So you have accumulated a little savings or you have heard about IRAs and want to know more about "investing." I'm writing a series about investing topics, their definitions, and what they mean.
Investing Introduction
1. Banks
2. Credit Unions
3. Mutual Fund Companies
4. Brokerage Houses
5. Investment Advisers
6. Full Service
1. Banks
Banks are businesses which make money by lending money for more than they can borrow money. In fact banks "borrow" money from you and pay you interest for the use of your money. You may have noticed that a bank does not pay you as high an interest rate as you pay for borrowing money.
I've included banks because many, most, or all of them offer some services for saving for retirements. Typically they offer instruments called "CDs" and some may offer another called a "money market."
A CD (aka certificate of deposit) is simply money which you promise to not withdraw for the period of time specified by the CD. For example, a 6-month CD means that you will not withdraw your savings for 6-months. CDs can be federally insured. CDs earn more interest than equivalent savings accounts.
A money market is similar to a savings account but the money is often not federally insured. Money markets typically earn more than savings accounts and can sometimes earn as much or more than CDs. However, they do not impose limitations on when you can withdraw your money.
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2. Credit Unions
To their customers, credit unions are very similar to banks. However, instead of operating as a for profit business, credit unions are member owned.
I mention credit unions as a separate entry because in my experience credit unions offer better rates (higher interest for savings and lower interest for loans) than banks. If you have never had a credit union bank, I recommend checking out your local credit union to see how it stacks up.
Credit union offerings are similar to banks with similar limitations.
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3. Mutual Fund Companies
A mutual fund company is a company which creates mutual funds. Mutual funds are a collection of assets (such as multiple stocks and/or bonds). Mutual funds can further be subdivided into actively managed funds and index funds.
An actively managed fund attempts to beat the average performance of the market through picking better than average stocks. Statistically speaking, actively managed funds perform worse than market or index they attempt to beat.
An index fund (also known as a passively managed fund) attempts to match the performance of the market or a market index (e.g. the S&P 500 index or Dow Jones Industrials).
Both fund types incur some management costs (the salaries for the management staff and trading costs of the assets in the fund). Actively managed usually incur higher costs than index funds. However, even among index funds, not all are created equally.
A critical performance characteristic of all mutual funds, is the management cost. This cost is subtracted from the performance of the fund's underlying assets BEFORE the investor earns any money. A 1% management fee means that you'll earn 1% less than you would have otherwise.
Two mutual fund companies with low cost funds, a wide selection of index funds, and that I have used are Vanguard and T. Rowe Price.
A mutual fund company with a wide selection of actively managed funds, very low management costs its actively managed funds, index funds, and that I have used is Fidelity.
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4. Brokerage Houses
A brokerage house is a company which offers you the ability to buy and sell assets on the financial markets (such as the American Exchange and New York Stock Exchange). Some brokerage houses (none of which I have used) are Scot Trade and E*Trade.
Brokerage houses make their money by charging their customers money for each transaction. However, the stiff competition among the brokerage houses means that even this transaction cost has gotten quite competitive. Even Vanguard (a mutual fund company) now only charges its customers $7.00 per transaction.
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5. Investment Advisers
Turn on your TV and you can't help but see investment advisers. Heck, one of these (cough cough Jim Cramer cough cough) *screams* at the TV in almost every one of his shows.
Besides the advice that you should NEVER buy a "hot stock tip" (I'm going to repeat this advice over and over), I recommend that you don't take any advice from any TV show.
However, that does not mean you should never take any advice! Two advisers that I respect very much are Value Line and Morningstar. Unfortunately both of these companies charge for membership.
I do not currently own such membership but based upon the quality of their advice I am serious considering purchasing such a membership
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6. Full Service
More astute readers may have realized that the mutual fund companies I mentioned offer brokerage services, some brokerage houses offer mutual funds, and both of these offer investment advice. In fact most investment houses now offer all services to a greater or lesser extent.
While I do think it's OK to use the same mutual fund company for your brokerage needs (and vice versa), I would not take their advice with a very large grain of salt.
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Proceed to my next investing blog on Investing Choices.
Tuesday, August 31, 2010
Sunday, August 29, 2010
Finances: What you should do this week
In my blog from last week, how to retire in 5 easy steps, I discussed the 5 steps you need to perform in order to set yourself up for early retirement. This week I'll discuss some things to try to get a handle on your finances. These are four things that you can do this week to get them under control.
Things to do this week
1. Refinance your mortgage
2. Consider getting an account at a credit union
3. Call your credit card company
4. Open an IRA account
1. Refinance your mortgage
If you own a house and have either a variable rate mortgage or a fixed mortgage of over 5.25%, call your lenders about refinancing to a fixed rate mortgage.
Rates for a 30-year fixed mortgage are running about 4.6% right now. The interest rates for mortgages are the lowest since national statistics have been collected (over 30 years)!
In my own research, I found that my credit union offered me the lowest rates by about 0.25%!
Check out this link to see what the mortgage rates are today.
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2. Consider getting an account at a credit union
My credit union provides me with the best offers for checking, savings, and loan accounts. In nearly every comparison I've made over the last year my credit union beat the banks handily and for my mortgage, they beat the bank's rate by a quarter point!
Here's a link to find a credit union near you.
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3. Call your credit card company
Pull out your credit card and call the number on the back.
If you have a credit card and are carrying a balance from month to month, ask for a lower rate. The worst they can say is, "no" and that leaves you exactly as you already are. However, if you have made all your payments for the last 6-12 months, they are likely to say, "yes" and that means you have just save yourself money!
If you have a credit card and do not carry a balance, then ask for something else. Some options you may want to consider are:
a. cash back bonuses
b. special offers
c. the cancellation of annual fees
d. lower interest rates
Yup, even if you are not carrying a balance now, the lower interest rates may help you in the future.
While you're on the phone, ask what your balance and interest rates are.
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4. Open an IRA account
Call or browse your bank's, credit union's, or investment house's (I like Vanguard) and ask how you can start an IRA account. Most people are permitted to deposit up to $2000 per year into this account. If you are able to contribute this much, it'll save you some taxes.
But I must warn you that if you get an employer match you should not reduce your 401K contributions to fund your IRA.
Back to top
Proceed to my next finances blog how to save money.
Return to my previous finances blog how to retire in 5 easy steps.
Saturday, August 28, 2010
Hollywood squares humor
These great questions and answers are from the days when the Hollywood Squares game show responses were spontaneous, not scripted, as they are now.
Peter Marshall was the host asking the questions, of course.
Q. Paul, what is a good reason for pounding meat?
A. Paul Lynde: Loneliness! (The audience laughed so long and so hard it took up almost 15 minutes of the show!)
Q. Do female frogs croak?
A. Paul Lynde: If you hold their little heads under water long enough.
Q. If you're going to make a parachute jump, at least how high should you be?
A. Charley Weaver: Three days of steady drinking should do it.
Q. True or False, a pea can last as long as 5,000 years.
A. George Gobel: Boy, it sure seems that way sometimes.
Q. You've been having trouble going to sleep. Are you probably a man or a woman?
A. Don Knotts: That's what's been keeping me awake.
Q. According to Cosmopolitan, if you meet a stranger at a party and you think that he is attractive, is it okay to come out and ask him if he's married?
A. Rose Marie: No wait until morning.
Q. Which of your five senses tends to diminish as you get older?
A. Charley Weaver: My sense of decency.
Q. In Hawaiian, does it take more than three words to say 'I Love You'?
A. Vincent Price: No, you can say it with a pineapple and a twenty.
Q. What are 'Do It,' 'I Can Help,' and 'I Can't Get Enough'?
A. George Gobel: I don't know, but it's coming from the next apartment.
Q. As you grow older, do you tend to gesture more or less with your hands while talking?
A. Rose Marie: You ask me one more growing old question Peter, and I'll give you a gesture you'll never forget.
Q. Paul, why do Hell's Angels wear leather?
A. Paul Lynde: Because chiffon wrinkles too easily.
Q. Charley, you've just decided to grow strawberries. Are you going to get any during the first year?
A. Charley Weaver: Of course not, I'm too busy growing strawberries.
Q. In bowling, what's a perfect score?
A. Rose Marie: Ralph, the pin boy.
Q. It is considered in bad taste to discuss two subjects at nudist camps. One is politics, what is the other?
A. Paul Lynde: Tape measures.
Q. During a tornado, are you safer in the bedroom or in the closet?
A. Rose Marie: Unfortunately Peter, I'm always safe in the bedroom.
Q. Can boys join the Camp Fire Girls?
A. Marty Allen: Only after lights out.
Q. When you pat a dog on its head he will wag his tail. What will a goose do?
A. Paul Lynde: Make him bark?
Q. If you were pregnant for two years, what would you give birth to?
A. Paul Lynde: Whatever it is, it would never be afraid of the dark.
Q. According to Ann Landers, is there anything wrong with getting into the habit of kissing a lot of people?
A. Charley Weaver: It got me out of the army.
Q. It is the most abused and neglected part of your body, what is it?
A. Paul Lynde: Mine may be abused, but it certainly isn't neglected..
Q. Back in the old days, when Great Grandpa put horseradish on his head, what was he trying to do?
A. George Gobel: Get it in his mouth.
Q. Who stays pregnant for a longer period of time, your wife or your elephant?
A. Paul Lynde: Who told you about my elephant?
Q. When a couple have a baby, who is responsible for its sex?
A. Charley Weaver: I'll lend him the car, the rest is up to him
Q. Jackie Gleason recently revealed that he firmly believes in them and has actually seen them on at least two occasions. What are they?
A. Charley Weaver: His feet.
Q. According to Ann Landers, what are two things you should never do in bed?
A. Paul Lynde: Point and laugh
Peter Marshall was the host asking the questions, of course.
Q. Paul, what is a good reason for pounding meat?
A. Paul Lynde: Loneliness! (The audience laughed so long and so hard it took up almost 15 minutes of the show!)
Q. Do female frogs croak?
A. Paul Lynde: If you hold their little heads under water long enough.
Q. If you're going to make a parachute jump, at least how high should you be?
A. Charley Weaver: Three days of steady drinking should do it.
Q. True or False, a pea can last as long as 5,000 years.
A. George Gobel: Boy, it sure seems that way sometimes.
Q. You've been having trouble going to sleep. Are you probably a man or a woman?
A. Don Knotts: That's what's been keeping me awake.
Q. According to Cosmopolitan, if you meet a stranger at a party and you think that he is attractive, is it okay to come out and ask him if he's married?
A. Rose Marie: No wait until morning.
Q. Which of your five senses tends to diminish as you get older?
A. Charley Weaver: My sense of decency.
Q. In Hawaiian, does it take more than three words to say 'I Love You'?
A. Vincent Price: No, you can say it with a pineapple and a twenty.
Q. What are 'Do It,' 'I Can Help,' and 'I Can't Get Enough'?
A. George Gobel: I don't know, but it's coming from the next apartment.
Q. As you grow older, do you tend to gesture more or less with your hands while talking?
A. Rose Marie: You ask me one more growing old question Peter, and I'll give you a gesture you'll never forget.
Q. Paul, why do Hell's Angels wear leather?
A. Paul Lynde: Because chiffon wrinkles too easily.
Q. Charley, you've just decided to grow strawberries. Are you going to get any during the first year?
A. Charley Weaver: Of course not, I'm too busy growing strawberries.
Q. In bowling, what's a perfect score?
A. Rose Marie: Ralph, the pin boy.
Q. It is considered in bad taste to discuss two subjects at nudist camps. One is politics, what is the other?
A. Paul Lynde: Tape measures.
Q. During a tornado, are you safer in the bedroom or in the closet?
A. Rose Marie: Unfortunately Peter, I'm always safe in the bedroom.
Q. Can boys join the Camp Fire Girls?
A. Marty Allen: Only after lights out.
Q. When you pat a dog on its head he will wag his tail. What will a goose do?
A. Paul Lynde: Make him bark?
Q. If you were pregnant for two years, what would you give birth to?
A. Paul Lynde: Whatever it is, it would never be afraid of the dark.
Q. According to Ann Landers, is there anything wrong with getting into the habit of kissing a lot of people?
A. Charley Weaver: It got me out of the army.
Q. It is the most abused and neglected part of your body, what is it?
A. Paul Lynde: Mine may be abused, but it certainly isn't neglected..
Q. Back in the old days, when Great Grandpa put horseradish on his head, what was he trying to do?
A. George Gobel: Get it in his mouth.
Q. Who stays pregnant for a longer period of time, your wife or your elephant?
A. Paul Lynde: Who told you about my elephant?
Q. When a couple have a baby, who is responsible for its sex?
A. Charley Weaver: I'll lend him the car, the rest is up to him
Q. Jackie Gleason recently revealed that he firmly believes in them and has actually seen them on at least two occasions. What are they?
A. Charley Weaver: His feet.
Q. According to Ann Landers, what are two things you should never do in bed?
A. Paul Lynde: Point and laugh
Finances: How to retire early in 5 easy steps
My title was said a bit sarcastically but there really is a magic formula to becoming financially independent and/or to retire early
How to retire in 5 easy steps
Step 1: Start saving as soon as you start earning income.
Step 2: Do not get into debt (or get out of debt as quickly as possible if you are in debt)
Step 3: Save at least 10% of every paycheck and put it in an Individual Retirement Account (IRA)
Step 4: Diversify your investments
Step 5: Continue steps 2-3 for about 40 years
If you set aside more that 10% of your income or you do especially well in your investments you could reach FIRE (financial independence / retire early) much earlier than 40 years - but everyone should be able get there with this formula.
Step 1: Start saving as soon as you start earning income.
You have probably heard about "compound interest." In case you haven't or as a refresher, it is simply that your saved money earns interest over a period of time and that as that interest is paid, that interest then ALSO earns interest.
If you invest in the stock market, your investments on average earn about to 10.5% return per year. With compound interest at this rate any investment will double in value in about 7.5 years. Over the period of 40 years you're initial investment will double about 4.5 times. So if you started with a $1000 investment this is how much it would be worth after the given amount of time:
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Holy smokes, our measly $1000 turned into $64,000 over 45 years!
This chart show us the most important point of compound interest, that the most important investment is your very first investment! This is the money that earns the most compound interest. If you waited 7.5 years before making that first investment, then you would only get $32,000 on the backend! It would mean that your own procrastination LOST 1/2 of your retirement money.
In trying to retire, you either fight time or use it as an ally.
Back to the top
Step 2: Do not get into debt (or get out of debt as quickly as possible if you are in debt)
The very power of compound interest in your savings account works against your when you're in debt. In fact, the credit card company (or mortgage company or student loan company or automobile finance company) is using YOU as a source for THEIR compound interest savings!
In general debt is toxic to you and your retirement planning - avoid it when possible. If you must take on debt, discharge it as soon as you can.
I must admit at this point that under certain circumstances debt can be beneficial. The best way of determining whether debt is good or bad is by determining whether the debt is to acquire an appreciating asset (one which gains in value) or a depreciating asset (one whose value declines over time).
The evaluation is still not done though. An asset that appreciates in one period of time or for one person may be a depreciating asset for another. The recent real estate markets should provide plenty of support for my assertion!
But also consider student loan debt. Taking on $100,000 in debt to acquire a degree in teaching (which doesn't pay very well) from an Ivy League school would be a BAD investment. Going to a state school to get a degree in a field which would significantly improve your earning is usually a good investment.
Nearly all consumer debt (for things such as electronics, cars, eating in restaurants, etc.) is BAD debt. If you don't already have the money to buy these things - then do NOT buy them with debt. An exception could be made to purchase a car so that you can get to your place of employment but buy a cheap vehicle and pay back the loan as soon as possible!
For more of my thoughts on debt, you can go to my previous blog on the subject. It isn't as well organized as this and I may go back and tidy it up if people express some interest in it.
Back to the top
Step 3: Save at least 10% of every paycheck and put it in a retirement account (IRA or 401K)
Of course we're not going to just rely upon the compound returns of just our initial year's savings. A more realistic scenario would be that we continue saving each year. In that case our savings profile will look more like this:
Cool, over 45 years we turned $45,000 ($1000 per year for 45 years) into nearly $950,000!
If your savings amounts to $10,000 per year instead of $1000, then you would multiply this number by 10 ($9,500,000!!). If you're making $50,000 per year and are saving $5000 per year, then multiply this number by 5 for about $4,750,000 in savings.
A quick but important addendum to this is that if your employer offers a 401K plan in which the employer contributes to your 401K, then ALWAYS put in enough of your own money to get ALL of the employers match. In life, you'll almost never encounter a situation in which you can get "free money" but this is one of those very rare cases for which you do get something for nothing.
I want to reiterate this point. Even if you have to immediately turn around and take your contribution out (this incurs penalties and I don't recommend doing it BUT if you must do so, you'll still do better by getting your employers contribute and living with the penalty).
Back to the top
Step 4: Diversify your investments
Earlier I mentioned that historically, stocks have earned an average rate of return of about 10.5%. However, most of you recall that stocks semi-periodically suffer from "market meltdowns", "black Fridays", or "crashes." In fact all asset classes (precious metals, treasuries, bonds, real estate, etc.) suffer from similar behavior (sudden rises in prices and soul crushing falls). However, it is nearly impossible for all asset classes to move in the same direction at the same time.
So the best means of protecting the capital value of your savings is to "diversify" your retirement across many asset classes. To do this you decide what percent of your money belongs in each class. Then when one asset class loses or gains value then rebalance your portfolio back to the correct proportions. This forces you to sell some assets after they've risen in value and buy others when they have lost value.
Your next question is going to be, "so what are good asset proportions?" That's a VERY good question and one that depends a lot upon a person and their tolerance for risk. A formula that works well for most people is (100 - your age) for how much you should invest in stocks as a percent of assets. The rest should be invested in bonds + savings accounts as a percent of assets.
As an example, I'm 44 years old. Using my formula indicates that 56% of retirement savings should invested in stocks. However, I personally am willing to accept more than average risk and actually have about 65% (or more!) invested in stocks. In normal times I would split the remaining 35% roughly equally between savings and bonds - but these are normal times (I don't trust the bond market right now).
Back to the top
Step 5: Continue steps 2-3 for about 40 years
As I pointed out in Step 1, the best ally you have for saving up enough money to retire is time - but only if you start early. If you start saving when you're 20, it won't be very hard for you to save enough to retire by the age of 60.
However, if you start late, then you'll struggle to save enough to retire. You can compensate for starting late, by working later into your life -OR- by allocating more of your income for retirement savings. In fact saving more for retirement helps in two ways - by actually putting more into your retirement accounts BUT also by getting you used to living with less.
Doubling the money you set aside will double the money available when you go to retire, it's a very linear relationship.
But if you can life on 80% of your income instead of 90% of your income, you have also reduced the amount of savings you will need when you retire.
Which brings me to another question I forget to mention, "how much money do you need to retire?"
The general answer is figure out how much you earn now, and the annual amount you'll need to retire will be about 80% of this value (or 70% if you're able to put aside 20% of your income). Now there's a whole smorgasbord of assumptions that go into that pronouncement - the most important being that there will be no inflation (which is a VERY bad assumption!).
But for sake of argument, let's say you earn $50,000 per year and can save 10% of your income per year (that's $5,000). When you go to retire, you'll need about $40,000 per year for retirement.
Now a bunch of very smart people have invested a lot of time to determine how long retirement investments can last after we start drawing them down. The magic number they have derived is 4% - you can withdraw up to 4% of your retirement investments per year and maintain a 95%+ chance that your money will last 30 years or more.
So to figure out how much you need, divide the $40,000 per year by 4%. The number you'll get is $1,000,000. Yup, your math isn't wrong, you'll need to be a millionaire these days in order to even contemplate retiring.
Saving for retirement may be aided a bit by Social Security, but you should not count on that.The Obama administration is currently "floating" several ideas. Some of these include:
"means testing", meaning if you have saved money for retirement, you will not get Social Security
"reducing benefits", meaning giving future retirees significantly lower benefits than current retirees
"confiscating 401Ks", meaning he has suggested that the federal government will take ALL current 401K assets from workers.
I will make one further observation about Social Security and that is Congress can (and has) changed Social Security's rules at any time. If they decide only Congressmen are eligible, then that's the final word.
Back to the top
Proceed to my next blog on finances called what you should do this week
How to retire in 5 easy steps
Step 1: Start saving as soon as you start earning income.
Step 2: Do not get into debt (or get out of debt as quickly as possible if you are in debt)
Step 3: Save at least 10% of every paycheck and put it in an Individual Retirement Account (IRA)
Step 4: Diversify your investments
Step 5: Continue steps 2-3 for about 40 years
If you set aside more that 10% of your income or you do especially well in your investments you could reach FIRE (financial independence / retire early) much earlier than 40 years - but everyone should be able get there with this formula.
Step 1: Start saving as soon as you start earning income.
You have probably heard about "compound interest." In case you haven't or as a refresher, it is simply that your saved money earns interest over a period of time and that as that interest is paid, that interest then ALSO earns interest.
If you invest in the stock market, your investments on average earn about to 10.5% return per year. With compound interest at this rate any investment will double in value in about 7.5 years. Over the period of 40 years you're initial investment will double about 4.5 times. So if you started with a $1000 investment this is how much it would be worth after the given amount of time:
<![if supportMisalignedColumns]> <![endif]>
| Years | Value |
| 0 | $1,000 |
| 7.5 | $2,000 |
| 15 | $4,000 |
| 22.5 | $8,000 |
| 30 | $16,000 |
| 37.5 | $32,000 |
| 45 | $64,000 |
Holy smokes, our measly $1000 turned into $64,000 over 45 years!
This chart show us the most important point of compound interest, that the most important investment is your very first investment! This is the money that earns the most compound interest. If you waited 7.5 years before making that first investment, then you would only get $32,000 on the backend! It would mean that your own procrastination LOST 1/2 of your retirement money.
In trying to retire, you either fight time or use it as an ally.
Back to the top
Step 2: Do not get into debt (or get out of debt as quickly as possible if you are in debt)
The very power of compound interest in your savings account works against your when you're in debt. In fact, the credit card company (or mortgage company or student loan company or automobile finance company) is using YOU as a source for THEIR compound interest savings!
In general debt is toxic to you and your retirement planning - avoid it when possible. If you must take on debt, discharge it as soon as you can.
I must admit at this point that under certain circumstances debt can be beneficial. The best way of determining whether debt is good or bad is by determining whether the debt is to acquire an appreciating asset (one which gains in value) or a depreciating asset (one whose value declines over time).
The evaluation is still not done though. An asset that appreciates in one period of time or for one person may be a depreciating asset for another. The recent real estate markets should provide plenty of support for my assertion!
But also consider student loan debt. Taking on $100,000 in debt to acquire a degree in teaching (which doesn't pay very well) from an Ivy League school would be a BAD investment. Going to a state school to get a degree in a field which would significantly improve your earning is usually a good investment.
Nearly all consumer debt (for things such as electronics, cars, eating in restaurants, etc.) is BAD debt. If you don't already have the money to buy these things - then do NOT buy them with debt. An exception could be made to purchase a car so that you can get to your place of employment but buy a cheap vehicle and pay back the loan as soon as possible!
For more of my thoughts on debt, you can go to my previous blog on the subject. It isn't as well organized as this and I may go back and tidy it up if people express some interest in it.
Back to the top
Step 3: Save at least 10% of every paycheck and put it in a retirement account (IRA or 401K)
Of course we're not going to just rely upon the compound returns of just our initial year's savings. A more realistic scenario would be that we continue saving each year. In that case our savings profile will look more like this:
| Years | Investment Value |
| 0 | $1,000 |
| 7 | $11,646 |
| 15 | $37,531 |
| 22 | $85,131 |
| 30 | $200,874 |
| 37 | $413,707 |
| 45 | $931,229 |
If your savings amounts to $10,000 per year instead of $1000, then you would multiply this number by 10 ($9,500,000!!). If you're making $50,000 per year and are saving $5000 per year, then multiply this number by 5 for about $4,750,000 in savings.
A quick but important addendum to this is that if your employer offers a 401K plan in which the employer contributes to your 401K, then ALWAYS put in enough of your own money to get ALL of the employers match. In life, you'll almost never encounter a situation in which you can get "free money" but this is one of those very rare cases for which you do get something for nothing.
I want to reiterate this point. Even if you have to immediately turn around and take your contribution out (this incurs penalties and I don't recommend doing it BUT if you must do so, you'll still do better by getting your employers contribute and living with the penalty).
Back to the top
Step 4: Diversify your investments
Earlier I mentioned that historically, stocks have earned an average rate of return of about 10.5%. However, most of you recall that stocks semi-periodically suffer from "market meltdowns", "black Fridays", or "crashes." In fact all asset classes (precious metals, treasuries, bonds, real estate, etc.) suffer from similar behavior (sudden rises in prices and soul crushing falls). However, it is nearly impossible for all asset classes to move in the same direction at the same time.
So the best means of protecting the capital value of your savings is to "diversify" your retirement across many asset classes. To do this you decide what percent of your money belongs in each class. Then when one asset class loses or gains value then rebalance your portfolio back to the correct proportions. This forces you to sell some assets after they've risen in value and buy others when they have lost value.
Your next question is going to be, "so what are good asset proportions?" That's a VERY good question and one that depends a lot upon a person and their tolerance for risk. A formula that works well for most people is (100 - your age) for how much you should invest in stocks as a percent of assets. The rest should be invested in bonds + savings accounts as a percent of assets.
As an example, I'm 44 years old. Using my formula indicates that 56% of retirement savings should invested in stocks. However, I personally am willing to accept more than average risk and actually have about 65% (or more!) invested in stocks. In normal times I would split the remaining 35% roughly equally between savings and bonds - but these are normal times (I don't trust the bond market right now).
Back to the top
Step 5: Continue steps 2-3 for about 40 years
As I pointed out in Step 1, the best ally you have for saving up enough money to retire is time - but only if you start early. If you start saving when you're 20, it won't be very hard for you to save enough to retire by the age of 60.
However, if you start late, then you'll struggle to save enough to retire. You can compensate for starting late, by working later into your life -OR- by allocating more of your income for retirement savings. In fact saving more for retirement helps in two ways - by actually putting more into your retirement accounts BUT also by getting you used to living with less.
Doubling the money you set aside will double the money available when you go to retire, it's a very linear relationship.
But if you can life on 80% of your income instead of 90% of your income, you have also reduced the amount of savings you will need when you retire.
Which brings me to another question I forget to mention, "how much money do you need to retire?"
The general answer is figure out how much you earn now, and the annual amount you'll need to retire will be about 80% of this value (or 70% if you're able to put aside 20% of your income). Now there's a whole smorgasbord of assumptions that go into that pronouncement - the most important being that there will be no inflation (which is a VERY bad assumption!).
But for sake of argument, let's say you earn $50,000 per year and can save 10% of your income per year (that's $5,000). When you go to retire, you'll need about $40,000 per year for retirement.
Now a bunch of very smart people have invested a lot of time to determine how long retirement investments can last after we start drawing them down. The magic number they have derived is 4% - you can withdraw up to 4% of your retirement investments per year and maintain a 95%+ chance that your money will last 30 years or more.
So to figure out how much you need, divide the $40,000 per year by 4%. The number you'll get is $1,000,000. Yup, your math isn't wrong, you'll need to be a millionaire these days in order to even contemplate retiring.
Saving for retirement may be aided a bit by Social Security, but you should not count on that.
"means testing", meaning if you have saved money for retirement, you will not get Social Security
"reducing benefits", meaning giving future retirees significantly lower benefits than current retirees
"confiscating 401Ks", meaning he has suggested that the federal government will take ALL current 401K assets from workers.
I will make one further observation about Social Security and that is Congress can (and has) changed Social Security's rules at any time. If they decide only Congressmen are eligible, then that's the final word.
Back to the top
Proceed to my next blog on finances called what you should do this week
Tuesday, August 24, 2010
The Case for Space IV: How to pay our way
(Just a quick note)
I'm new to blogging so when I first
thought of this topic I wrote a whole smorgasbord of things I wanted to discuss.
In and of itself, this was a good idea but trying to put all of that content
into a single blog entry - blech!
I'm going to try to complete the
other sections but do each section as a separate blog entry.
This will be section IV of my blog The Case for Space
How to pay our way
Really, this is a far more troublesome question than it first seems. Space has nearly unlimited quantities of raw resources (space, energy, minerals, and simple chemicals). However, it doesn't have infrastructure and getting into space in the first place is a huge problem. Here's a more extensive essay called "Why Build Orbital Space Colonies?" It covers both sides of the equation (the troubles and rewards).
So let me set up a couple of
scenarios:
1) Humans have a robust presence in
space with multiple habitats (on the Moon or in orbit). The colonists in those
places need water, air, fuel, building materials, power, and raw resources to
establish their own industries. They could get all of these things from the
Earth but at a shipping cost of $10,000/lb of concrete, they're not going to be
able to build a very big house!
2) If the infrastructure to produce
such things were already in place, it might be possible to toss the materials
up from the surface of the Moon for substantially less money (say $25-$50/lb)
or heck, just have the colonists live there.
The problem is that this is a
catch-22, the only time it makes sense to build a space habitat is if there's
extensive infrastructure. The only reason to build infrastructure is to support
extensive space habitats!
The solution to this is called "bootstrapping"
- lofting major components of infrastructure into place to kick start the
development of space infrastructure. However, right now there's very little
reason for doing this.
Materials
Realistically almost any material
you could want is available in space from hydrogen to diamonds. The questions
we should ask, "What resources can we get," "how much will it
cost to get them," and "for how much can we sell it?"
I've provide a link to a detailed
discussion of the Economic feasibility of mining asteroids. The
come to the same conclusions that I have, namely that the first target is
finding a source for volatiles to use as a propellant.
There's another argument for going
to space and that is for the first time ever, modern industrial humans will
start to run out of resource over the next few decades. From copper to
platinum and rare earth metals, humans will need to find these resources from
somewhere other than the Earth (the reality is the Earth has plenty of these
things but we can't get to them because they mostly reside in the core).
In orbital dynamics, the exchange
currency is called "delta V" and that means change in velocity. To
get from the Earth's surface into Low Earth Orbit (LEO), you need to
"spend" about 7.6 km/s delta V (meaning accelerate by 7.6 km/s - but
in most cases you won't actually be going 7.6 km/s when done because some of
that was sapped by climbing out of the Earth's gravity well!).
There's a great table that gives us
most of what we want at the Atomic
Rockets web site.
Here's another table that gives us
most of the rest of what we want Delta-v
budget
The closest destination from a delta
V expenditure perspective is the Moon for about 5.7 km/s. There are several
Near Earth Objects (NEOs) we can get too with only 4.0 km/s or so from LEO and,
based upon the total mission propellant requirements, represent the best source
of materials. Mars also is "close" requiring only 6.1 km/s but is a
lot higher if you include landing on Mars' surface (10.2 km/s BUT you do get
some free aero braking too). Mining the main asteroid belt would also be useful
and would require a much lower delta V than landing on Mars.
Each of these is a potential source
for space construction materials.
What sort of materials? Well it
depends upon where you go.
from LEO to
|
Outbound
|
Inbound
|
||
delta V (km/s)
|
delta V (km/s)
|
|||
Rocket
|
Aerobrake
|
Rocket
|
Aerobrake
|
|
NEA
|
4
|
0
|
0.8
|
3.2
|
Earth-Sun
|
4.15
|
0
|
0.05
|
4.1
|
L4/L5
|
||||
Moon
|
5.7
|
0
|
1.6
|
4.1
|
Mars
|
3.8
|
6.4
|
6.4
|
3.8
|
This table shows how much it
"costs" to get there and back. Note, without aero braking, the
propulsion costs are reciprocal (it costs as much to get back as it does to get
there). However, with aero braking it is becomes much cheaper to get materials
back to Earth from certain locations (especially the L4/L5 and NEA locations).
This strongly supports a mission
profile in which automated (these will have to be automated because we can't
afford to send people to this location at this time because it's too expensive
AND too dangerous) machines are sent out once to setup an automated facility
and then materials are sent back on the "cheap" return trajectory.
The problem of course is that machines eventually break. This probably means
developing sophisticated telepresence and a generalized set of work robots that
can repair the mining machines.
Once deployed, the mining station
may not require propellant to send materials back to Earth. Instead, we can use
technology like a coilgun (mentioned in my first entry) and power from a
nuclear power plant to launch refined materials back to the Earth. This technique requires no (or very little)
propellant.
This leads to another question, what
sort of materials should we send back?
I've researched large numbers of
"economics of asteroid mining" essays that quote the spot price for
iron and indicate that we'll just drop 1,000,000s of tons of pig iron on Earth
and someone is going to pay billions of dollars for that material.
This is wrong.
Operations in space are expensive. Returning
material to LEO or Earth is expensive too. If the value of our materials by
weight is lower than our costs, then will we lose money, no matter how much of
it we can return to the Earth!
Our profits will be calculated based
upon this formula $$ = weight * (value - costs). We can't make a profit off the
stuff that costs more to get to the Earth than we can get for the material once
it reaches the Earth. Furthermore, materials returned from space could never
compete with cheaply extracted materials form Earth (e.g.). This means we'll never make a profit selling
asteroid iron on Earth.
So any space project will only send
materials that are very valuable back to Earth (to pay off our investors). We
could make a profit by selling materials useful for space infrastructure in LEO
(water, silicon, construction metals, rocket fuel, and other materials).
Therefore, we send ONLY platinum group metals and rare earth elements back to
Earth. We send water, bulk construction materials, and various other elements as
needed.
Now when you shoot a gun (or mass
driver), the gun has recoil or kick. We'll use our mass driver to ship
materials but it will also provide thrust to the asteroid. The mass driver will
do more than just ship our product materials back to Earth; it will also be the
asteroid's engine. We might be able to use it as a cheaper way to get the
asteroid back to LEO too!
Using gravity assists and aero
braking we might be able to make each mass driver shot perform two functions
(sending back materials and nudging our asteroid towards Earth). This would
mean that many of our mass driver shots will not put tour buckets on direct
return courses, instead they'd be taking the long way back to Earth (via flybys
of other planets). This may not be worthwhile in the end since such shots would
require on-board guidance and propulsion systems to correct their courses.
An alternative would be to use our
mining slag as propellant to nudge the asteroid toward Earth and only send
buckets directly to Earth when they were full of valuable materials
(propellant, PGM, & REE).
In addition, here's another table
that shows what you can expect to find when you get there:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Here's schematic of the Near Earth
Asteroid 433 Eros and the trajectory of the NEAR
spacecraft that rendezvoused with it:
Here's an image of the asteroid itself:
The first thing we will need to get
will be propellant - without that, there is no way we can build the rest of the
infrastructure.
Asteroids possess higher
concentrations of both Platinum and similar metals (called Platinum Group
Metals) and elements. An additional resource that would be valuable in space
but perhaps not worth sending back to Earth would be radioactive elements
(especially those suitable for fission reactors such as Uranium, Thorium,
Polonium, etc.).
This is a link to a website (called "Asteroids")
which discusses some of the major asteroid types: M - metallic, S - Stony, and
C - Carbonaceous.
I apologize for running out of steam
on this topic (asteroid resources). I have a whole lot more to say but I've
already written a lot. I intend to return to this topic in another blog when
I've finished writing those details (which are as of 10/1/10 still in draft
form).
Free pollution
This really isn't a valuable
resource in and of itself but this should be a very important point for those
concerned about the Earth's environment. Many of the industrial processes
necessary to sustain our technological society require a great deal of
pollution generating processes.
In some cases, these processes can
be moved into space and we can allow those pollutants to be swept away by the
solar wind.
This particular usage of space would
necessarily come after the development of a robust space infrastructure. The
ability to mine, process, and ship the required materials would be a definite
prerequisite to the ability to manufacture and finish products for shipping
back to Earth.
How much do we now pay for pollution
disposal and counter measures?
The US spends about
$4.2 billion on superfund site clean
ups per year.
$30 billion on the BP oil spill
$4 billion per year on nuclear
reactor waste disposal
Other areas which could benefit (but
I couldn't easily find numbers) include
Highly toxic chemical wastes
Organic wastes.
Any industry we can move off of the
Earth means we also remove their waste products from our biosphere. Any
reprocessing or recycling would recover chemicals valuable to the colony. The colony could dump pure waste without
worrying about contamination.
Clean energy
When we develop space infrastructure, this element will be
second only to mining the raw materials in importance. At first space
infrastructure would rely upon the use of nuclear power because of its very
high energy density. High impulse (aka good propulsive efficiency) plasma drives
(such as the Hall Effect thruster shown below) require a power
source capable of producing a great deal of power. Furthermore other processes
such as drilling, smelting, and launching materials back to Earth (via a
coilgun - see below) also require substantial amounts of power.
Hall Effect Thruster in operation
Schematic of a coilgun in operation
These power requirements would drive
the size of the solar panel arrays to be much too big (optimistically 5000 sq
meters per megawatt) to economically launch the structures from Earth in the
first missions. In addition, a fact most solar power optimist’s neglect is that
solar panels degrade over time. In space, this will happen much faster (due to
particles impinging upon and degrading any coating over the PV cells). Meaning
after a very short time a photovoltaic (PV) panel array sized to provide 1
megawatt of power will produce less. After many years, it will produce much less
than 1 megawatt.
Given that the panels cost $3.13 per
Watt and electricity on Earth costs $0.10 per kW/hour, then just to pay back
the costs of the panels would take 4 years. That excludes any space
transportation cost for the materials and its assembly!
On the flip side of that, space
based solar power may be an answer to the world's energy problems!
Large structures are not difficult
to make, the sun always shines in space, the sun will continue shining stably
for the next 4 billion years, and there's multiple mechanisms for harness solar
power in space that make it attractive for use in space.
PV panels cost a lot ($3.13 to
generate 1 watt) due to the cost of the very pure silicon it takes to make them
(unlike computer chips in which the major cost is the cost of constructing the
fabrication plan). Silicon is abundant on both the Earth and in space; the
trick is in refining it to ultra-high purity. After constructing an
infrastructure for building these panels, space refining has two significant advantages
over Earth refining, weightlessness, and a very hard vacuum.
Space power satellites would transfer their
energy to Earth by using microwave beaming. Such a concept would permit us to
produce our power in space and beam the power to Earth - with the hope of
eliminating the need for messy power plants on Earth. In fact, once they were
in place, they would require minimal upkeep. However, their upkeep would
include the replacement of individual cells or perhaps entire stations over
time to accommodate the degradation of the cells over time.
However, such a concept would
require two things: large quantities of raw materials from space mining
operations and receiving stations on Earth for the microwaves beamed from
geosynchronous orbit. The microwave receiving stations on Earth would need to
be ten miles in diameter (but farming and other activities could continue
underneath the thin-wired antenna structure that would not block much light).
Would we be willing to sacrifice so much land for "clean energy"?
Would people concerned about anthropogenic global warming support such a
project with their political backing?
I don't know the answers to those
questions, I can only point out that it is FAR cheaper to produce our energy on
Earth using fossil fuels and nuclear power than it would be to generate it in
space.
Tourism
Tourism will never be a major driver
in the development of space. However, if the development of space
infrastructure becomes a marginal activity, just barely making economic sense,
then space tourism could certainly tip the balance into making it more
economically viable.
For instance, it costs approximately
$10,000 per pound to launch mass into low earth orbit (LEO). If the typical man
weighs 200 pounds and he needs 100 pounds of support (oxygen, water, and food)
then it would cost about $3,000,000 to send that person into space. The
Russians would charge $20,000,000 or more for this same trip. Even after adding
in costs like training, this could easily be a profitable venture.
Of course, the number of people who
can afford the cost of this trip to space is limited, but it is an income
stream.
Science
Science doesn't really provide a
strong profit motive. However, some science can only be done in space. Any
organization able to provide economical access to space will also be able to
perform this science at a much lower cost.
A case in point is president Obama's
decision to cancel all manned space activities by the US. Now NASA will need to
purchase manned space flight from the Russians anytime we wish to have a manned
presence in space. If a company could provide cheaper access to space, then the
US would purchase those launches from the more economical space launch company.
This could amount to hundreds of millions of dollars per year.
Just like space tourism, this will
not provide a primary motivation for creating space infrastructure but it could
provide an added opportunity for making money.
Colonization
The most successful of English
colonies were called Joint Stock Companies. The basic concept was/is
investors (and some colonists) invested their own money into the venture.
Stockowners were given the right to participate in the decision making process.
They were also entitled to a share in the profits of the colony.
Another means of investing in the
company would be similar to the concept of bonds. Essentially the owner of
these bonds (called debentures), were entitled to a set rate of return
regardless of whether the colony earned a profit or not. On the other hand, the
owners of the debentures were not entitled to any share of the profits.
This mechanism of financing space
colonies gives the colonists an element of self-rule, a motive to make the
venture profitable, a share in those profits, and a means of generating the
capital necessary to start the venture.
In my opinion the two main obstacles
would be risk (the colonists would be risking their lives) and the costs. I
think both of these obstacles link directly back to infrastructure or its lack.
Without an established and reliable means to provide supply essentials (air,
water, food, power, safe shelter, and fuel); delaying the colony's supplies would
doom colonists to a swift death. In some ways this is similar to what the
English colonists faced when coming to the new world but those colonists never
faced death by oxygen starvation, lack of water, or similar necessities (many
did starve or die of exposure).
In conclusion, I think the
colonization of this type could be a great way to finance the expansion into
space of human colonies BUT that this can only occur after the initial creation
of infrastructure to supply those colonies with essentials.
Survival
Someday, another whopper asteroid will
smack the Earth. Within the next couple of hundred years, multiple meteors
large enough to take out a city will hit the Earth. Over the next couple of
10,000 years, an asteroid large enough to take out a country will hit the Earth.
Over the next 100,000,000 years, an asteroid large enough to wipe out every
human on the Earth will hit us.
Scientists are certain that these
things will happen. We just don't know
when.
Someday, the super volcano that is
Yellowstone Park will erupt again. In
fact, it is now over-due for an eruption. When that happens most of North
American will become uninhabitable. In fact, this region produces 1/2 of all of
the grain produced in the entire world - so this will cause mass starvation
across the world too. Not to mention the effects of all of the dust an ash the
volcano will throw into the air.
This is very likely to happen, but we
don't know when.
In about 1-2 billion years the Earth
will run out of water - more precisely, most of the water will work its way
into crustal rocks and not get re-liberated by plate tectonics. In fact, the
global quantity of surface water has slowly been declining over the history of
the Earth. Eventually we'll run out. When that happens, there will be nothing
to trap and sequester carbon dioxide.
This will put the Earth into a run-away greenhouse effect that will
mimic that of Venus.
If the water crisis doesn't get us
first, the gradual warming of the Sun will (the Sun has already heated up by
25% since it first started shining). Over about the same 1-2 billion year
period the Sun will warm the atmosphere enough that some atmospheric water will
achieve escape velocity and leave the Earth (more precisely the water molecules
will get high enough to become dissociated by UV light and its hydrogen will
escape).
These last two are a certainty and
we even know about when they'll happen.
Sooner (as exemplified by the former
example) or later (as exemplified by the latter) all humans left on the Earth
will die. Without any colonization of space, humanity will die with them. With
the colonization of space, some of humanity will survive AND if we see the threat
early enough, some of those on the planet will have a hope of escaping.
I'm a firm believer in not keeping
all of our eggs in one basket on this regard.
Go back to my earlier discussions on
The Case for Space
Go to my next discussion called The Case for Space V: Lightcraft
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