Benefit from Being a Baby Boomer
For the Baby Boomers, at least the ones that are able to retire, many are concerned about their future. In many cases, the big house that they have grown accustomed to is just unrealistic at this stage in their lives, and retirement communities can often be even more expensive. But all is not lost…in fact, as Nathan Lewis points out, below, retirement years can be affordable – and even fun. Read on…
People sometimes ask me: "What should I do with my retirement account?" I often tell them to consider ways of retiring that are not dependent on financial abstractions and various corporate/government promises, such as Social Security or corporate pensions. This usually gets some puzzlement because they’ve been trained for decades to think only in terms of financial products.
Let’s look at a specific example. This is for my own parents, who turned 65 last year. (That puts them just before the Baby Boomers.) They live in a nice suburb outside of New York City, on the coast of Connecticut. Like many older people, they would like to stay in the house they have owned for about 20 years now, in the community they are accustomed to, and near the friends they have. It’s not so easy to start over when you’re over 65.
Even people who have been able to accumulate significant assets, pensions etc., might be a little nervous. Trying to depend, for the next 20 or even 30 years perhaps, on financial abstractions and government promises would be a little scary. I usually tell them that they should be scared! Or, at least don’t put too much faith in various Wall Street promises (and pensions are ultimately Wall Street promises too). You aren’t going to make a smooth 8% per year in your 401(k) just because some financial advisor told you so. But, I guess you’ve figured that out now. Anything can happen. Particularly as we are sort of in a depression right now. Owning a big house in a nice neighborhood is not cheap, even if it is 100% owned with no mortgage. The annual costs of a house look something like this:
Property tax: $8000 (and that could go up)
Insurance: $2000 (could be higher)
Maintenance: $2000 (could be higher)
Utilities (phone, internet, cable, electric, trash collection) per month: $200 or $2400/year.
Heating oil: $2000 per year (could be higher).
Total: $16,400. That is probably on the low side. So, let’s just budget it at $18,000.
Then, you’ve got a car and all the other expenses of living. And what happens when you get a little frail, and want living assistance?
Have you seen the prices for nursing homes?
It’s not that these burdens are unbearable. It’s rather that they are burdensome. Just house-related costs could chew up most of your Social Security check right there. And, if things really go to hell in the future, they might become unbearable. Who knows what things will look like in 20 years? Only your financal advisor knows for sure.
Let’s look at it from the financial side. Maybe you can get 3% of cashflow from a "safe" muni bond portfolio, or dividends from stocks. And, you have to take into account inflation … over the next twenty years. How do we "take into account" the unknowable? What happens if there’s not enough fifteen years from now, and I’m still alive? To get $18,000 of income would take $600,000 of muni bonds. And, muni bonds are looking kinda risky these days. Dividends from stocks might take more than $600,000, because you have to pay taxes on dividends. Stocks go up and down a lot too. Sickening.
Now, like I said, they’ve been living in the area for a while and have some good friends, who are about the same age and in similar circumstances.
So, here’s the plan:
You get together with your friends. You say: "We’re all retired now. I’ve got a big empty house. You do too I suppose. Maybe we can think of living together. That would help reduce our living expenses. Plus, it might be fun, and it would be a good way to keep an eye on each other. That can be important when you’re getting older."
Everyone is repulsed at first, because we Americans are all taught that we have to live as far away from each other as possible. But, they remember that, when they were in college, they used to share houses, and it was kind of fun. Also, everyone is older now and a lot better behaved than when they were in college. And, it is true that it might be good to have someone keeping an eye on you.
So, everyone decides to move into one house, owned by the Owner. The people who move in, two other retired couples, are the Renters. The Renters pay the Owner $800 a month to rent a bedroom, and agree to pay 1/3 of the utility and heating bills. The Renters’ cost of living looks something like this:
Rent: $800 * 12 = $9600
Utilities: $100/month = $1200
Total annual costs: $11,500.
Now, indeed renting turns out to be cheaper than owning the big house, even when the big house is fully paid for. They could sell their big houses if they wanted to. But, they are nervous about just selling the house they have owned for twenty years, and moving in with someone else. It might not work out. Let’s not burn any bridges. So, instead of selling their now-empty houses, they rent them out.
Rent: $3500 per month = $42,000 per year (typical, actually a little low). Heckuva lot cheaper than paying the mortgage on a million-dollar house. Just the thing for a Wall Streeter with a family that needs to downsize quickly. Real quickly. Utilities are paid for by the renters.
Property tax: $8000
Maintenance: $3000 (higher with renters)
Net cashflow: $42,000 – $13,000 = $29,000.
Now, they’re getting $29,000 in rent net of property expenses. Then, they pay their $11,500 it costs to live in the shared house.
$29,000 – $11,500 = $17,500.
Now, look at the renters:
Before: $18,000 per year of housing costs.
After: Housing and utilities are paid for, and an extra $17,500 per year of free cashflow, plus probably some tax benefits.
Wow, all of a sudden, you’re living for free, and getting paid too! You just created, out of thin air, the equivalent of a $1,200,000 muni bond portfolio. Maybe more, if you consider tax benefits (rental properties can charge depreciation.) And, you still own your house.
For the Owner, it looks like this:
House costs: $13,000
Utilities: $1200 (1/3)
Heat: $700 (1/3)
Rental Income: $800 * 2 * 12 = $19,200
Net cashflow: $19,200 – $14,900 = $4,300.
So, the Owner is also living for free! However, their cashflow is not as high as the Renters. That’s probably the way it should be, because the Renters will probably want a little extra incentive to move out of their house into someone else’s.
So, now where are we? All three couples are now living for free, and getting some extra cash on top of that. And, there are things you can do in a shared house, like splitting cooking duties. Instead of cooking every night for two, the cook can cook twice a week for six. That’s a lot easier, and would probably result in a more ambitious menu, and would resolve the question of how three people can cook in one kitchen. If the men are smart, they will encourage a little friendly competition among their wives, to "keep up the pace" for their two dinners a week. You can finally use that formal dining room every day. Then, everyone has a house’s worth of furnishings. The antiques, boutiquey stuff, art and heirlooms, and the grand piano, all goes into the house where everyone is living. The more generic, replaceable stuff can go into the houses that are being rented out. Maybe you can charge an extra $500 a month for a furnished house. $500 a month is $6000 per year. That’s another $200,000 muni bond portfolio-equivalent, that you created out of some used furniture. You would have had to save $400,000 before income taxes, to get a $200,000 portfolio after taxes.
After a while, in a shared house, there is always the issue of who does what house chores, and do they do it adequately, and so forth. The easy way to solve this problem is to get a housekeeper to come in one day a week, and do the vacuuming, laundry, bathrooms and all that. It’s $100 a week, or $5,200 a year, or $1,735 per couple per year. Covered by their extra cashflow. Over time, people are over 70 and a little frail. Maybe they would like a little more help with shopping or even cooking, or they are no longer able to drive safely by themselves.
So, they get a live-in full-time housekeeper. The housekeeper lives in the fourth bedroom. The housekeeper gets room and board and use of a car, plus $1,000 a month in salary. Not a bad deal for a housekeeper. That’s $12,000 per year or $4,000 per couple. That is also within their net cashflow. So, now everyone has their housing and utilities and a live-in housekeeper paid for. Make it $2,000 a month and you could get a registered nurse, probably. Now you’ve got a private nursing home.
Being older with lots of free time, it would probably be good to get outside for some light exercise. The house sits on two acres, of which perhaps there is one full acre of lawn. Instead of growing grass, let’s grow some vegetables. This is prime farm country, or it was in the colonial days. You can grow a lot of vegetables on a full acre. Heck, you can grow a lot of vegetables on a tenth of an acre. A tenth of an acre is 4,356 square feet, or 43 feet by 100 feet. Not a small garden, that. So, you drop some seeds in the ground, and have fresh vegetables all summer. You even do some canning and put some away for winter. It’s all organic, you get some exercise, and no more big-ticket trips to Whole Foods.
So, now, instead of paying out $18,000 a year in housing expenses, you’re living for free, with your friends, with a live-in housekeeper, with some extra cashflow on top of that, and a lot of your food costs are covered as well. What is there to be worried about? Pass the 401(k) on to your kids. Don’t worry about the corporate pension. Consider the Social Security check to be your entertainment budget. If there’s inflation, just raise your rents.
And all it took was a little cooperation among friends, to make better use of what they already own.
for The Daily Reckoning
January 07, 2008
Nathan Lewis is the author of Gold: the Once and Future Money (2007), published by Agora Book Publishing and John Wiley.
"Psst…we’re breaking out of this joint…Saturday night…pass it on…."
Yes, dear reader…we’re breaking out… We’re not going to let these prison bars stop us. A whole generation of American investors is being fattened for slaughter…we’re not going to be among them.
Let’s look at yesterday’s headlines just to see what is going on.
The Dow rose 62 points yesterday. Oil held steady at $48. Gold went up $8. Yields are rising…but you still get paid nothing when you lend money to the U.S. government.
The economic news tells us that things are getting worse. Alcoa said it will lay off 13,500 workers. But all across the country, businesses are either laying off old workers or not hiring new ones. Most of the joblessness never makes the news – until it is already painful to the fellows without jobs. Small businesses don’t announce layoffs. Nor do they send out a press release when they decide not to hire a new kid at the carwash.
After the worst car sales in half a century, Toyota says it is shutting down its plant for 11 days.
And a figure out yesterday tells us that consumer bankruptcies rose 33% last year. But the crash came late in 2008; job cuts didn’t really begin until the last quarter. People didn’t have a chance to get their paperwork together. This year, the bankruptcy numbers should really soar.
Most likely, Americans are still in the dark about what is going on. Heck…their leaders are driving without headlights…why shouldn’t the lumpen too? People don’t seem too sore about what happened to them in ’08. They’re still hopeful that a new administration will find a way to fix things. Yes, they’re planning on cutting back spending and saving money…but they have no idea how their attempts at thrift – magnified by millions of other citizens – will affect the economy.
Levy Forecasts, which was generally right about the financial crash, now says the "damage to the economy will rapidly accelerate the financial crisis." In other words, the financial crash is causing an economic crash…which will cause a worse financial crash.
Profits are made at the margin. Most sales merely cover costs. It’s the marginal extra buyer – preferably the one who spends his savings, rather his salary – that provides business with profits. On a macro level, salaries are a cost to business. When a man spends his salary, business is merely getting back the money it paid out in labor costs. But when a man spends savings, the money falls to the bottom line as profit.
Who is going to spend savings in ’09? Who is going to spend at all? That’s why business profits are going to fall harder than most people suspect. Unemployment is going up more than most people expect. And stocks are going down more than most people expect.
Barron’s survey of Wall Street’s "top strategists" tells us that the consensus among these fellows is that stock prices will go up 18% in 2009. But these are the same strategists who thought stock prices were going up in 2008 too – instead of crashing 35% – 40%.
Here at The Daily Reckoning, we’re with the Levy bros. Our guess is that stocks will rally…and then crash again, ending the year below where they began it.
There is no doubt that the U.S. economy has entered a major downturn…probably a generational slump, in which the errors of an entire generation will be corrected.
What do we mean by that? Well, since the early days of the first Reagan Administration Americans have been building fences, to keep themselves confined, and forging chains, to wrap around their own ankles. They built cars and houses that demanded more energy – when energy was becoming more expensive. They became accustomed to lifestyles that cost about 10% more than they earned. They began to think that houses and stocks would go up every year…and that foreigners would lend them money forever. Well…you know what happened. Every link was heated white hot in the furnace of mass delusion and hammered on the anvil of wishful thinking – while public officials urged them on!
Now, the whole country drags around these heavy chains of debt…private debt in all its forms – mortgages, student loans, credit cards, home equity lines, commercial loans, private equity finance, bridge loans, road loans, ditch loans. Last year, all of a sudden, this debt got so heavy, the poor debtors started to pitch over. Lenders looked around and worried, not about the return on their money, but the return OF their money. In many cases, it didn’t look like they’d get it back. That is what caused the ‘credit crisis’ – lenders closed their wallets to all borrowers – save one, the only borrower who was 100% sure to pay you back the money when you needed it, the U.S. government. As a result, bonds and gold were the only two major asset classes to go up last year. People bought government bonds to protect against the implosion of private debt. And they bought gold to protect against government bonds.
We recall Nassim Taleb’s turkeys. Until Thanksgiving, he says, the turkey lives well. Everyday, the food arrives. Everyday, he gets bigger and fatter. Then, one day, just before the third Thursday in November, when Americans celebrate their traditional Thanksgiving dinner…with no warning, comes the knife…the crash…the collapse…the discontinuity…the 7 sigma event in the turkey’s life that changes everything.
"That’s why we need to study history," says Elizabeth, who is working on a master’s degree in 18th century French history at the Sorbonne. "If the turkeys had studied history, they might been warned. In early November, they might have started whispering to each other in the yard: ‘it’s a set-up…we’re all going to be sent to the ovens…break-out planned for tomorrow at dinner…pass it on.’ Then, while a few birds got into a squawk to provide a diversion, the others might have rushed the gate. Instead, they didn’t know what was coming and took it in the neck."
There are plenty of histories of finance – oral and written. But investors pay no attention. One generation of turkeys learns. The next forgets. One makes money; the next loses it. Every generation has to get its own neck chopped in its own way.
*** With so many citizens groaning and collapsing under the weight of so much debt, it is entirely foreseeable that the feds should pretend to come to their aid. Today’s news tells us that Barack Obama’s rescue mission will bring about $770 billion of cash with it. This comes on top of other rescue missions mounted by the Bush Administration and the Federal Reserve. Altogether, the total cost of these mercy efforts is into the trillions.
In fact, this morning, the Congressional Budget Office has reported that the U.S. government will run a budget deficit of $1.2 trillion in 2009…and that’s not taking into account the stimulus programs.
We have explained why bailouts don’t work. You can’t solve a problem caused by too much debt by adding more debt. The ‘hair of the dog’ technique won’t work – not even if you throw in the whole pooch. But it will have an effect – it will increase the weight of debt to the whole society. The forges are hot again…the hammers are clanging…the smithies are sweaty; now they’re building new chains of debt – public debt. They’re putting up a chain-link fence around the entire United States…and shackling every citizen to a monumental ball. Next year alone, the U.S. federal deficit will go to $1.5 trillion to $2 trillion – or about $20,000 for every family in the country. Over the course of the slump, the total could run to $100,000 per family. This extra public debt is the only sure outcome of the bailout projects.
How will Americans possibly carry so much public debt – along with their already bone-crushing private debt – without collapsing? Who would lend these sub-prime borrowers so much money in the first place?
Give us 24 hours and we’ll have answers to those questions…and give you our break-out plan too. The rest of the turkeys may get the axe…but we’re headed over the fence. We’ve got wings, remember….
*** A dear reader writes: "I respectfully disagree with your assumption regarding the ‘bounce.’ One of the goals of the Bush Administration is to have significant government ‘equity’ presence in Wall Street. This is called ‘Privatization’ when it applies to Social Security – but whatever the Government ‘privatizes’ but retains a hand in, it really ‘socializes.’
"Sufficient ‘equity’ has been poured into NYSE stocks, that the Government can manipulate the Dow (DJIA) much more than it could five years ago.
"As most people find the DJIA and the American economy synonymous, a slow and gentle rise in the Dow is cheering to many. So it is done.
"The Hunts attempted the same thing, with vastly different purpose, with the silver market some 30 years ago. They tried to corner it – and lost. The price went up – but they couldn’t get enough of a controlling share to ‘own’ the market, so they were left with vast holdings of massively overpriced silver.
"(I suspect that the fluctuations in oil prices may have been something similar, just from the pattern – but that’s sheer speculation.)
"We (the taxpayer) are gathering a massive market portfolio of overpriced equities. Like dime stocks, we can drive the price up; but it is so volatile, we cannot sell it all at the higher price – and that would crash the market soundly.
"Our acceleration into Market Socialism is another version of what Governments habitually do – play shell games with values, in order to reap profits. I’m sure that the Soviet Union allowed a little stock market to run here or there, eh? The NYSE is Uncle’s pet now, and it is on strings. Never mind that it is dead. It can still dance."
*** England isn’t so merry these days. First, it is cold – temperatures fell to minus 10 centigrade, according to that reliable source of meteorological intelligence – the Sun. We knew it was cold because the Sun girl on page 3 had goose bumps all over her naked body. But at least she wasn’t sick with the flu. A record 2.4 million workers called in sick yesterday in England – one out of 12 staff was out. Another two million stayed at home because they don’t have jobs to go to. The financial storm that hit Britain last year continues to send waves over the island’s gunwhales. Big retailer Marks & Spencer said it is cutting 1,700 jobs today. And the firm founded by Josiah Wedgewood 250 years ago went bust. UK stocks are down about 40%. Houses are going down fast too. Unemployment is going up. And Britain’s most profitable industry – finance has gone into a slump. Apparently, half the country is either out of work, down with the flu, recovering from the flu, or pretending to have it so they don’t have to go to work.
The Daily Reckoning