Few Millionaires are Rich These Days

When Bernie Sanders released his tax returns, he triggered taunts about being a millionaire – a rich socialist! Bernie did achieve richness temporarily: for two years his success as an author made him a income millionaire. Presumably his net worth is also well over a million. But unlike demi-billionaires, ordinary millionaires don't live rich.

Median U.S. household income is a bit over $60,000. As Thomas Heath points out in The Washington Post, a retiree with $1 million probably can't reach that income level. Even retirees with two or three million shouldn't expect to live large.

These days living rich probably requires at least $20 or $30 million. According to Spectrem, almost 12 million U.S. households have at least one million in investable assets, but only about 170,000 have more than $25 million.

Fleecing Retirees by Phone

Read the comments from bedeviled retirees and weep.

Should Retirement Savers Slow Down?

Most Americans aren't building adequate retirement nest eggs. Investment providers usually urge them to save more. So how do you explain this T. Rowe Price mailing?

Why on earth would a mutual fund firm want enthusiastic retirement savers to slow down – to trot rather than gallop as they add to their investments?

Turns out it doesn't. "Rein in" is seldom taken literally in an age when few of us ride or drive a horse to work. The phrase has become a figure of speech. If you're a nervous wreck, you're urged to rein in your emotions. If you're deep in debt, you're advised to rein in your credit card usage.

As figures of speech age, their meaning sometimes goes astray. What T. Rowe Price really wants, according to the next page of the mailer, is for retirement investors to consolidate their accounts.

Maybe their headline should have been E Pluribus Unum.

Our advice to retirement savers? Give yourself free rein.

The High Price of Nice Dinners, Continued

Robert Neubecker's illustration for
"We Went to a Steak Dinner Annuity Pitch."

After an invitation to a gourmet dinner arrived in the mailbox of his 80-year-old aunt, NY Times columnist Ron Lieber decided to go along as her guest. Like other (but not all) nice dinners, Lieber found that this one – promoting equity indexed annuities – was garnished with dubious financial claims.

Almost a decade ago, in “Protecting Older Investors: 2009 Free Lunch Seminar Report,” AARP said 63 percent of the people it had surveyed had received an invitation like the one my aunt found in her mailbox. Among that group, 57 percent had received five or more within the previous three years. The organization figured that 5.9 million people ages 55 or over had attended at least one seminar. 

AARP’s protective instincts were warranted. Two years earlier, the Securities and Exchange Commission, the North American Securities Administrators Association and the Financial Industry Regulatory Authority sent examiners to 110 free-meal seminars.  They found  that 57 percent of the time, the salespeople used materials that “may have been misleading or exaggerated or included seemingly unwarranted claims.”

I genuinely hoped not to encounter any such thing Tuesday night. But I did.

To avoid elder abuse, annuity sales efforts are said to target people no older than 70. But oldsters certainly get dinner invitations. My mother has received several this year. Had she not died in the 1990s, she now would be well over 100.

Time to Retire “Retirement”?

In financial marketing circles you don't hear much about personal investing. It's "retirement investing." Personal financial planning? It's mostly "retirement planning."

Out in the real world, that's a problem. Many, perhaps most working people aren't actually retiring. Some can't afford to retire; others prefer not to. The vast majority of "retirees" working part time say it's by choice, not necessity.

The meaning of "retirement" gets even murkier as young people aspire to retire early. Movements such as FIRE urge them to spend almost nothing, save and invest almost everything.

Alas, spending almost nothing is not a meaningful life plan. Suze Orman interrupted her own retirement to assert that somebody retiring at 40 would need $5 million to live on. Maybe $10 million. She later recanted, after learning that the  potential "retirees" realized they would have to keep working for a living. They simply wanted to stop "working for The Man" and start doing something they enjoyed or found fulfilling.

"Retirement," whatever it means, is not a useful financial goal. The goal should be financial independence. Canadian writer  Jonathan Chevreau calls it findependence.

[W]hen you’re financially independent, you work because you want to, not because you have to. “Findependence is necessary for retirement,” he says. “You can be findependent and not retired, but you can’t be retired without being findependent.”

The FIRE movement (Financial Independence, Retire Early) should become simply the FI movement. Calculators could help Millennials check their FI progress like they check their FICA scores.

Former Marines should love this approach. "Semper FI, guys. Semper FI."

The High Price of Nice Dinners

After enjoying a free dinner, the WSJ tells us, a retiring tour bus driver bought an annuity. Several years later, after another nice dinner, she paid a heavy penalty to ditch her annuity and invest in a portfolio, including other annuities, pitched by another retirement "adviser."

The DOL effort to impose a fiduciary rule dampened annuity sales for a time. Now the rule is gone, and sales of annuities – some paying 6% commissions – are booming.

Did a Stock Slump Radicalize Steve Bannon?

Marty Bannon, Steve Bannon’s father, worked fifty years for AT&T, rising from lineman to middle management. Whenever possible he bought AT&T shares, his only investment. When Marty retired, the AT&T represented his retirement fund and, in his eyes, the family fortune.

Then came the Great Recession. In October, 2008, Marty panicked. Apparently fearing AT&T would go to zero, he sold for over $100,000 less than he had paid.

Steve Bannon has enjoyed a more varied career: Goldman Sachs banker, documentary film maker, and now chief strategist in the Trump White House. But his life’s pivotal point, according to The Wall Street Journal, was the loss his father took on that nest egg.

There were many factors that turned Steve Bannon into a divisive political firebrand. But his decision to embrace “economic nationalism” and vehemently oppose the forces and institutions of globalization, he says, stems from his upbringing, his relationship with his father and the meaning those AT&T shares held for the family. 

“Everything since then has come from there,” he says. “All of it.”

Why was Marty able to ride out AT&T's staggering 2000-2001 price drop but not the lesser decline in 2008? A “sell” from TV’s Jim Cramer may have triggered his panic attack.

Was "Wall Street" really to blame for allowing Marty to buy high, sell low? Not entirely, and not enough to cause Steve Bannon to go radical, in the view of The New Yorker's Nicholas Lemann.

Bottom line: Retirees like Marty Bannon shouldn’t obsess with market swings. They’re income investors. And incomewise, AT&T investors have little to complain about.

In 2008 AT&T paid $0.40 quarterly, up from $0.355 the year before. Since then, the quarterly dividend has increased by a penny every year: $0.41 in 2009, $0.42 in 2010, and so on. The 2017 quarterly dividend is $0.49.

If Marty Bannon still had his shares, his investment income would have grown by more than 20 percent since 2007.

Habits of Highly Unsuccessful Investors

Why do some older investors lose big while others prosper? An AARP survey suggests a few reasons.

Those who get fleeced tend to be risk takers. They crave home runs, not singles.

Often they trade more frequently.

They're more likely to be drawn to unregulated alternative investments. "Nearly half of fraud victims," the survey finds, "compared with less than a third of general investors, agreed that 'the most profitable financial returns are often found in investments that are not regulated by the government.'”

They're more susceptible to sales pitches.

The losers surveyed were 70 or older, but the same traits can separate anyone from his or her money.

Monetizing the House, the Old-Fashioned Way

Sarah Purcell's house

When Sarah Wentworth Purcell's husband died in 1776, she became a gentlewoman in reduced circumstances. To generate income she took in roomers.  Today, writes Amy Zipkin in The New York Times, Airbnb and other rental sites enable retirees, predominantly women, to monetize their homes in the same way. (Yes, everything old is new again.)

Short-term rentals generate extra money without requiring the homeowner to take on new debt. No home equity loan. No reverse mortgage. In addition:

Rentals may allow the homeowner to remain in a house tbat's otherwise unjustifiably large for an empty nester. Arranging rentals keeps the homeowner healthily active. And the homeowner meets a stimulating stream of new people, perhaps including visitors from around the world. She might even get to know someone who's about to become famous.

Sarah Purcell did. In 1777 one of her roomers was a Scot waiting for his ship to be built nearby. The ship was the Ranger, and John Paul Jones became our nation's first navel hero.

Sarah's home still stands in Portsmouth, New Hampshire, now known (sorry, Sarah) as the John Paul Jones House.

The Bell Tolls for Long-Term-Care Insurance

Perhaps the product was doomed from the start. As critics pointed out, people who needed long-term-care insurance couldn't afford it; people rich enough to afford it didn't need it.

And those were the good old days. Most holders of LTC policies have seen their premiums soar. Sales of new policies have plummeted.  In 2002 the number of individual policies sold peaked at 750,000. Last year's sales: 110,000.

As if soaring premiums and severe shrinkage in the number of companies offering policies aren't trouble enough, marketing of long-term-care insurance also has clashed with an opposing concept: Medicaid planning. Why buy a policy to protect yourself against the risk of exhausting your wealth and ending up in a Medicaid-funded nursing home? Medicaid planners  offer techniques for diverting or divesting assets in order to achieve that very result.

Still, LTC insurance and Medicaid planning share the goal of protecting the children's inheritance. Shouldn't the kids be glad to pay their parents' LTC premiums?  The idea hasn't  gained traction.

If the potential costs of long-term care can't be insured against, they must be met through added savings and investment. The job of investing for financial independence only begins with building a source of regular retirement income.

They Retired at 40. But Not Really.

Retire at 40? Some Do, With a Small Fortune. That's the provocative headline on a 1996 WSJ article I came across while cleaning out old files.

Examples mentioned in the article included Eugene Bernosky, who sold the company he co-founded and planned to take it easy and do a little consulting, and a married couple, Lee Leslie and Terri Evans, who quit nine-to-nine work after five years of running a small ad agency.

How have they fared after almost two decades? Googling suggests that modern retirement looks a lot like work.

Bernosky has done a bit of investment banking and helped launch various ventures. Recent project: Zaavy, a company that produces custom jerseys and related items for cycling teams.

Leslie and Evans, according to Linkedin, are still open to marketing/advertising assignments, but perhaps not nine to nine.

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Most boomers didn't get to retire at 40. But these days they're quitting the rat race in great numbers, and many of them think 60 is the new 40. Wealth managers should not expect them to act like traditional retirees.

Rather than "retire," affluent boomers want to declare financial independence, free at last to work or play at whatever turns them on. 

How to Prosper by Living Long: the Tontine

You and a lot of others each invest a set amount in a pooled fund.  The fund pays out, say, 4 percent a year, equally divided among you and your fellow investors. As other investors die off, your payments rise. By the time half have died off, your payment should double. And if you live long enough….

The tontine "might be the iPhone of retirement products,” says Moshe Milevsky, an associate professor of finance at York University in Toronto. Is he on to something?

Earlier post: Bring Back the Tontine.

Retirement Investing is Personal

From Dueling Strategies for Your Retirement Funds:

For anyone approaching retirement, an important investing question is: Should your strategy be "to" or "through"? *** 

The "to" refers to preserving savings for an expected retirement date; the goal is to get "to" that date without last-minute harm to your nest egg. Generally this means cutting back sharply on riskier investments—namely stocks *** 

A "through" strategy means tilting a portfolio to keep increasing savings well into, or "through," retirement. That means higher allocations to stocks and other riskier investments despite a bigger risk of losses.

The strategies aren't dueling. As we discussed five years ago, different retirees have different goals. See The Trouble With Target Date Funds.

Online: Graduate Course in Retirement Investing

Most Americans over 50 can't even remember simple arithmetic, so Stanford's graduate-level video lectures, described here, may be over the heads of many. Still, seems like a good idea.

Millionaires: No Longer Worth Marrying

These days, The New York Times laments, mere millionaires have to keep working; they can't afford to retire. Decades of inflation have reduced $1 million to nonwealth:

In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment….

 Remarkably low bond yields make 2013 an especially tough time to retire with a mere $1 million. Or maybe not. Truth is, retirees usually get the short end of the stick, one way or another.

 In 1980, for instance, Treasury bonds yielded double digits – around 10%. After the high taxes of the era, a retiree netted maybe 6%.  No, strike that. In 1980 a retiree netted less than nothing. That year the inflation rate was 12%.

As The Times suggests, retirees need common stocks in order to achieve positive returns. And they shouldn't let Mr. Market's mood swings scare them. That's easy for wealth managers to say, difficult for ordinary people to do.

Oddly, Mr. Market's mood swings don't scare anybody, even the most timid millionaires, when for no good reason he sends the Dow up 30%.

Bring Back the Tontine?

Does the secret of financial security in retirement reside in a product devised by a 17th-century Italian banker? In a WSJ column University of Toronto professor Moshe Milevsky proposes the return of the tontine.

Imagine a group of 1,000 soon-to-be retirees who band together and pool $1,000 each to purchase a million-dollar Treasury bond paying 3% coupons. The bond generates $30,000 in interest yearly, which is split among the 1,000 participants in the pool, for a guaranteed $30 dividend per member. A custodian holds the big bond and charges a trivial fee to administer the annual dividends. So far this structure is the basis for all bond index funds. Nothing new. But in a tontine arrangement the members agree that—if and when they die—their guaranteed $30 dividend is split among those who are still alive. 

So if one decade later only 800 original investors are alive, the $30,000 coupon is divided into 800, for a $37.50 dividend each. Of this, $30 is the guaranteed dividend and $7.50 is other people's money.  

Then, if two decades later only 100 survive the annual cash flow is $300, which is a $30 guaranteed dividend plus $270. When only 30 remain, each receives $1,000 in dividends—a 100% yield in that year alone.

Back in the Gilded Age, Milevsky notes, almost half of U.S. households owned some sort of tontine insurance. The policies appear to have been a form of deferred annuity, spiced up with a longevity bonus. Popularity led to excess – some tontine products amounted to little more than swindles, according to Wikipedia. Since 1906 tontines have been banned in the U.S.

Could the tontine make a comeback?

Francis Guy, The Tontine Coffee House. New-York Historical Society

The Tontine Coffee House on Wall Street, established in 1793, is still remembered because it became overcrowded with brokers. They decided to move out and form a stock exchange.

Wealth Is Not A Number

"If you can count your money," J. Paul Getty observed, "you don't have a billion dollars."

Even so, Bloomberg's new Billionaires Index is a guilty pleasure. Look at Bill Gates make $319 million in a day! See an unfortunate Brazilian lose $213 million! Watch Warren Buffett grow $86 million richer before sundown!

It's fun. And, of course, pointless. Warren Buffett almost certainly doesn't fall asleep trying to compute his daily net worth. More likely he dozes off by inventorying Berkshire-Hathaway's holdings: Geico…reinsurance…furniture…Lubrizol…thirteen percent of American Express…almost nine percent of Coca Cola…more than five percent of IBM….

Mr. Buffett must sleep very well.

Just as the market value of billionaire wealth can be expected to fluctuate by tens or hundreds of millions of dollars daily, modest wealth fluctuates by thousands or tens of thousands of dollars a day. For non-billionaires, that's scary. For two reasons.

First, merely affluent investors don't have an extra billion tucked away for emergencies. Second, financial planners have taught them that financial independence is measured by a specific number. Very specific, in the case of ING ads. Make your number and you're OK. Fall short and you'll never retire.

Say Jake's number is $1,247,543. He hits his number and retires. Then his wealth dips to $947,865. Must Jake go back to work? Can he stop working again when he rebounds to $1,147,543?

IF he rebounds.

During the Great Recession many investors were terrified by market volatility. Terrified enough to act against their own best interests. Brett Arends has tried to estimate how much investors lost by ill-timed selling over the last five years. His ballpark figure: over $100 billion.

Over $100 billion! That's enough to get even Warren Buffett's attention. And enough to make you wonder. Does trying to motivate investors by giving them a precise wealth number to strive for do more harm than good.? Even if they reach their number, it's likely to be here today, gone tomorrow…and may or may not be back next year.

In the ING commercial, the bad example is a dolt who "has no plan." The poor soul just keeps investing and hopes he hits a gadzillion. If that approach allows him to weather market downturns, maybe he's not so dumb.

Is there a better way to encourage people to save and invest, a better way to help them understand what they'll need for financial independence? Come up with a good answer and you're practically guaranteed a place in the Financial Marketing Hall of Fame.

"I Am Woman, Watch Me Retire"

"It's underappreciated how much better one large cohort of aging boomers should do financially during the traditional retirement years," writes Chris Farrell in BloombergBusinessweek: "The college-educated stalwarts of the feminist movement."

These professional women have been slightly better than men at taking advantage of 401(k) plans, he notes. And they don't have to hurry into retirement. 

The vanguard generation of the women’s movement is well-suited to work long into the traditional retirement years. Baby boomers are healthier and better educated than earlier generations. Survey after survey shows that they don’t think of themselves as old and they’re well-positioned to earn a paycheck.

They're well-suited to investing, too,  Farrell contends. "A University of Michigan Retirement Research Center study found that men trade 56 percent more than their female counterparts in 401(k) plans, and the more men traded, the worse they did." 


Many of these women should be prospects for investment services of fiduciary quality.

Can Investment Advisers Save the Economy?

Savers and investors continue to suffer from an income famine. Yields on CDs are negative. Ditto for real, after-tax yields on ten-year Treasuries. Belatedly, financial journalists have realized that policies intended to bring banks back to life are toxic for savers and investors. 

That's not the worst of it. What's bad for savers and investors is bad for the economy – especially now, as the great tidal wave of Boomers are reaching retirement age. Ordinarily, many business managers and professionals up their spending as they prepare to retire. It's time to expand the cottage at the lake into a real retirement home … launch and equip a retirement business .… take more time off and treat the grandkids to a Disney cruise.

With Boomers suffering from the  income famine, they're not likely to tap their nest eggs to augment consumer spending. Unless ….

When investment advisers help their clients realize income through interest-paying deals that aren't too dicey, plus sturdy income stocks, they're doing more than helping their clients. They're helping save the economy.

Retirement: a Low-Stress Alternative to “The Number”

If I want to retire, according to conventional marketing messages, I need to reach a number. Say my number is $1.2 million. When I hit that target I can retire and withdraw 4% a year.

 If only it were that simple. At retirement, volatility in the markets  could chop my expected $1.2 million down to $900,000. (Yikes! I'll never be able to stop working.)

Or volatility could temporarily supersize my nest egg, to $1.5 million or more. (Whoopee! I'll live large for the next 30 years.)

Wouldn't my risk of deep despair or dangerous euphoria be sharply reduced if I set an income target and invested accordingly?

Suppose I want $40,000 a year. If I prepare by building a portfolio from income stocks and a bond fund or two, my chances of success are pretty good. Even if Wall Street goes berserk the year I retire, my dividend and interest income should remain close to expectations.  (The Great Recession hardly dented this blogger's modest investment income. Dividend increases pretty much balanced out dividend cuts.)

David Van Knapp is an author who loves dividends. He favors setting a retirement-income target and investing primarily in stocks known for increasing dividends..

Hardly a new approach. After the Great Depression vaporized his hot-shot portfolio, grandfather promised himself he'd never again buy a stock that didn't pay decent dividends. And he retired in solid comfort.

Should this low-stress approach to retirement investing be encouraged? Or is it an anachronism, unfit for a "total-return" era, where most retirement investing is highly regulated and fewer Americans are accustomed to "living on income"?