A rant on Bailouts + Taxes + Education

Do you remember when President Bush pushed through a landmark bailout plan saying:

"This legislation will safeguard and stabilize America's financial system and put in place permanent reforms so these problems will never happen again"

The citation is the shocker - as this is a quote from George H. W. Bush (senior) in 1989 during the Savings and Loans scandal. This bailout was for an unprecedented sum (at the time) of $66 billion. Sounds a lot like George W. Bush in September of 2008 when he pushed through a landmark bailout saying:

"We'll make sure, as time goes on, this doesn't happen again. In the meantime we got to solve the problem. And that's why people send me the Washington D.C."

Like father like son 20 years apart. But don't worry - this isn't a bust on the Bush's for government spending - as we all know Clinton repealed the Glass-Steagall Act of 1933 which had put up a firewall between savings banks and investment banks after the great depression.

I think it's a great point to look at political stereotypes - which are that Republicans are against government spending - though in additon to the two bailouts mentioned the Bush presidents and Regan count for a huge majority of the national debt. Though credit Bush senior for recognizing that we needed to raise taxes to lower the debt - though he broke his promise of "read my lips - no new taxes" and his own party revolted against him making him a one term president and paving the way for Clinton. Credit Clinton for having left a huge budget surplus which would have cut the national debt in half from $10 trillion to $5 trillion had Bush Jr. not passed his famous (and overwhelmingly popular) Bush tax cuts (mostly for the wealthy) that ran the national debt up to the $10 trillion dollar figure.

The other stereotypes are that Democrats are all for big government and increasing regulations - but Clinton's administration de-regulated banks allowing the crazy derivative investments that seem to have been a major cause of the current recession.

NET - my point is voting by ideology is misguided as we Americans (in general) don't vote for the tough medicine. It is popular to cut government spending but no one wants to cut medicare to the elderly. In fact the Republicans recently balked at the Health care reform provisions seeking to cut $500 billion dollars of "waste" out of medicare stating that the elderly will suffer. Fine! I am all for spending money if we all agree to fund it - by raising taxes. But NO ONE can run on raising taxes - it is immensely unpopular. But then poeple who voted against it then say "I am affraid of the national debt and passing that burden on to our children!" Well - start voting with you mind and not your ideology. You may disagree with large government - but if we have ALREADY spent $12 trillion dollars more than we brought in over the past 30 years - then guess what - it's time to raise taxes!

I am in a minority who don't react violently to the thought of higher taxes - and we would pay one of the highest tax brackets on our money. We live comfortably, save for retirement, and even enjoy splurges like vacations. An additional 3% tax (moving from 38% to 41% bracket) on money over $250,000 (which we don't make) is what is proposed, but let's assume it was an additional 3% tax on money over $50,000 - it's really not a life changing sum for us (and I argue for anyone making over $50,000 per year) but would help solve numerous budget issues not the least of which being the national debt, but then would fund health care reform (if you are opposed to the government spending part since the public option is gone) as well as educational programs.

In fact I'd like our government to pay off the national debt and then create a government surplus to pay for disasters or wars with savings - like normal people do when they have unplanned expenses. Though I believe it is bad national policy when you can print money - so I think carrying some debt helps invest and you build for today - though it is unpopular. There are also those who don't think the government should have a savings built up as that is "our" money as tax payers and the government shouldn't have it.

And Finally - an unorganized rant on education - I believe if fundamentally an economy is all about GDP (if you make the assumption that your production matches your consumption but that is another blog) - so you can transpose GDC ( as in consumption) though it's not as easy an index that is tracked like GDP so NET - if our country is a person, our GDP is like our salary - or a measure of our productivity to society - and the best way to raise that is through education. So I am all for the government providing low interest loans directly to students. The win-win is that tax payers make money (maybe 2-3% on the investment) and students get lower rates than the currently crippling 6-7% student loan rates just because many feel ideologically that it is un-American for the government to profit a little - but "American" for bank CEOs to get huge bonuses off of the back of students and stick the money in their "fat-cat" pockets.

I think there is a fair skepticism to say that the government is not an efficient way to use our money - and there is waste and corruption in politics - I just don't believe the solution to this issue is to line the pockets of elite private citizens who are efficient in funneling money to their own bonuses. I'm not against corporations or "free markets" in general - but not necessarily for public works, especially when free market forces don't translate to doing the right thing for the economy - as you can see that bank CEOs motivations were not in the best interest of the economy - but rather in their own. People are outraged to hear that banks receiving bailout are paying out huge bonuses - but those in power in companies are not prone to "market forces" as much as personal gain. Hence driving businesses into the ground. regular employees lose their jobs, these guys get millions in parachutes - and we complain about the inefficiencies of government as a justification to continue this cycle?

Fear of big government (in my opinion) has been an ideology that has made the rich richer supported on the ideological votes of the poor who "don't trust the government".

Guilty Pleasure Reading + Goldline.com

I have a few guilty pleasures, I like to read an article on CNN and then go and look at the same story on FoxNews and HuffingtonPost. If you really want to be scared about our society read some of the people who comment on the Obama articles on FoxNews. I'm not talking about the usual battles between big government and smaller government, I'm talking scary "end of times" talk, you know the birthers and the socialism conspiracy ala the Manchurian Candidate. I wish I could tell you that the messages on HuffingtonPost or NPR are as scary but I guess I must have some bias OR they are less apocalyptic and really don't jump out at me. I mean the 9-11 conspirators who think our own gov't attacked us would fit this description - I just haven't seen that on there recently.

In a similar vein, you've probably seen the commercials for GoldLine. It's a major scam about buying gold coins etc but... a new fun place to get the latest "rumors" and "inside scoop" is the Goldline.com bulletin board where real Goldline.com members can tell you all about how the world is coming to an end and our currency is about to crumble (thanks to Obama and General Mao apparently).

I don't have time to post my blog of "controlled inflation is good and any deflation is a depression" but I will say that there seem to be people who think that inflation is one of the seven horsemen in revelations signaling the rapture.

I for one am not likely to buy into these end of times debates. I think if you believe that the government and the printing of money (which it does) will lead to inflation (which it does) but at such a catastrophic rate that you will be left penniless unless you own gold - I am all for you paying up to $1,500 per oz for gold coins when gold is trading at $1,088 per oz. I won't call goldline a scam but it is. (PS whenever something becomes "mainstream" like gold is now - you missed the run up, it's like when everyone and their brother was thinking they should be flipping houses - you then have already missed the prime house flipping time).

BUT - before you buy overinflated gold (pun-intended) you should know that the richer you are the more at risk you are for inflation. The ones crying foul when the government prints money are those who have the largest savings. For those living paycheck to paycheck it is basically a push as you live in the moment and begin to make more but things cost more at a relatively even rate. It is the "space-time" disconnect of savings that inflation preys upon. So NET I am just saying if you have millions of dollars in the market you might want to hedge your bets with some gold for the long term (if you do buy an ETF instead of Gold Bullion from scammers) - however if you have relatively modest means, buying gold is not a magic bullet for savings, especially if you are buying at 50% premiums. Otherwise I have a lot of P&G stock to sell you at $100 per share too.

PPS - Anytime a commercial basically says "I'm afraid" it's just playing on human fears. Same with politicians. So if Goldline's selling line is "I'm affraid of all of this government spending and inflation"... run the other way! If they don't use fear - then maybe listen (maybe) but in general most "investments" you don't understand are ways to scam you out of your money.

Combo Impressions

There are a few impressions I make where the same voice can be used for multiple impersonations. Theses double impersonations require comedic genius and impeccable timing. Attempt at your own risk:

Example 1) I do a hilarious Sean Connery / Mathew McConaughey

Example 2) I do a mean Mr. Bill / Julia Child impersonation

Oscar: The Hospice Cat

I love this story because of the mystery and the compassion of cats!

(Story as seen here)
Oscar, a two year old cat that lives at a nursing home in Providence, Rhode Island in the New England region of the United States, appears to know when residents at the home are approaching their final hours because he curls up next to them.

The story of Oscar, the hospice cat who conducts daily rounds like a feline version of a hospital consultant and appears to be able to predict when patients are going to die, is told in an essay about a day in his life by one of the doctors, David Dosa, in the New England Journal of Medicine.

Dosa said that Oscar has been accurate in 25 cases so far. He sits with patients at the Steere House Nursing and Rehabilitation Center in Providence, Rhode Island, when they are in their last four hours of life.

"He doesn't make many mistakes. He seems to understand when patients are about to die," said Dosa in an interview with the Associated Press news agency. Dosa is professor of medicine at Warren Alpert Medical School at Brown University, Rhode Island, and a geriatric consultant at the nursing home.

Dosa said that relatives of the dying patients "take solace" from this curious phenomenon. The companionship that Oscar provides is appreciated, he said.

Oscar was adopted by the medical staff as a kitten and his home ever since has been on the third floor of the nursing home, with the dementia patients.

Soon, he was making his own rounds, sniffing patients and looking them over, then he would curl up beside a patient who died a few hours later.

Staff at the hospital trust Oscar's instinct so much that they call the patient's relatives to let them know it's likely their loved one will be passing away soon.

Dosa says Oscar is an "aloof" cat who is not normally friendly towards people, he describes him as hissing at a patient when she walks past. But he seems to take his work very seriously, and when he settles next to a patient who is dying, he purrs and nuzzles them.

Sometimes, when he is ejected from his vigil beside a dying patient (some families don't like him there), he paces and meows outside the room.

Cat experts say that cats can sense illness, especially in their owners or other animals. They can also sense changes in the weather, and their ability to sense impending earthquakes is well known.

According to a report in the Washington Post yesterday, another doctor at the home, Joan Teno who is also of Brown University and experienced at treating terminally ill patients, said that Oscar can predict who is going to die more accurately than the staff.

She became convinced of Oscar's "skill" while she was treating a patient who had stopped eating, was breathing erratically and her legs had started to look blue. She thought the patient was near death. But although Oscar called in to see her, he did not stay in the room.

However, as Teno later found out, this was 10 hours before the patient actually died, and the nurses told her that Oscar came back to sit with the dying patient 2 hours before she finally passed away. This was Oscar's 13th accurate prediction.

Speculating on the accuracy of Oscar's predictions, Teno said she wondered if he smells something, or he notices subtle changes in the behaviour of the nurses while they attend the patients.

There is a commendation wall plaque at the nursing home, awarded to Oscar by a local hospice agency. The plaque reads: "For his compassionate hospice care, this plaque is awarded to Oscar the Cat".

"A Day in the Life of Oscar the Cat." David M. Dosa. NEJM Volume 357:328-329, July 26, 2007, Number 4

Oscar the Cat awakens from his nap, opening a single eye to survey his kingdom. From atop the desk in the doctor's charting area, the cat peers down the two wings of the nursing home's advanced dementia unit. All quiet on the western and eastern fronts. Slowly, he rises and extravagantly stretches his 2-year-old frame, first backward and then forward. He sits up and considers his next move.

In the distance, a resident approaches. It is Mrs. P., who has been living on the dementia unit's third floor for 3 years now. She has long forgotten her family, even though they visit her almost daily. Moderately disheveled after eating her lunch, half of which she now wears on her shirt, Mrs. P. is taking one of her many aimless strolls to nowhere. She glides toward Oscar, pushing her walker and muttering to herself with complete disregard for her surroundings. Perturbed, Oscar watches her carefully and, as she walks by, lets out a gentle hiss, a rattlesnake-like warning that says "leave me alone." She passes him without a glance and continues down the hallway. Oscar is relieved. It is not yet Mrs. P.'s time, and he wants nothing to do with her.

Oscar jumps down off the desk, relieved to be once more alone and in control of his domain. He takes a few moments to drink from his water bowl and grab a quick bite. Satisfied, he enjoys another stretch and sets out on his rounds. Oscar decides to head down the west wing first, along the way sidestepping Mr. S., who is slumped over on a couch in the hallway. With lips slightly pursed, he snores peacefully — perhaps blissfully unaware of where he is now living. Oscar continues down the hallway until he reaches its end and Room 310. The door is closed, so Oscar sits and waits. He has important business here.

Twenty-five minutes later, the door finally opens, and out walks a nurse's aide carrying dirty linens. "Hello, Oscar," she says. "Are you going inside?" Oscar lets her pass, then makes his way into the room, where there are two people. Lying in a corner bed and facing the wall, Mrs. T. is asleep in a fetal position. Her body is thin and wasted from the breast cancer that has been eating away at her organs. She is mildly jaundiced and has not spoken in several days. Sitting next to her is her daughter, who glances up from her novel to warmly greet the visitor. "Hello, Oscar. How are you today?"

Oscar takes no notice of the woman and leaps up onto the bed. He surveys Mrs. T. She is clearly in the terminal phase of illness, and her breathing is labored. Oscar's examination is interrupted by a nurse, who walks in to ask the daughter whether Mrs. T. is uncomfortable and needs more morphine. The daughter shakes her head, and the nurse retreats. Oscar returns to his work. He sniffs the air, gives Mrs. T. one final look, then jumps off the bed and quickly leaves the room. Not today.

Making his way back up the hallway, Oscar arrives at Room 313. The door is open, and he proceeds inside. Mrs. K. is resting peacefully in her bed, her breathing steady but shallow. She is surrounded by photographs of her grandchildren and one from her wedding day. Despite these keepsakes, she is alone. Oscar jumps onto her bed and again sniffs the air. He pauses to consider the situation, and then turns around twice before curling up beside Mrs. K.

One hour passes. Oscar waits. A nurse walks into the room to check on her patient. She pauses to note Oscar's presence. Concerned, she hurriedly leaves the room and returns to her desk. She grabs Mrs. K.'s chart off the medical-records rack and begins to make phone calls.

Within a half hour the family starts to arrive. Chairs are brought into the room, where the relatives begin their vigil. The priest is called to deliver last rites. And still, Oscar has not budged, instead purring and gently nuzzling Mrs. K. A young grandson asks his mother, "What is the cat doing here?" The mother, fighting back tears, tells him, "He is here to help Grandma get to heaven." Thirty minutes later, Mrs. K. takes her last earthly breath. With this, Oscar sits up, looks around, then departs the room so quietly that the grieving family barely notices.

On his way back to the charting area, Oscar passes a plaque mounted on the wall. On it is engraved a commendation from a local hospice agency: "For his compassionate hospice care, this plaque is awarded to Oscar the Cat." Oscar takes a quick drink of water and returns to his desk to curl up for a long rest. His day's work is done. There will be no more deaths today, not in Room 310 or in any other room for that matter. After all, no one dies on the third floor unless Oscar pays a visit and stays awhile.

Note: Since he was adopted by staff members as a kitten, Oscar the Cat has had an uncanny ability to predict when residents are about to die. Thus far, he has presided over the deaths of more than 25 residents on the third floor of Steere House Nursing and Rehabilitation Center in Providence, Rhode Island. His mere presence at the bedside is viewed by physicians and nursing home staff as an almost absolute indicator of impending death, allowing staff members to adequately notify families. Oscar has also provided companionship to those who would otherwise have died alone. For his work, he is highly regarded by the physicians and staff at Steere House and by the families of the residents whom he serves.

Retirement "Secrets"

I've been thinking about retirement planning recently, and I have a retirement model for Meghan and I that I update annually. But I was thinking about creating a general retirement model as I found out some interesting things.

Pass this along to anyone you know in college or just starting out in the workforce:

The "secret" to retirement is to save 10% of your income (before taxes) every year. For example if you make $40,000 per year out of college - save $4,000 per year or $333 per month. This also means that as your income increases, your savings must increase as well to stay at 10% of your total income.

Let's look at the model:


The reddish line (sorry I have Office 2007) represents income per year. In this scenario it starts at $40,000 per year at age 23. As you can see at age 65 the income stops. That's why we are saving for retirement. After 65 (assuming that's when you want to retire) we need to live off savings. (In terms of retirement 65 is the new 55).

The short teal-ly blue line way below out income is our annual savings (10%).

The more smurfy-blue line that quickly jumps off the page is our retirement balance which thanks to compounding grows exponentially with each years of savings and growth. As you can see when our income stops - we live off of this smurfy-blue line which eventually crashes to zero at 90.

The pumpkin orange line is the growth of our retirement each year. As you can see - it quickly becomes a meaningful force working for our retirement. After about 10 years of saving - the growth on our savings contributes as much per year to our retiement as we svae from our income. It's like an additional employed member of the family saving 10% of their income for you! (only better because they don't spend any money). As we spend our retirement after age 65, the growth of our savings declines as we withdraw money to live on, and it to crashes out at 90 in this model. (It looks like it crashes a year after our retirement savings is depleted but that is just an artifact of my lazy annual compounding versus monthly).

The frog green line starting at 65 is social security. The reality is 23 year-olds today won't be eligible for full social security until 67, however you can take a reduced amount starting at 62, this model is somewhere in between. It may also be a leap to say there will be any social security in 30 years or so.

The plum purple line (not shown) are living expenses after retirement which are all below the x axis (negative). 80% of pre-retirement income is a "rule of thumb" that factors in empty nest'ers and possibly paying off your mortgage by that point as well as averaging the fact that you may be more active in retirement at 65 but slow down your spending by 90.

OK - so this isn't earth shattering - but I learned some interesting things running this model.

- It doesn't matter how much money you make - the 10% rule still holds

Let's look at a starting salary of $20,000


Or a starting salary of $100,000


Now for some quick examples of compounding. If you were able to save just 14% of your salary (or $466 per month starting with out $40,000 salary example) then you would not only be able to retire, but live off the interest of your retirements and never touch the principle. Therefore your retirement fund will "last forever" and you can pass on a huge sum to your children (in this example $5,600,000). This difference isn't far from just giving up cable each month (watch TV on hulu.com instead).

14% savings model


If you only save 5% per month (every month) then your retirement savings will only last until you are 75 in this model - or just 10 years after retirement.


Another compounding example - if the return on our investments nets 10% per year rather than 8% then 5% savings per month would last until 90 and therefore work for this model.


This is not a "crazy" scenario as the S&P500 index has returned 10% per year for the last 30 years. However the S&P500 has also returned 0% over the past 10 years and -5% for the past 3 years. Long story short - relying on 10% growth is not recommended.

Retirement Matching
So if you need to save 10% of your salary per year - what about 401k matching? If you are lucky enough to have an employer who matches your 401k savings - The most common is a 50% match up to 6% of your salary - or a 3% contribution to your retirement - reducing your burden to 7% per year.

Some Personal Notes
In addition to saving for retirement on our own - Meghan and I are fortunate enough that P&G has a profit sharing program. It's one of those things you don't think anything about when looking for your 1st job, but later makes a big difference. P&G's profit sharing doesn't require you to save any money for retirement (like a 401k match does). P&G just contributes money to your retirement. It starts at 5% per year and increases almost 1% per year of service to a max of 22% of your salary per year after ~17 years. P&G's contributions are made in P&G stock and remain as P&G stock until you turn ~50. Can you imagine - they do this for EVERY employee. It is remarkable!

So is that it then? Just have P&G contribute money for my retirement? Well I know folks who retired recently without saving a dime of their own for retirement and retired with quite a sum. However over their careers P&G stock had returned 16% annually. I am skeptical that the next 30 years will yield as much growth - but everyone who recently retired tells me they felt the same way when they started with the company - so who knows.

Another "artifact" of working at P&G is that it seems quite challenging to be employed past 55 - and 65 might be unheard of unless you are an executive.

Let's look at our original retirement model when saving 10% per year trying to retire at 55


Yikes! We only make it to 66 with our savings! In fact - if you crunch the numbers, in order to retire at 55 - you must save almost 20% of your salary every year (19.5%)! Or $650 a month for our $40,000 salary example.

Here's the 19.5% annual savings model


So what's the point of all of this?
- You will likely live longer than you can work.
- You need to save enough money during your working years to cover your expenses after retirement
- Saving for retirement isn't easy - but your need to do so doesn't change

I know some folks who start working at P&G and plan to save for retirement "later". They say it's hard to start out with their pay check and save for retirement. They assume their income will grow and eventually they will be able to save. Of course things will get in the way later as well, like buying an engagement ring, paying for a wedding, buying a house, having kids, etc. And the longer you wait to start, the more money you have to save.

It all comes down to 10% per year - every year.

I wish you all the best of luck with saving for retirement!

APPENDIX: Retire at 65 Assumptions
- You are living off your parents from Age 0-18
- After 23 you live within your means to pay back any student loans while still saving 10% annually
- Save 10% of income before taxes annually starting at age 23
- Retire at 65
- 8% annual growth rate (S&P500 10.34% annually over last 30 years)
- 3% annual inflation
- 4% pay increase annually
- Spend 80% of salary at time of retirement
- Assume you actually get Social Security
- Lifespan of 90 wonderful years

Recession Datapoint(s)

Meghan and I bought our house at the very peak of the market - APR 2006. I think interest rates and housing values have only fallen since. And because of that we are refinancing to a lower interest rate (from 6.5% to 5.125% though you can get 4.875% but it would take too long to explain the challenges of refinancing a non-conforming 80/20 loan - which is why we haven't refinanced until now). In order to do so we had to have an appraisal on our house. So we know that officially our house value has dropped 3.36% since then. I actually feel like that isn't too bad (which is a sad commentary on the state of the economy). Also for what it's worth Zillow's Zestimate was spot on.

While the housing market (and interest rates) may be bottoming - the stock market has had a pleasant rally. Had we panicked and changed our investment strategy we would be sorry today as the S&P 500 is up over 60% from the bottom - which amazingly enough was only 9 months ago in MAR 2009. While we are still ~17% below our 2007 highs - I feel much better about our savings balances.