little bit of uncertainty is worse than a great deal of inequality Uncertainty leads to the potential corruption of the tax gatherer Convenience Taxes should be due when the contributor is most likely to be able to pay The consumer pays whenever he consumes a service or product, and the wage earner should pay taxes as soon as he gets the wage, not at some other time when he might already have spent it all Efficiency A tax may never be more burdensome to the people than it is beneficial to the government For instance … – As few people as possible should be required for gathering the tax – A tax should never discourage industry – And the degree of visits and examinations of the people shouldn't make them feel oppressed With these 4 principles in mind, i'd like to ask you a question: Do you think that it is a good idea for a country to have a wealth tax? In other words, a tax which is in proportion to the total assets of private people. Please comment with your answer down below! Alright, that's it for Adam Smith's Wealth of Nations Here are two unusual recommendations for further watching from other channels: You can watch me doing the Navy Seal's screening test for eight hours, if you want to watch me in a lot of physical pain Or, you could watch this summary of 79 of my book summaries Cheers guys!
Read MoreThe Ultimate Retirement Plan | Wade Pfau | Ep 63
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
[Music] welcome to the market call show where we discuss what's happening in the markets and the impact on your Investments tune in every Thursday on Apple podcast Google play Spotify or wherever you listen to podcasts hi Wade how are you doing I'm doing great thanks for having me on the show you know I'm so happy to have you here if you're in the retirement income planning business or if you're a financial advisor or a money manager somehow managing money in the space for retirement income planning everybody has heard your name you've been around in this field for a long time and as I was looking through your uh resume from various sources it's like okay well what are we going to exclude you know there's because there's so many things that you have done but I thought I would just kind of just fill in for viewers that don't know you a little bit about you um you know you're an active researcher and educator about retirement income strategies you know you do a lot of speaking I know you're going to be speaking here in Denver uh pretty soon uh you are a professor are you still a professor of retirement income at the American College of financial services I am currently yes and the director of Retirement Research for McLean asset management and in-stream uh you did your PhD in economics from Princeton and you did interestingly you did a dissertation on Social Security reform which we hopefully we'll talk a little bit about later uh you're also a fellow CFA Charter holder like myself um and you've got lots of AD you know accolades and some great books in particular one that I really like that you've done is a retirement planning guidebook uh 2021 uh and then you have that safety first retirement planning how much can I spend in retirement etc etc you've done some stuff on reverse mortgages The Unwanted stepchild that actually is a useful tool for many people yet not quite known by many so uh with that said I I was just curious tell me a little bit about your background where did you grow up so uh well I was born outside of Detroit I lived there until I was 15 moved to Iowa after that my my mother is originally from Southwest Iowa so I graduated high school in Des Moines Iowa and then went to the University of Iowa after that so pretty much midwesterner lived a number of different places afterwards including New Jersey Pennsylvania Tokyo Japan for 10 years and then now I live in Texas you live in Texas now yeah actually these pictures behind me and all are all the places I've lived over the years so it's so so you so you grew up in Detroit mostly it sounds like but moved all traveled a lot um how did you go from you know studying what did you study Finance initially when you were in college in undergrad economics and finance economics okay so how did you go from economics and finance to just being so focused it seems like you're focused on retirement income planning well yeah I mean uh financial planning as an academic field is still pretty new and even I entered the PHD program uh in 1999 and actually Texas Tech University started the First Financial Planning PhD program in the year 2000 so it wasn't even an option at that time but academic economics is very mathematical and theoretical and I was always looking for ways to apply to more real world type activities and that's ultimately how I made my way into financial planning indirectly you mentioned the my dissertation on Social Security reform that was testing how in the early 2000s there was a proposal to create personal retirement accounts to carve out part of the Social Security tax and put that into like a 401k style account and I was simulating how that might perform and ultimately that's the same sort of thing I've made my career on at this point which is just writing computer programs to test how different retirement strategies perform in looking for ways to get more efficiency out of one's asset base for retirement now that was during the bush 2 Administration if I remember correctly wasn't it and so and uh what were your findings in that what was your general thesis or not thesis but your general conclusion well at the time what I determined was that it could be made to work but it wasn't obviously a better approach and now in hindsight I realize more and more that there's so little in the way of protected lifetime income that carving out more of Social Security which is that inflation-adjusted protected lifetime income and exposing that to the market as well uh probably would lead to worse outcomes for many people than we do need some risk-fooled income and so now that traditional pensions are going away Social Security is one of the last holdouts and so it probably wouldn't be the best idea to private or not privatize but uh create personal the defined contribution 401K style accounts out of those Social Security contributions very interesting and we'll we'll touch a little bit more I have a lot a few questions on Social Security uh in general um you know from a macro perspective and also a micro perspective personally for uh people so um one of the things that I really like about what you've done is that you kind of take more of a approach that I'm kind of used to like more of an asset liability management approach when you think about funding ratios rather than the traditional way that you hear financial planners talk about it I really like your overall framework and one of the things that I I think is very helpful is your retirement income style protocol your resubm Matrix can you explain a little bit uh to the viewers about your ideas there and and what how that helps an individual determine their overall approach to how they should tackle their retirement income plan yeah absolutely and that's really one of the the confusing aspects of retirement income is there are different strategies that people can use and unfortunately just there's a lot of disagreement and arguments about one strategy is better than all the others and and by what I mean by that is you have What I Call Total return which is just a you build an Investment Portfolio and you take distributions from it throughout retirement you have different bucketing or time segmentation strategies and then you also have strategies that will focus more on having protected lifetime income through annuities or other tools to cover your Basics before you start investing on top of that and they're all viable strategies at the end of the day and that's an important point that Advocates of Investments only don't appreciate how powerful the risk pooling that annuities can do to offer more income how that is competitive with anything that the stock market might do and so people really have options about what they're most comfortable with and that's what the retirement income style awareness is about developing a questionnaire to help guide people in the direction as a starting point which of these different retirement strategies resonates best with your personal Outlook and preferences you may not ultimately choose the the strategy coming out of that but at least it gives you a starting point to say okay it seems like I might look here first as a way to build my retirement strategy and ultimately if that helps me connect to a strategy that resonates and that I can stick with through thick and thin in retirement that can help give a better outcome because they're all viable strategies but where a strategy doesn't work is if you're not comfortable with it and you don't stick with it and you you bail on it during a market downturn or something like that that that's what the retirement income style awareness is really designed to do is just provide that initial talking point on which kind of approach might work best for me to to think about as a starting point yeah I like that because what it's doing is it's basically more holistically looking at how you would can solve the problem and typically you'll find advisory firms that will will overweight if you will one over the other they're like I'm a Time segment guy or I I hate annuities it's all Total return annuities are a scam or uh you know I will never buy an annuity or uh you know Etc et cetera and risk pooling is is something that's really important but it's also very complicated and I think that's why a lot of people have shunned annuities and annuities have changed a lot over the years um and you know coming from my background you know which is more of a total return approach that's great if you have a lot of money but in in other cases you know I think that you can you can you can look at the problem from a optimal way of doing it or you can look at the problem from a way that's actually going to get implemented and work and what I like about Risa is it's practical pretty much all the stuff that you're doing is practical it's not completely theoretical one problem though with that is that you can have somebody who has a safety first for example mindset but their situation is such that if they have a Safety First with 100 of their Capital that they're very unlikely to be successful can you can you expound a little bit upon how you would think about that in terms of giving advice to people in that scenario yeah so that scenario is probably more they do have a safety first mindset but they've been pigeonholed into a total return strategy but they're ultimately not comfortable with the stock market and therefore maybe most of their Holdings are in cash or in bonds which doesn't support a whole lot of spending power and that's you kind of there's three basic ways you could fund a retirement spending goal the first is just with bonds or with cash not really offering much yield on top of that and then to try to spend more than that the um the probability base perspective is invest in the stock market and the stock should outperform bonds and that should allow you to spend more throughout retirement the safety first approach is more now let's build a floor of protected lifetime income that then brings in with an annuity the the risk pooling the the support to the long-lived helps provide more spending power than bonds alone as well and people have that option and it's when the safety first person gets pushed into a total returns probability based strategy and just doesn't invest in the stock market they're ultimately left with bonds which which is the least efficient way to fund a retirement spending goal over an unknown lifetime very true and you know I guess a lot of people did take that approach probably when I first got in this business 20 over 20 years ago there was a lot of people that were doing that who were retired back where the municipal bonds were paying it was it was conducive the market was conducive for that we had high interest rates that were in the long-term secular decline so you had capital appreciation from those bonds he also had reasonably good uh tax-free interest yields that were working for people and inflation was falling um and so now we potentially could be in the opposite inflation Rising who knows how yields are going to work themselves out but um it when you're looking at this um you you bring up this concept of some of the retirement risks and and you have like these uh longevity sequence of returns spending shocks Etc of of the risks that you're seeing out there which one would you say has had the largest impact negative impact on people that they really need to solve for you know longevity sequence of returns spending shocks and surprises well longevity in a way it's the overarching risk of retirement and it's misnamed because it's a good thing it's if you live a long time it's just as an economist will point out that the longer you live the more expensive your retirement becomes just because every year you live you have to fund your expenses for that year so the cost of retirement grows with the length of retirement and then it's when you live a long time not only is there that issue that you're having to fund your budget but then there's just more time for all those other types of risks to become a problem as well with the macroeconomic environment with changing public policy with inflation even a lower inflation rate still is slowly eating away at the purchasing power of assets and then the spending shocks are things like big Health Care bills helping adult family members having to support a long-term care need to to pay for care due to declining cognitive or physical abilities and so forth and so so it's really that longevity is if you don't have longevity there's not really time for the other risk to disrupt your retirement too much and that's why longevity usually gets listed as the primary risk of retirement interesting I hadn't thought about that so a lot of the other risks are kind of correlated to the longevity element um so so really tackling that that that could be one of the biggest parts of all the surrounding risks around that you you talk a little bit in your book a retirement planning guidebook you talk about quantifying goals and assessing preparedness and I I had mentioned before that I like that you're taking your approach more like a Alm or asset liability management type of of an approach which basically that's what it is um and uh and I don't think the average person thinks about it that way they tend to think about it as like I have so much money and I'll be able to with draw so much from it sometimes there's unrealistic expectations about it but one of the common things that I've seen is that most people are not spending the time they need to do on budgeting really to actually even come up with a number or help come up with a number of what your present value of assets need to be to be prepared do you have any kind of practical tips for people and their advisors on how they can actually think about and execute a good budget not only just you know come up with one but actually implement it well now that technology can really help with that and so if people are comfortable with some of the the different websites or software that Aggregates all of your different expenses different credit cards and so forth into one Excel spreadsheet that's a very easy way to to start budgeting now for people who mostly pay in cash that can be a lot more complicated these days I don't use a lot of cash so I just simply when in the rare case that I have an ATM withdrawal I'll just kind of call that a household expense for that time period and not worry about breaking that down much more but uh when you start having those credit cards or debit card type expenses now the the software may not categorize them in the way you desire and so I usually try to not more frequently than once a month but maybe once a month once a quarter download the expenses while I can still remember well enough if I have to change some of these categories and so forth to then be able to keep track of all my expenses and know exactly then pretty much to the scent almost what I spent that year and then to start thinking about well were there any anomalies of course there's always going to be anomalies and to make sure you budget in that sort of thing but that really once you have a few years of expenses down and once you think about bigger Big Ticket items like car purchases and things that can really give you a foundation to start projecting ahead at what your expenses may be in the future as well and then then you have a way to start thinking about well how much do I need to fund those expenses and that's the whole idea of that asset liability matching do I have the resources necessary to fund your expenses are just your liabilities and do you have the resources to be able to fund that with a level of confidence that you feel comfortable with hmm interesting so I I had a meeting with a client actually who was forced into early retirement and a former engineer and keeps meticulous records has for years and uh he gave us the actual numbers for the last three years and I I figured out what the compounded rate was and it was a lot higher than the inflation rate reported by the bl by the government so um I I think there's some disconnect there between you know how we model and reality um you know uh when you look at financial planning software and you look at the assumptions that are the number of assumptions that are involved in the financial software and you know even if you're not taking Point estimates if you're doing Monte Carlo or whatever stochastic process it's very difficult to come up with a robust plan so I'd like I'd like for you to give me some and I know this is kind of a big general question do you have any general tips to people who are doing this modeling on how and for and for clients actually for for individuals and how they can make their retirement more robust to be able to deal with all the changes that can happen in the world like you said public policy changes Market changes Etc yeah you will have to revisit things over time and and as you get new information about your spending make revisions to the budgeting but uh it's still just a matter of when you're like round up your expenses or be conservative with some of your projections there's some categories that are challenging as well like healthcare and when someone switches to MediCare at age 65 that could lead to an entirely different set of health care expenses and with all your expenses on Health Care in the past you might have to completely upend that and and and do a reset there so it is challenging but if you're trying to build in conservative projections the default is usually whatever you believe your expenses will be you just adjust that for inflation every year and most people don't really do that they tend their expenses don't tend to necessarily keep up with inflation over time now that can get complicated but the way I describe it in the retirement planning guidebook is you'll have one particular budget through ajd and then you'll have another lower expense budget after ajd but also building in what if there's a long-term care event and so forth how much additional Reserve assets would I like to have set aside for out-of-pocket expenses that sort of thing and then it's not going to be perfect and it's going to need revised over time but I think you can start to get fairly confident like I've sort of done these exercises I'm still far away from the retirement date and of course I may be wrong but I I think at this point I have a sense of what my expenditures will be or what they can be at least uh over the longer term Horizon of course subject to new technologies new inventions everything else that can happen uh that would change your expenses but at least roughly speaking I think you can start to figure these things out yeah um I guess I'm coming from a practitioner who's been doing it for you know 25 years and seeing the the the conventional wisdom by the best experts at each point in time and looking at how people have actually fared without advice and what I've found consistently is that changes in in particular with government policy has led to uh sub-optimal choices for people who are trying to optimize to the typical cfp advice so and let me let me uh back that up a little bit with with uh some some examples um education planning what was optimal has changed in my career probably four or five times um let me just put it this way I I have put more emphasis in tax diversification and diversification and stuff in how you do things now because what if you if you over optimize in these scenarios it's sub-optimal does that make sense right if like if you designed everything to handle one particular public policy and then it changes on you like right now Roth IRAs or Roth accounts are incredibly attractive to have Assets in but something could change it could just be not that they might necessarily ever tax a Roth distribution but they could add a required minimum distributions or they could count it in the modified adjusted gross income measures used to calculate taxes on Social Security benefits or to calculate higher medicare premiums and so forth and so if something like that happened and you'd been doing all these Roth conversions to get everything into the Roth account yeah that would be overdoing it and subjecting you to that particular risk so I do think tax diversification is is quite important so that you still have flexibility and options because the the uncertainty is the rules will change and we see that every couple of years we just in late December 2022 secure act 2.2.0 came out and that has changed a number of different public policy matters related to retirement income it's gonna and that will continue to happen over time so so be flexible and part of that is just not overdoing things making sure you stay Diversified with with how you're approaching planning yeah in today's environment what we see a lot is is people that have taken the advice of Max 401K uh you'll get a lot of tax deferred and and what's happening is is they're coming to retirement with a large very large 401K plans and things like that and then they just get nailed in taxes and in fact I'm finding a lot of people pay more taxes when they're retired than they did in some cases than when they were not retired um and uh and and it becomes an issue it becomes a real issue then they have estate planning issues and things like that so um uh I just I'm glad that you said that about the the tax diversification I think more than ever especially given our our current you know country's economic condition there's a lot there's we're going to have lots of changes and they could be very large changes uh in particular if you considered quote unquote rich um so I'm sorry I put my little uh two cents in there but getting back to your book uh you have this concept of the retirement income optimization map um again going back to the assets and liabilities and all of that and when you're you when you're you talk about optimizing that's that's why I brought up the the concept of optimizing I I think there's optimizing within ranges one of the concepts that I've kind of looked at and you talked about you talk about different people's retirement styles um one of the issues that you can look at is like matching the duration of your expected liabilities up for a certain period of time so let's say you have a certain percentage of your portfolios in a total return portfolio and then and then another percent that you're you're cash matching or your duration matching matching for one to five years or whatever uh I think some people call that time segmentation you can call it many different things if forget about psychology and how somebody feels if you are just a rational investor a rational person what would you say the optimal length of time is on average for somebody retiring 65 say to cash match or to duration match uh you know their near-term expenses at one year is it five years is it 10 years I know that's a a loaded question but if you forget about forget about psychology and just go pure rational mm-hmm well pure rational the the total return investing approach which has less emphasis on trying to duration match uh can work and also if you then use a an income protection or wrist wrap type strategy you you have that income floor in place that is lifetime so it's already kind of duration matched to your liability so time segmentation is certainly a viable strategy in terms of my personal preferences it's my least favorite strategy so the whole behavioral point about time segmentation is if I have five years of expenses in in cash or other fixed income assets I don't have to worry about a market downturn because I feel confident that the market will recover within five years and I'll be fine and that that story that's a behavioral story and it just doesn't resonate with me personally I I can understand it resonates with others but it doesn't resonate with me personally and therefore I don't necessarily think about what sort of like front end buffer you need in place too to somehow be rational or optimal also that's where something like a reverse mortgage can fit in in a really interesting manner because if you set up the growing line of credit on a reverse mortgage that can be the the type of contingency fund that you can draw from so that you don't necessarily need to have as much cash or other assets sitting on the sidelines to fulfill that role so I would look more at some other of course you need some some cash but I tend to say less rather than more and maybe look at some other options as well about how to have that liquid contingency fund that's great so so basically the in in the guaranteed income sources plus plus reverse mortgage could uh provide a buffer provide a floor so that you could have uh less cash and and you're generally getting a higher expected rate of return on the annuity than fixed income securities and your at at least at the present time a reverse mortgage line of credit grows at a faster rate than the cash which can be used tax-free when you need the money uh so you can see that Evolution that Carol davinsky is one of the famous planners and researchers in this area and in the 1980s he talked about the five-year Mantra which was have five years of expenses in cash now cash you create drag on you're not able to get as high of potential returns with the money you have in cash so he gradually lowered that down to two years in cash and then when he came across reverse mortgages and in subsequent research and and descriptions he talked about having six months of cash alongside a reverse mortgage growing line of credit so I think that's an example of I I think something like that sounds pretty reasonable that's that's that's that's really helpful so and I want to Circle back to reverse mortgages here but before we do if you don't mind I'd like to talk a little bit more about social security uh so we're kind of getting into the realm of the the guaranteed side of things not the total return side of things um or or I more more knowable income sources um I was just looking at the kind of the statistics right now total debt in the United States is really huge um we're running very large deficits project to be like 2 trillion we have a Pago system right now in Social Security and even if we taxed it's been argued by many people even if we taxed every billionaire 100 that would barely make a dent in our current situation so we have huge unfunded liabilities off balance sheet uh type unfunded liabilities how can we really expect Social Security to keep up with inflation and will it be there for quote unquote you know what I'm saying well it will need reforms it's very unlikely to Simply disappear for my own personal planning I I assume I'll get 75 percent of my presently legislated benefits but for people who are younger as well further away from their their 60s uh the social security statement they receive assumes the zero percent average wage growth as well as zero percent inflation and the reality is there's probably going to be a positive real wage growth over time so you're presently legislative benefit could be a lot higher than what your social security statement is implying and therefore when you offset a benefit cut with the uh the wage growth that can be expected over time you may not have that much less in terms of what you're going to plug into your financial plan but yeah I certainly we don't know how the reforms will shake out but if nothing is done sometime in the 2030s Congress would have to legislate a benefit cut and to keep the system so that enough payroll contributions are coming in to cover exist current benefits that cut would have to be somewhere in the ballpark of 20 to 25 percent so I just simply assume I'll get 75 percent of my presently legislated benefit as part of my financial plan is is it fee Is it feasible feasible to actually get Social Security in a funded situation or is it gonna is it most likely going to stay Pago in your if you had a crystal ball oh it yeah it's always been pay-as-you-go and right so the buildup of the trust fund was an effort to just build up some reserves in anticipation of the changing demographics where there's more and more retirees relative to the workers paying contributions uh they try to keep Social Security funded over the 75-year time Horizon and so it's never permanently funded but yeah with a 25 20 to 25 percent benefit cut that would be sufficient to get the system to be expected funding funded fully over the subsequent 75-year time Horizon that's that's really helpful um thinking about it that way in terms of just potentially a 25 less is a reasonable way to look at it I think um the that part of it's not so hard what's harder to understand or to get a grasp on is whether or not that's going to be what that means in real terms for for a retiree um if we continue on a certain path and inflation is is in a different scenario in the future how how do you think about scenario when or inflation when you're when you would set up a plan or a retirement plan what how would you what kind of what kind of uh of Monte Carlos if you will would you put on on your inflation expectation so I do well I tend to just try to think of everything in today's dollars so that the inflation's factored out of it but I the way I think about long-term inflation is the markets tell us what they expect inflation to be if you just look at the difference between a treasury bond and then a tips treasury inflation protected security with the same maturity uh the difference between those two is what the markets expect inflation to be in if they thought it would be different they would invest in one or the other to get that aligned inflation is coming down now and even over the next five years at this point markets are only factoring in an average inflation rate of about 2.1 to 2.3 percent so it seems like markets really expect inflation to come over to come under control even over 30 years right now the markets are building in about a 2.3 percent average inflation rate which is below historical numbers and in terms of if I'm building a Monte Carlo simulation right now I'd to be a little more conservative there I'd base it around a two and a half percent inflation rate with historical volatility and inflation is around four percent so so you're basically an average of 2.4 or 2.5 and then uh standard deviation is like four basically okay so uh that that sounds reasonable um I I guess what is interesting about that is I guess if you assume that we have typical real rates of return for different asset classes that that all works itself out if you put it in present value terms um but if that's not the case and and it should stay that way ultimately it should stay that way but you could have major moves in markets in people's uh time Horizon when they retire which leads us to sequence of returns conversation uh when people retire you can have these you can have these big shifts in markets things things are rough right when somebody retires uh we uh remember I told you about that engineer we had a conversation with forced into early retirement right when the market topped uh the good news is is he had two types of annuities that worked out perfectly for him in the sequence return can you explain sequence return risk for listeners and and what it means and how to you know strategies to mitigate that a little bit more and just one quick last comment on the inflation too like if you thought when I said these low inflation numbers that that's ridiculous inflation would be much higher well then you'd benefit from investing in tips because they'll provide you a real yield plus whatever inflation ends up being and so they'll perform better if inflation is higher and they've already discounted that that was one of the best performing uh fixed income markets uh in the last couple years so but anyhow but but yeah a sequence of returns risks so that's it whenever you have cash flows going in or out of a portfolio the order of returns matters and it's when you start spending in retirement that it matters a lot more so it's like the market could do fine on average over the next 30 Years but if the market goes down at the start of my retirement I'm not having to sell more and more shares to meet my spending needs and sell a bigger percentage of what's left to meet my spending needs such that when the market subsequently recovers my portfolio doesn't get to enjoy that recovery and so it can dig a hole for the portfolio and the the average return could be pretty high but if you get a bad sequence of market returns right at the start of retirement it can really disrupt that retirement and lead to an implied much lower average rate of return than what the overall markets were doing over your retirement Horizon yeah so and in terms of actually uh let's say you're coming up on retirement so this is a common scenario you're retiring in 10 years or five years what should an investor be thinking about doing to transition from that accumulation to distribution phase to kind of mitigate that sequence of return risk so when people start thinking about retirement I think that's where the first step take that retirement income style awareness to get a sense of what sort of retirement strategy might work for you because that's where you then have um different options if you're more of a total return investor that's the whole logic of the target date fund and so forth is just start lowering your stock allocation but still investing in a diversified portfolio as part of that transition into retirement if your time segmentation the easiest way to think about the transition is instead of holding those Bond mutual funds you start exchanging those in for holding individual bonds to maturity like if I'm 10 years before retirement every year for the next 10 years I could start buying a 10-year bond and then when I get to my retirement date I have the next 10 years of expenses covered through these maturing bonds if you have more of an income protection or risk draft strategy the the options would then to be thinking about well if I have an income gap I'm trying to fill where after I account for Social Security or any pensions I'd really like to have more reliable income to meet some basic expenses well you could start looking at purchasing annuities that would turn on income around your projected retirement date as a way to have that transition into retirement and so they're all viable options and it's just a matter of taking the the route that you feel most comfortable with very good that's really really helpful um now I I guess at least is a little bit into the what I would call the traditionally unloved unwanted stepchildren annuities and reverse mortgages uh you know they've gotten a bad a bad rap for so long but they're so useful in in as tools I would say probably the reverse mortgage is the least understood and uh and and one very helpful um tool I think maybe because of just the history of them and how they used to be structured versus how they're structured now um can you give me a sense about how to think about reverse mortgages for people is it only for people who are you know can barely get their their plan together with their assets or or does this also work for people who have a cushion but they should still do a reverse mortgage more yeah I mean the conventional wisdom a lot of times is that the reverse mortgage is a last resort consideration after everything else has failed and maybe then just a way to Kick the Can down the road a little bit but ultimately that retirement wasn't necessarily sustainable since about 2012 that really the focus of the kind of research retirement planning financial planning type research was looking at how reverse mortgages can be used as part of a responsible retirement plan and so it's not that a lot of advisors may just think the reverse mortgage is only for someone who's run out of options but but that's really not the idea it's we have different assets and it's back to that real map the retirement income optimization how do we position those assets to fund our goals and the reverse mortgage provides a lot of flexibility about how to incorporate our home equity asset to help fund our retirement plan and it can lead to a lot more efficient outcomes than just simply say leaving the home sitting on the sidelines and saying well I've got the home if I have long-term care needs I'll sell my home to fund the long-term care something like that otherwise I'll just leave the home as a legacy asset for my beneficiaries there's much more efficient ways to incorporate home equity into a retirement plan and that's what the whole discussion around reverse mortgages is how can I I use a reverse mortgage to help build a more efficient retirement plan and not as a last resort but as part of a responsible well-funded retirement plan it's just another Diversified tool to a source of source of of assets that you can use that's not just sitting there I just had a conversation with a client yesterday that is about to retire in a few years and uh that is exactly what he said that other property that I have in that other State uh I'm just gonna keep that as a that'll be my I'll sell it if I need to you know there was a conversation about health care contingency and um uh long-term care and things like that and that was his rationale um and and in discussions with clients there has been a a ton of resistance you've been really good at putting out information that shows why it makes sense to have it as a potential use so can you explain a little bit about the the line of credit portion of it and how that how use how that could be advantageous yeah and it really it goes back to this idea of sequence of returns risk and if you look at a reverse mortgage in isolation it may look expensive or whatever else but it's how does it fit into the plan and by reducing pressure on the Investments it can help lay the foundation for a better outcome and the the growing line of credit is one of the most misunderstood aspects of the reverse mortgage and I think it was partly unintentional and it may sound too good to be true in a way it probably is and we saw in in October 2017 the government put some limitations on the growing line of credits so it was incredibly powerful before then it still quite powerful not as powerful as before for new uh anyone who opened a reverse mortgage before October 2017 was protected to have those Provisions in place for the entire life alone but if you wait and then after October 2017 you still have the growing line of credit it's not as powerful but but the idea is I believe the government assumed people would open reverse mortgages because they want to tap into the funds but financial planners realized with the variable rate not with a fixed rate but with a variable rate home equity conversion mortgage you do have to keep a minimal loan balance of say 50 to 100 dollars but otherwise the rest can be left as a line of credit and that line of credit grows at the same way the loan balance would grow and so you can understand why if you borrow money the what the loan balance will grow over time well it just happens to be the case that the kind of neat planning trick is if you open the reverse mortgage and 99 of it is in the line of credit the line of credit is growing over time at the same rate that the loan balance would have been growing and ultimately this improves the odds dramatically of having a lot more access to funds over time if you open it sooner and let the line of credit grow versus just waiting to open it at the time you might actually want to start spending from it yeah how has it been limited uh limited versus the way it used to be what what are the limitations well they increased the initial mortgage insurance premium which is not directly to the line of credit but then every every so often used to be more frequently we're now getting overdue at this point with it's been over five years but they revised the tables that determine the principal limit factors of what percentage of the home value can you borrow and so as part of that 2017 change they uh lowered the the borrowing percentages and also they lowered I mean this this part's a good thing but they lowered the ongoing mortgage insurance premium that would cause the loan balance to grow at a slower rate but it also in turn caused the line of credit to grow at a slower rate so it before that change I was running simulations where if you opened a reverse mortgage at age 62 there was like a 50 chance that within 20 years the line of credit could be worth more than the home and that's no longer the case it's still there's still a probability that the line of credit could grow to be worth more than the home but it's not nearly as dramatic as what I was Finding before the rule change that's very interesting because the line of credit growth rate is tied to interest rates and home prices have somewhat of an inverse relationship to interest rates to some degree but it's basically positively skewed so it's not it's hard to know but uh uh but yeah that's that is a great planning tip and it's interesting because we have had a lot of friction with this discussion with uh clients uh mentioning to them because they just have it in their head that I'm going to lose my home and I'm going to there's all these things that can go wrong and then you have to explain it's a big education process and of course they are required to do education as well no we don't sell reverse mortgages but we always you know if we if we you know we mention it to people as a source and you know having it there makes a lot of sense uh and and the same thing with the annuities um you know I have a love hate relationship with annuities but I'm becoming to love them more and let me tell you why before it was all commission driven you know and we're fiduciaries we don't do commission stuff now with the Advent of finally the insurance companies have really gotten to the point where there's at least enough of them now doing products that make sense with the guarantees I mean there was always companies out for a long time there's companies out there like Americas Etc that had just pure plain vanilla uh va's variable annuities that had just lowered your expenses and maybe eliminated a surrender or something but the guarantees is where the real there were folks too much on tax deferral and not enough on guarantees what were the guarantees is really really what we're really looking for here uh and the only way you could even get them you guarantees would be if you did a commissionable product so we'd be handing you know we would be referring people to Insurance guys who were selling commissionable products and then sometimes you don't know what's going to happen after that happens uh with that client so now thank God we have uh we're in a scenario now where the where the financial industry has finally caught up to what needed to happen with annuities yeah the only annuities yeah yeah the only annuities and there's it still has a lot more to be done it's it's you shouldn't be overlooked and I think what happens one of the reasons that I think they're so helpful uh for people is that risk tolerance is time variant people say their risk tolerance is X and then as soon as you have a market decline then their risk tolerance is all all of a sudden why which is more conservative and and uh these annuities can help people psychologically overcome that right you can always look to something that is either staying equal or growing and you can also have growing income streams during the Gap we see that a lot there's a gap between uh when they get Social Security and when they retire and it kind of fills that Gap and it's funny when I was when I was I actually had my assistant who's also a CPA excuse about my financial planning system I had to read this book first and she uh she said it sounded like like you uh were like in the room with him uh because there's so much stuff in here that you and I agree with it's amazing uh before not even knowing you so and I think it might have to do more with the approach of taking things more from uh your academic background and your CFA background it gives you a different perspective than what kind of the traditional financial planners had who had come more from a sales background and now what's happening is is we have uh the whole industry is now moving in the I think moving in the right direction and I think you've been a big uh reason why that's happening so I I really want to thank you for that all your work is really making a difference I want to talk a little bit about Medicare if we can and health insurance this is probably one of the most the hardest part is the medical the medical discussions in some ways um people don't want to think about long-term care people don't want to think about health costs I was looking at some of the statistics you know long-term care statistics is how much it costs it's a big number how would you how would you model the contingency planning you know for let's just start with long-term care how would you model that would you model it as a present value number or would you try to put it as a as something that's over time how how would you how do you approach that yeah actually so I did try to make the retirement planning guidebook as comprehensive as possible and and so I as part of that developed a long-term care calculator and the the basic logic of it is develop a scenario that you would feel comfortable that if you could fund that scenario uh you'll feel like okay things things will work out whether that's three years in a nursing home whatever the case may be but develop that scenario where you're saying okay at age 90 I will spend the next three years in a nursing home right now in the United States the average cost for a semi-private room in a nursing home is a little bit under a hundred thousand dollars I'll say in today's dollars a hundred thousand dollars a year but then I'm gonna plug in the the math gets complicated but you've got what's the inflation rate in long-term care what's the overall inflation rate and then back to this whole idea of the asset liability matching like what's the investment return discount rate you're comfortable assuming as well and also recognizing that if I do go into a nursing home I don't have to also fund my entire budget of a like if I thought I was going to spend 80 000 a year well I'm not going to be going on any sort of trips I don't have to go to restaurants or anything uh a lot of my other expenses would reduce not not 100 but they would reduce so plug it in what I think is a reasonable reduction to the rest of my budget and then you get calculated a present value of here's how much money I'd have to have set aside as a reserve asset to feel comfortable that I would be able to fund this long-term care need and and be able to have a successful retirement and for people who are worried about and who may be paying out of pocket for long-term care that could be several hundred thousand dollars to be blunted on average that's what it comes out to I actually had a coffee with a gentleman and he said uh what is it just tell me what the number is I said well it depends on your age he says no just tell me what the number I said it's roughly about 300 000 roughly on average it could be more it could be less uh you know uh okay and and there's there's there's different ways you can fund it right you can do long-term care insurance uh traditional Standalone you could do um you know life insurance policies that have embedded features you could do if you can't like qualify for um you know you know get a policy you can maybe get it embedded in an annuity of some sort you can sell fund um so it's not an easy thing that you can uh solve it with a quick answer um but but it's important to have in a plan and I and I like the fact that that uh you've emphasized that a lot in your work um it's just it's just great that that people are thinking about it from that perspective I want to switch gears a little bit um and talk a little bit about tax efficiency uh you know taxes are such a huge part of the impact of a plan and there's so many different angles to it and and the tax rules change so much um I'll tell you one of the challenges that I have asset location the concept of balancing you know where you put a certain asset according to us is tax efficiency versus keeping an asset allocation in line right up you know operationally keeping it in line with the objectives and then as money is being spent taking it from the right place it's a challenge even with excellent software and then sometimes I'm finding that it doesn't actually work out as planned so can you can you give me some practical tips on how to deal with asset location well the the basic logic of asset location but yeah I mean in practice it gets incredibly complicated as you're spending from these accounts to think about also rebalancing and making sure you're keeping the right asset allocation between stocks and bonds and the NASA location is where do you keep these things but generally just is a basic guideline your taxable brokerage accounts of course you want some cash there for your liquidity but otherwise that's your most tax efficient stock Investments so if you own stock index funds and so forth the on a relative basis they're most likely to be best off in your taxable account because a lot more of their returns will be those long-term capital gains that get the preferential tax treatment then with like your tax deferred IRAs and 401ks that's more of a place where less tax efficiency so bonds and so forth maybe lower returning type asset classes and then for your Roth accounts the Roth IRA and so forth that's where less tax efficient but higher expected return type asset classes could go the Emerging Market funds and small cap value and that sort of thing and that does also work with distribution ordering as well because the Roth will be what you tend to spend last and so also having these uh riskier asset classes that may have more growth prospects over the long term that can be a good place to set them aside since you're not likely to be spending from those accounts until later in retirement okay yeah it I think for a lot of people it's a little bit of a daunting thing and in practice it can be with contingencies and things like that can be hard to to do correctly and keep managed and I know there's good news is there's good software now that that helps with that um as far as tax efficiency the other you mentioned the order of withdrawals I mean traditionally you know you have the you know your traditional order of withdrawal that you would you would uh do in in the past a lot a lot of recommendations has been you know you want to take from your taxable accounts first right let those tax-free tax deferred accounts grow and then and then you start taking from those other sources but you make a really good point that that's not always the best thing to draw that taxable account down too fast can you expand upon that a little bit well the yeah the the basic tax efficient distribution is spent down taxable assets than tax deferred like IRAs and then tax exempt like Roth against last but you you can do better and so the the better approach is to have a blend of taxable and tax deferred until the taxable account depletes and then a blend of tax deferred and tax exempt after that and as part of that blend you can do rock conversions to in the short term pay higher taxes if that can better position you to pay less taxes over the long term and to have a higher Legacy value from assets over the long term yeah and then getting more specific than that it's there's no you really got to run the the individual numbers on a case-by-case basis but generally there's the opportunities to sustain your assets for much longer by having a more tax efficient distribution strategy that digs into that taxable plus tax deferred and then later tax deferred plus tax exempt exactly and and that's why it's important while you when you're an accumulation phase make sure you have some tax diversification if you can yeah have Assets in all those different types of accounts yeah so that you're not nailed so bad uh later on uh and then there's a lot of complexities that can happen with happen that we see quite a bit with concentrated stock positions and things like that which is probably outside the scope what we're talking about today so um and lastly here last last topic here non-financial aspects of retirement this is a huge huge huge thing uh it's funny it was the last towards the end of your book and I'm glad that you talked about it uh because uh there's I can't tell you how many times um you know you see people think that they're going to be happy sitting on the beach and then they they do that and they're miserable uh or or spouses that wind up hating each other for some reason can you tell can you give us some ideas about um like what should people be doing like say they're five years into retiring or ten years into retirement retirement What should people be thinking about doing to kind of get their their overall lifestyle satisfactory when they actually do retire yeah and and that's this is in some ways more important than any other Financial stuff because with the finances it's easier to adapt but work does so many things in a person's life it's not just that it provides a salary and you need a way to replace all the other aspects of work such as structure to the day camaraderie feeling part of a team feeling like you're creating value for a society all these different aspects that you need to be able to replace with something that gives you motivation to wake up in the morning in retirement and so to say simply it's not the best starting scenario if you retire because you hate your job you want to be able not to retire away from something but to be able to retire to something you want to have and it gives you purpose and passion and meaning to give you the motivation to wake up and and have something be active each day because in all too many cases people just they start doing passive things like watching too much television or surfing the internet too much and that can lead to a really miserable and unsatisfactory retirement wow that's huge that's interesting have something to retire to so uh and and start figuring that out sooner rather than later right not don't wait till the very end and go yeah what am I doing uh and sitting there staring at your wife or your husband yeah that's the idea that there's all these things you you want to get done but you just think well when I retire then I'll have more time to do it well if it's something you've been holding off on doing for the past 40 years it's not likely that just having more time in retirement is what you need you may just simply either not be interested if it's a hobby like oh I want to go back to playing the guitar or something if you're waiting for retirement to do that sort of thing there you go that retiring may not be enough and then people might start feeling bad that you no longer have the excuse and that's where if that sort of bad feeling compounds it can create a spiral like a downward spiral where people just become less engaged and less positive and it can even impact Health which then in turn makes it harder to be engaged and involved and and can lead to downward spirals it's really important to try to avoid that and as part of that not waiting for retirement to to consider all these other aspects of your life outside of work but making sure you're nurturing relationships and having hobbies and having things outside of work so that it will then be easier to transition into the retirement yeah that's great so is there anything as we close here is there anything that you're really excited about that you're working on right now that you want to share or is there at all right now I am just trying to get the updates done for the retirement planning guidebook and where we're doing the best we can to build out that retirement income Styles ideas uh something that people can benefit from and uh the other main research area is with the tax planning as well that I think this will be a Hot Topic and I've already done a lot of work in that area but it is such a complicated area that just trying to push forward as well about like Roth conversion strategies and and how to best Implement those in a most of the work in that area just assumes a fixed rate of return and with the reality of not fixed rates of Returns on your Investment Portfolio that also dramatically complicates some of those tax planning decisions so I'm continuing to push ahead in those areas interesting so more stochastic modeling in your future yes stochastic modeling and now you're probably going to be uh that Technology's got to be in there somewhere too any plans uh that you want to announce or share with new technology that you're going to be coming out with or software programs or anything like that or I mean I just have this Vision in my head if I were you I'd be doing something like that but I mean I'm just saying yeah don't Envision creating tax planning software but uh the retirement income style awareness that's where I'm putting on my efforts in terms of having software and that's an easier problem than the tax planning problem definitely yeah there's a lot of changes always yeah you'll be coding to your uh blue in the face all your staff would be so uh the uh it's interesting I I I'm actually going to be diving into that that profiling software that you have um I had a conversation yesterday about that so that's very good so where would people uh would you like people to send you see learn more about you um anything that you're up to oh yeah uh so my website retirementresearcher.com all one word retirement researcher and if you go there you can sign up every Saturday morning we send out an email with different articles and things and then my retirement planning guidebook is on Amazon or any other major book retailer and also I do have a podcast as well they're retire with style podcast with Alex mergia who's my a co-co-researcher and and co-founder of the retirement income style awareness excellent all right Wade thank you so much appreciate you coming on it's been a pleasure thank you the information in this podcast is informational and General in nature and does not take into consideration the listeners personal circumstances therefore it is not intended to be a substitute for specific individualized Financial legal or tax advice to determine which strategies or Investments may be suitable for you consult the appropriate qualified professional prior to making a final decision wealthnet Investments is a registered investment advisor advisory services are only offered to clients or prospective clients where wealthnet Investments and as representatives are properly licensed or exempt from licensure [Music] foreign
THE WEALTH OF NATIONS SUMMARY (BY ADAM SMITH)
Jason 0 Comments Retire Wealthy
This was quite inconvenient to state the least Enter: Money Money helps with the exchange of assets that we generate To get back to the first takeaway, one can say that they boost the efficiency of exchange Fairly early, steels were utilized as cash as well as they have at the very least 2 top qualities which make them appropriate for this objective: They generally do not perish and also they can be divided right into lots of parts and after that merged once more Some points have worth in usage-like spears, meat, salt as well as shirts Various other things have worth in exchange-like expenses, coins as well as metals That which has high value in one, usually is rather pointless from the other viewpoint You can ' t utilize a dollar costs for anything.I indicate you can ' t consume it or anything In a similar way, a spear could be quite valuable but it doesn ' t work well for exchange, as we just saw As long as individuals trust that cash can be exchanged for something else that they are in demand of later on, they are pleased to trade their very own produce for
that money It all'boils down to that: Depend On Warren Buffett has stated that it is fairly misleading that'on the behind of every buck bill, it claims “in god we trust” Because, what it should really say is “in The Federal Get we trust” Takeaway number 3: The 3 parts of cost The real price of every little thing is its rate in labor Something that takes even more time, energy or sources to bring up commonly has a higher actual cost Bob didn ' t desire to make that final bargain with “George because he believed that his spear had a greater actual rate “than George ' s * tee shirt However”, there ' s likewise a small cost and also that is the cost as gauged in money Due to the fact that it ' s tough to measure as well as contrast labor, we ' ve come to estimate genuine rates in terms of money instead The rate of every little thing that is created settles itself right into either one or more of the complying with 3 components:-A wage, to pay the'labor that did the work-An earnings, to pay for the funding that was laid out for the work to occur -As well as a rental fee, to pay the owner of the land where the work and or exchange need to take place We all understand that earnings can differ a lot between different occupations Just look at the ordinary income of a McDonald ' s cashier and also compare that to the wage of a neurosurgeon Similarly, earnings vary from sector to market, yet not as much, as well as also they must balance out over time, something that we ' ll obtain to later These are the typical profits measured as return on equity for different sectors during the period 1999 to 2019 As well as the variable that can differ the most is of program leas In New York, for instance, you ' ll have to pay about $ 5,200,000 per acre of land, while in the nation town of Eksjö in Sweden, you ' ll pay only around$20,000. It ' s just that i ' m not all set to pay$70,000 for it yet Hence i ' m a part of the need, however not the effectual demand, that can really bring the item to the market Takeaway number 4: The three elements of cost, component II Allowed ' s have an appearance at these 3 elements independently An employee will certainly always demand a wage so that he can at the very least purchase the necessities of life for himself and his household
This is the bare minimum which also the easiest type of task have to pay, because or else, such workers will certainly discontinue to exist over time In countries where no minimum wages exist, the easiest jobs will tend to be at this degree as well as not higher This is since employees are at a natural negative aspect when trying to haggle just how much of that cost which was stated previously which should go towards their wage They usually exist in abundance contrasted to funding and also land and also in addition, they usually do not have actually much cash saved so they can ' t afford to wait for a much better possibility But incomes can vary a great deal which we shall see later on A business owner is a person who employs his capital to make an earnings within a particular trade or industry The more capital that is used in a particular sector, the greater the competitors there becomes, and also the lower the profits tend to be So it has to be in society as a whole too.If there are no smart methods to use resources any longer returns will be low Over time, even though some firms can hold on for very long, returns on capital will also out throughout markets This is since where returns are high, there will certainly be incentives to relocate resources, as well as where returns are low, there will be rewards to remove capital This recovers a balance of sorts If you desire to know more about which kinds of industries that can stand up to competition the lengthiest, head over to my summary of “Affordable Approach” An owner of land will certainly either try to offer his land for an earnings or offer it out for a rental fee Either method, a person down the line will at some point attempt to offer it out for a rental fee, or make use of the land themselves, and after that it is they who get the rent Rental fees differ A LOT depending on place Some types of land essentially manage no rental fee at all.While those that individuals discover eye-catching-land in cities or beautiful coastline residential properties- gain a great deal of it Something that need to be kept in mind is that rent is rather like a syndicate price After normal earnings have actually been paid as well as the business person have been able to replace his funding with a” suitable revenue, the proprietor of the land will quite much take what ' s left Land is immovable and irreplaceable, and is as a result strange compared to the 2 other types of profits that can be earned Takeaway number 5: Why some tasks pay more than others do So … Profits of industries should average out over time, and more lease is given to the person who holds a residential or commercial property in a city or at a coastline, all right … However why the **** does my neighbor have a higher wage than me, even though I ' m much smarter than him ?! The wages of labor are chosen by supply as well as need, like every little thing else The complying with five elements have a tendency to impact this to boost the incomes of a particular job- The expenditures as well as troubles of learning it-The incongruity of settlements- The trust and duty-The improbability of success; and- The challenge uncleanness and also disagreeableness of the task In the 18th century a blacksmith had to be an apprentice for lots of years before he was allowed to open his very own profession During this time, he earned very little or essentially absolutely nothing at all The higher wage that he got once finished is a compensation for those years, and also the apprenticeship helps in limiting the supply of such employees A mason could only work throughout good weather problems, as well as so his per hour wage had to be made up for those idle hrs A higher obligation suggests that less individuals are fit for that type of work and also as a result salaries are higher Back in the days, attorneys and also doctors had such functions (and they still have by the means )The improbability of success is an additional element that matters The anticipated wage of a task with an extremely high stop working rate is usually even lower than normal jobs, yet the individual who does well normally obtains the salary of those who fall short too( kind of )Individuals looking for gold or prize belonged to that category As well as in the 18th century the most dirty as well as unpleasant job one might possibly get was probably that of the public death squad, as well as the pay was thereafter Today, a hard as well as costly job to obtain would be that of the previously discussed neurosurgeon An inconsistent one might be that of an actual estate broker A job which calls for a whole lot of responsibility.Is that of a pilot Improbability of success is high among exclusive professional athletes and also artists And also the dirtiest and most unpleasant work is possibly that of a hedge fund supervisor! This book is even more than 900 pages long, so I ' m definitely going to make a part 2 on this with 5 added takeaways In component 2 we ' ll cover subjects such as globalization, free profession, as well as the function of a government So you ' ll probably obtain to listen to even more regarding motivations in component 2!
Read More
Recent Comments