Fact Checked by a Five Year Old's Network

Prior to my daughter's fifth birthday, I explained to her that turning five meant there would be higher expectations and she would have more responsibility. In fact, I jokingly told her, that she would be given a five year old rulebook, which she would need to follow.

At first, she resisted by saying no. After I explained she couldn't say "no," she told me that since she wouldn't be able to use a rulebook, since she couldn't yet read. In response, I explained that learning to read was the first rule. For several months, our daughter would come up with a clever reason for not getting a rulebook, and I would respond with a counterpoint that negated the reason.

Then she got me.

One day, she informed me that she had checked will her friends that turned five on whether they had received a five year old rulebook. She reported that the answer was a unanimous no, and therefore, there was no such thing as a five year old rule book. Busted, and what could I do? I admitted there was currently no five year old rulebook. ( I wonder when it was eliminated :-)

Daughter: 1 Daddy: 0

Next year, I need to prepare better and ensure all her friends get a six year old rulebook ....

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial or parenting advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

A Return from the Abyss

Soon after I retired early in October, 2007, the Dow reached an all-time high and our retirement savings was at 23 times my annual salary. About a year later, Lehman Brothers filed for bankruptcy and confidence in the U.S. financial system was destroyed. From November, 2008 through March, 2009, a full depression appeared to be a reasonable concern, and the Dow declined 54% from a closing high of 14,164.53 to 6547.05. Our retirement savings declined 41% to 13. 6 times my previous annual salary. It seemed that financial systems would collapse and not recover.

Since March, 2009, the Dow has rallied 58% to 10,337.05, and our retirement savings has grown 25% to 17.1 times my annual salary, when adding back the amount used to pay off our mortgage in May, 2009. Although the Dow hasn't returned to the highs of October, 2007, it feels to me that a financial catastrophe has been avoided. For now, there is a reasonable chance the economy will recover, although it will likely take a long time.

The financial experience of the pass two years will likely affect our investment strategies for the rest of our lives. The next time the market seems to be going no where but up, e.g October, 2007, we will definitely sell stocks and lock in some profits. On the other hand, when the market looks like it is in freefall , e.g. November 2008 to March, 2009, I hope we have the discipline and courage to put money back into the market, and benefit from an inevitable return from the abyss.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Links To Carnivals From December 1 to 7, 2009

Here are the links to the Carnivals in which My Wealth Builder participated from December 1 to 7, 2009:

Festival of Frugality #206

Baby Boomers Blog Carnival #16

Carnival of Financial Planning #117

Tax Carnival #60

For some interesting articles from the blogosphere, check out these Carnivals and give the hosts some recognition for their hard work.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial, saving or tax advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Choosing Certainty or Additional Returns

Knowing Your Own Risk Tolerance shares an interview with chief investment officer Michael Cembalest in which he notes that people can trade off liquidity for higher returns. Unfortunately, he observes, this trade off was overdone in the recent financial crisis.

His comment made me think about our allocation across certainty and additional returns for retirement savings. For us, funds needed in the short term (3-5 years) are in certain but low return investments. Mid term funds (5-10 years) are invested in CDs and bonds. Long term funds (over 10 years) are invested in equities, which offers higher returns. Spreading our savings across all categories results in an overall lower average return, but provides more stability during periods of high volatility, like last year.

Even though it appears the economy and stock market has stabilized, we will continue to allocate our savings across certain and higher return investments. While the short term investments continue have a very low return, the peace of mind of certainty is a worthwhile trade off for us.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Further Reducing Contributions to my Alma Mater

After reading Alan Blinder's op-ed How Washington Can Create Jobs in The Wall Street Journal, I decided to further reduce my annual giving contribution to my Alma Mater, at which Mr. Blinder is a Professor of Economics and Public Affairs. I'm getting tired of economists believing that government holds the proactive solutions to our economic problems. In my opinion, government does best by creating good regulatory frameworks that support sustainable business growth and then enforcing them. Mr. Blinder recommendation of further direct government intervention is not what I would consider good for sustainable business growth.

Of course, my reduction in contribution to my Alma Mater is entirely symbolic. I already reduced my annual contribution several years ago to what I consider a token amount. The next time I want to make a stronger statement, I can reduce my contribution in that year to only $1. Perhaps, I'll use the difference to invest in a business that will really create jobs :-)

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Maximizing our Social Security Benefits

Although we are still quite a long ways from being eligible for Social Security benefits, I've looking into ways we can maximize our benefits. For our situation, a strategy know as the 62/70 solution appears to be most promising, allowing us to have the proverbial cake and eating it too.

The 62/70 solution is relevant when the the lower paid spouse is younger, by less than eight years, and the older and higher paid spouse is delaying until 70 to receive the maximum Social Security benefits. While the higher paid spouse is waiting, the younger spouse can file for reduced Social Security benefits at 62, which enables the older spouse to collect spousal benefits at full retirement age. (12/13/09 update: Getting spousal benefits isn't likely for the higher paid spouse. I check with Social Security and they said the older spouse would automatically gets the higher of their own or spousal benefits when filing for Social Security payments at full retirement age.) Thus, the couple can collect Social Security payments, while waiting for the higher benefits to take effect at age 70 for the older spouse.

At 70, the older, higher paid spouse can apply for the higher Social Security benefits, and the younger spouse will be eligible spousal benefits at full retirement age. If the spousal benefit is higher than the younger spouse's retirement benefit, the Social Security payment will be increased to the level of the spousal benefit.

The benefit of the 62/70 solution is two fold:

1. The couple can collect some benefits while waiting for the older spouse to reach 70 and maximize the Social Security payment. Otherwise, the couple receives no payments while waiting for age 70.
   
2. When one spouse dies, the surviving spouse will continue to collect the maximum Social Security payment of the higher paid spouse.

My understanding of the 62/70 solution seems almost too good to be true. Therefore, I plan to confirm my understanding with our financial planner, and the Social Security administration before proceeding with this approach as a firm plan.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial, retirement or Social Security advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Becoming My Parents

The older I get, the more I realize I am my parents' child when it comes to some financial habits. Here are a few that I've noticed:

Buying gas. In the days of 28 cent gas, my dad used to search out the lowest priced gas station and save 1 or 2 cents. On a percentage basis, he was saving 3.5 to 7%. While I won't go out of my way, I tend to also look for the lowest price gas among the stations in our area. The difference ranges from 5 to 10 cents, with the percentage being about 2-4%. Usually, one of to gas stations has the lowest price in our area.

Investing. My dad liked higher risk/higher return investments and my mom preferred certain returns. I like both types of investing. Our savings are split between higher risk stocks and lower risk CDs/bonds.

Living frugally. My parents were very frugal, since they grew up during the Great Depression. When I was a child, my parents focused purchases on basic necessities (e.g. basic food, clothing, home). They rarely ate out, took occasional, modest vacations, drove their cars over 10 years, and paid for major expenses with cash that was saved. While we eat out and take vacations more often, I still drive cars over 10 years and pay for major expenses with cash.

Filing taxes. My dad always did his own tax return, even into his seventies. He enjoyed identifying and taking advantage of all the tax breaks, especially those for investing in rental real estate. He routinely filed for an extension, resulting in an October filing of his previous year's income tax return.

It's surprising how many financial habits I learned from being around my parents. They never formally taught me these habits, and yet I'm doing them much like my parents did. As a result, I'm sure our daughter is also learning her future financial habits from us :-)

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Real Estate is not a Sure Gain

I know people who are wary of investing in stocks due to the bear market of the past year. Instead, they are putting their money into real estate. While I'm not opposed to real estate, I think believe that good real estate always makes money is based on some assumptions that underestimate the risk and expenses of keeping real estate.

Here are some of the assumptions that I believe can be misleading:

Real estate value always increases with time. Over long periods for time, this assumption is true. We all know the story of settlers buying Manhattan from Native Americans for some beads. However, over short periods of time the price of real estate can decrease significantly as in the case of the Pontiac Silverdome which cost $56 million to build in 1975 and recently sold for $583,000.

Real estate is easy passive income. In my experience, real estate usually requires quite a bit of work. For rental property, there are always maintenance and repairs, collecting rents and finding new tenants. For vacant land, there is also maintenance cost, in particular to keep others from using the property without permission. Finally, there are the usual taxes that need to paid.

Leverage multiplies the gain from investment. Yes, and leverage can also quickly also eliminate the equity in a property in a declining market, as shown the CNN article 1 in 4 mortgages 'underwater' .

Real estate is not a sure thing, as the recent recession has confirmed. As with any investment, due diligence needs to be done to determine if there is a reasonable probability of getting a good return.

For more on The Practice of Personal Finance, check back every Wednesday r a new segment.

This is not financial or real estate investment advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Our Approach for Choosing a Contractor

As we're getting older, we are having contractors do more of the repair and maintenance work around our house. In our area, we usually choose company with a good reputation, especially if neighbors and friends have referred them. The cost is usually on the higher end of the estimates, but the work and follow-up is also better.

Recently, I've had to help mom with some property. Since I live a long distance from my mom, I've had to do more due diligence than usual, because I don't have neighbors and friends in the area. Here's what I did to identify a contractor for the work on my mom's property:

Ask for local referrals. In this case, I checked with local government officials for their recommendations since the work was regulated. In some cases, I was given a specific name and in other cases, I was given a list of approved contractors.

Get at least three estimates. For me, getting estimates is an educational experience. I usually ask lots of open ended questions and learn about how contractors think about and do their work. Having three estimates gives me a better understanding of the range of costs for the work.

Check Better Business Business Ratings. I check the rating (A+ to F) and look at the complaint history. Most important to me is a low level of complaints and 100% resolution.

Get a copy of insurance coverage. For us, it is important that the business carry general liability, vehicle and worker's comp insurance. Otherwise a homeowner could be liable for any damages or injury that occurs during the project. In my mom's case, her own liability coverage would not cover any suits against the homeowner for damages caused by a hired contractor.

After getting all the above information, we chose a contractor who best met all the criteria. For reference, we gave the job to the contractor with the middle price estimate.

For our own work, we were regularly doing the first three steps, but were not always doing the insurance verification with the larger, well known companies in the area. However, we have decided to now include insurance checking even for large companies, since it is better to confirm than to find out a company has let it's insurance lapse.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

Links to Carnivals from November 24 to 30, 2009

Here are the links to the Carnivals in which My Wealth Builder participated from November 24 to 30, 2009:

Festival of Frugality #205

Carnival of Financial Planning #117

Carnival of Money Stories

Carnival of Twenty-Something Finances

Carnival of Personal Finance #233

Festival of Stocks #169

For some interesting articles from the blogosphere, check out these Carnivals and give the hosts some recognition for their hard work.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial, saving or investing advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC