I hope that I stressed sufficiently in my recent post about How much capital do you need to start real-estate investing? that my “purchase in the median-to-just-below” price range recommendation is based on single family homes/condos/apartments.

Barbara Corcoran, who I consider to be the USA ‘expert’ in this area (although, the particular advice in my previous article did not come from her) said that you should also look:

1. For an area where rents are rising fast (7% year-over-year rent increase generally means a hefty property price increase is soon to follow),

2. You should take a walk around at night and look for ‘young activity’ in coffee shops, cinemas, whatever

Peter Spann (the Australian version of Barbara Corcoran, although both would dispute that particular comparison on more levels than one) would add:

3. Look for a neighborhood NEXT to a neighborhood that has spiked in values … that will generally be the next one to go up,

And, Dave Lindahl in his book about finding emerging markets has a very comprehensive way for identifying the next hot areas (for multi-family housing in particular, but I see no reason why it wouldn’t work just as well for single family) for those who like doing a little web-based data research.

Of course, if you are pessimist, the market is still overpriced and you will sit on the sidelines until we are late into the next boom, but if you are an optimist (realist?) …

… happy bargain hunting!

Not exactly a high-tech video for a guy who claims to be the “millionaire-maker in this country” [the country he is talking about is Australia]. but I actually remember buying some of his stuff many, many years ago and some of it seemed quite good …

… but, I suggest you just watch the first minute and a half of this video, because what he says is absolutely true.

It’s good to get the occasional reminder of just how bad ‘conventional financial wisdom’ can be:

1. Diversify funds?

2. Track performance of your fund against history / peer groups?

3. Rebalance your portfolio?

4. Move from stocks to bonds now that the market has ‘crashed‘?

This isn’t my life (thank goodness) …

… however, in the current market Cash is King! But, I still wouldn’t keep it in a suitcase.

Hop on over to our favorite navy jet Fighter Pilot’s web-site where he is hosting this week’s Carnival of Personal Finance … it’s where you get to see what other people are saying about personal finance; particularly useful when you get sick of my daily diatribe … then, when you’re done, come right back here for another dose … 🙂

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When you visit a financial planner, one of the first / most critical questions that they will ask you is:

When do you want to retire?

Now, that should be fairly easy for you to answer (at least, until after they have crunched all the numbers and you suddenly realize that you left your ‘financial plan’ a little late and will fall short, and have to keep working).

Their second question is the doozy:

How much income will you need in retirement?

Which is another way of asking how much you expect to spend in retirement?

Now, these are the $64,000 Questions (literally for some!) …

Since you will have no idea how to answer, and even if you think you do the financial planner will still trot out their firm’s trusty Rule of Thumb on this subject and proclaim:

You need 70% [or 75%, or 80%] of your pre-retirement income when you actually do retire.

How do they come to this ‘number’?

Well, it turns out that there is this one source for this piece of ‘holy gospel’ used by almost the entire financial planning industry:

There is an annual study conducted by Aon Consulting and Georgia State University’s Center for Risk Management and Insurance Research called the RETIRE Project.

Here it is in a nutshell:

The primary research focus of the GSU/Aon RETIRE Project is on the important question of ”How much income is needed at retirement in order to continue a person’s pre-retirement standard of living into the post-retirement period?”  In addressing this question, the RETIRE Project develops estimates for pre- and post-retirement taxes, rates of pre-retirement savings and examines certain key expenditures and changes in these expenditures between the pre- and post-retirement periods.

Now, that you know what it’s all about, here’s what they found (for 2008):

The current study finds that retirement income replacement ratios under the baseline scenario start at a high of 94 percent at the $20,000 salary level, progressively decrease to 78 percent at $60,000 and then remain essentially flat through $90,000—the highest salary examined.

There you go, you need to replace anywhere from 78% of your final pre-retirement salary to 94%, depending upon how much you earn.

Simple … but wrong!

Here’s why:

Micro: For a couple (no children, at least no longer at home or dependent) earning one income (ages 65 for the worker and 62 for the spouse) of $50,000 per year, the study assumes that their age/work-related expenses will decrease by $750 at retirement (e.g. no more commuting costs, presumably some extra health-related costs, and so on).

But, it doesn’t take into account the key difference: if you are not earning … you are spending!

How else are you going to absorb all that free time? Sitting on your rear-deck writing speeches  😉 ? Or, will you be out there playing golf, having coffee with friends, indulging your hobbies, etc.?

These all cost, Man!

Macro: More importantly, we know that we want to make fundamental changes in our lives so that we can “live life” … work is what we do while we are saving up to live that life.

In other words, our current life is a compromise in order to get us to the life that we want to live … how can ANY ratio of a ‘compromise life’ equate to a ‘real life’?

Of course it can’t, so here’s what to do next time your financial planner trots out his trusty Rules of Thumb… say:

Forget my current life … here’s the life that I want to live when I stop work, and here’s when I want to start living it .. now, can you draw me a plan that tells me what I have to do/sacrifice/be now in order to get what I want then?

If not, see another financial planner! Or, do it yourself … if you know how the life that you want to live looks:

1. Pull out a scratch-pad and start to fill in this worksheet.

2. Use these sample budgets to help you

3. Don’t forget to account for inflation BEFORE retirement (i.e. double the amount of income you think you need for every 20 years between now and your intended retirements)

4. Multiply by 20 (to then allow for inflation AFTER retirement)

5. There, you don’t just have a ‘number’, you now have The Number

Now, you just have to figure how you’re going to get there 🙂

I wrote a post detailing a memo from the junior partner in a financial advisory firm to one of their more well-off clients; here is the slightly cynical follow e-mail from his boss to that same client:

To: Lee

Our junior partner sent you his rules of investing, Mine are much better:

1. Only buy stocks that will go up. The others are a waste of time.

2. Give your broker a lot of business. By trading in and out he will become your best friend.

3. Pay attention to Wall Street research. The people who produce it are intelligent, honest, and really care about you.

4. Read the papers daily and the listen to TV financial reporting. Do exactly what they tell you.

5. Be nice to your barber – he’ll always have the best stock tips.

Regards,

Bob.

The first couple of points are an obvious barb about trading stocks, and timing the market – although, with online trading accounts offering trades at less than $10 each the second point is less of an issue than the first.

I don’t buy ANY financial newsletters of research (I do get the Tycoon Report … hell, it’s free) or read the financial press, or watch much – if any – TV (for news of any kind). I just skim the headlines when I want to understand a market move that has already occurred.

I like my barber … but, he ain’t rich … ’nuff said 🙂

Of all the countries in the world, America is truly the land of opportunity. It’s just interesting to hear it come from an unusual source: Jerry Springer …

… watch no more than the first 4 minutes of this video to see how Jerry came from nothing to (as he calls it) the “ridiculously privileged life I live today because of my silly show”.

As it happens, this speech is very similar to his recent speech to the newest group of Law graduates at his alma mater – the Northwestern University School Of Law (just given on May 16, 2008)  – where he stood up to jeers and sat down to cheers (and, a standing ovation!); read his closing statements and you’ll see why:

It is perhaps inevitable that we are inclined to always be judging others. But let me share this observation. I am not superior to the people on my show, and you are not superior to the people you will represent. That is not an insult. It is merely an understanding derived from a life spent on the front lines of human interaction, be it in the arena of politics, law, journalism, or in the spotlight of the media. We are all alike. Some of us just dress better, or have more money – or perhaps we were born into better circumstances of parental upbringing, health, brains and luck.

On this great day, when we honor your achievement – which is considerable by any standard – we might also say thank you to God in full recognition that whatever we achieve in life is 99% a gift. After all, not one person in this hall had anything to do with the decision to be born, to whom we’d be born, in what era, in what country, with what health, with what mind. Indeed, if the brightest most successful person living in America today – no matter who you think that person is – if he or she had been born in Darfur, the chances are, he or she would be dead by the age of 5.

No, life is a gift, as is living in America. And I know that from personal experience. You see, I am not the first lawyer in my family. My dad’s brother was. His practice was cut short, as was his life – in Auschwitz. My grandparents, uncles, aunts, cousins, they met their end as well – Chelmo, Thereisenstadt, camp after camp. Hitler turning my family tree into a single vine – mom and dad, by the grace of God, surviving, enabling them to bring my sister and me ultimately to America.
Four tickets on the Queen Mary, January 1949, sailing into the New York harbor. In silence, all the ship’s passengers gathered on the top deck of this grand oceanliner as we passed by the majesty of the Statue of Liberty. My mom told me in later years (I was only 5 at the time) shivering in the cold, that I had asked her: “What are we looking at? What does the statue mean?” in the German she spoke, she replied: “Ein tach allas.” “One day, everything!”

She was right. In one generation, here in America, my family went from near total annihilation to this ridiculously privileged life I live today because of my silly show.

Indeed, in America, all things are possible. So on this day, as we celebrate and honor your achievement, may it be for you – as it was for me – “ein tach allas,” one day, everything.

I can relate to this on many levels (for instance I, too, have a ‘silly show‘) and always say that the difference between a country like (say) Australia and the United States is like opening a sandwich takeout restaurant:

In Australia (and most other countries on this planet) you find an empty shop on a corner location. You clean it out and wheel some second hand fridges and counter tops in. You hang a sign out the front, in vinyl lettering that reads “Joe’s Sandwiches … Fresh To Go”, and …

… work 60 hour work-weeks for what amounts to not much more than minimum wage, until you are too old or sick to continue.

In the United States you find an empty shop on a corner location. You clean it out and wheel some second hand fridges and counter tops in. You hang a sign out the front, in vinyl lettering that reads “Potbelly’s Sandwiches”, and …

… open up 1,000 more all over America … you never make a single sandwich yourself; why should you? After all, you’re now a self-made billionaire!

All things are indeed possible … even for you 🙂

Lee Eisenberg, in his strangely titled book “The Number” (strangely titled, because it actually has very little to do with calculating your Number and reads more like a rollicking yarn … if traveling around the country investigating the financial planning industry seems ‘rollicking’ to you) provides the following ‘memo’ as an example of good financial advice …

… surprisingly, it is good advice – mainly for those in their Making Money 301 ‘wealth preservation’ phase!

It reads like a memo from a junior member of a financial advisory firm to one of their reasonably well-heeled clients:

Dear [Your Name Here],

I wanted to take a moment to outline a few thoughts and ideas before our meeting Friday morning. Some of this may seem old and redundant, but I would like to present this in the context of of your upcoming asset allocation decisions.

1. Overdiversification – This is the single biggest mistake made in managing assets. Once you get beyond three or four funds, you might as well index the whole pool of your assets. If you have more that one bond fund and two or three equity funds you are not really doing much to increase your return expectations or diversification.

2. Value investing works better. Almost all great long-term investors are value investors. Growth investing in the public market works for moments in time but typically does not produce investment results that hold up over longer time periods (i.e. ten years).

3, Don’t be afraid of volatility. If you get your mix between stocks and bonds right, you can use volatility as an opportunity – especially if you are a net buyer of stocks. Your fixed income allocation should meet your cashflow needs and spending plans for the next five years in any environment. So, knowing that your lifestyle needs are met, you can operate as a long-term investor if you have a comfort level in your manager’s investment style. That way you don’t need to be concerned with volatility in the equity market in any given quarter or year.

4. Fees can kill you. In any given year an extra 1% in fees is no problem, but when you get into allocation of large amounts of money to fund low volatility products, arbitrage strategies, and other “alternative” asset class vehicles, you will be spending 2 – 4% of your expected return of 8 – 10% every year in order to achieve the “Holy Grail” of low volatility.

5. If you don’t believe in the fundamentals of any given investment, don’t invest in it. The quickest way to get into trouble is to be seduced by past returns. When you hit the first significant bump, you’ll pack up and get out – this is not a good prescription for long-term investment success.

6. Low turnover is key. Almost no one has made a lot of money engaging in high turnover strategies. It may work for a year or two but the ability to actively trade your way to wealth is all but impossible. When you incorporate the impact of short-term tax rates into the equation, the mountain you need to climb to achieve successful results gets a lot higher. I would be hard-pressed to ever buy a mutual fund with an annual turnover north of 50%. (I make this comment knowing that the average fund manager has turnover in excess of 85% a year, according to the latest studies).

I look forward to seeing you at 10.00 on Friday Morning.

Sincerely …

Over the next few weeks, I will try and dissect this advice for those of you in (or contemplating) Making Money 301 …

… for those of you still trying to make your money, heed the advice on overdiversification (better, yet, read my posts on the myth of diversification), the impact of fees (even 1% is too much!), and the benefits of Value Investing over Growth Investing.

Well, it didn’t really take very long, but my FIRST sales site is up and running … feel free to visit, and sign up to receive my 2nd eBook for FREE (don’t buy the 1st eBook mentioned in the ‘sales letter’ … it’s also available FREE to all of my readers, here).

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Let’s say that you don’t care about your Life’s Purpose – it’s an airy-fairy exercise not suited to you.

Fine.

Far be it for me to prove you wrong 🙂

… so here is what you are looking for: a ‘menu’ of Ideal Incomes, already served up for you … pick the one that you like and scan across to the corresponding Number.

This is also useful even if you did work on coming up with at least a reasonable facsimile of Your Life’s Purpose … you might be struggling to calculate the cost of living that future / ideal lifestyle on the worksheet that I provided, so this post will help you, too.

It comes from a book by Lee Eisenberg, appropriately called The Number, but which seems to have very little to do with calculating your Number and a lot to do with:

a. Why you need one (still not convinced that you need one even after all of my diatribe? Go get the book!)

b. Your Life’s Purpose – but, the closest he seems to get to helping you understand what that might be is when he quotes directly from George Kinder’s Big Three Questions.

However, Lee does recount a story of a guy who has no interest in understanding his Life’s Purpose, but does have a very clear idea of his Number and what sort of lifestyle it can support; the ‘mystery man’ produces the following table:

According to this table, I already live “kind of rich” to which I add the travel habits of the “rich” …

Otherwise, this is a remarkably sensible table!

However, the jump between “kind of rich” and “rich” is too large … and, I suspect that a lot of you will find that your dreams also put you somewhere between the two (as it has for us), in which case Michael Masterson’s more detailed discussion of the cost of various lifestyles – from his book Seven Years to Seven Figures – may help (but, read my posts as they correct various glaring errors that, in my humble opinion, Michael has made):

– The $100,000 A Year Lifestyle

– The $250,000 A Year Lifestyle

– The $550,000 A Year Lifestyle

Again, read my posts as I do not believe that these sufficiently take into account market returns (hence ‘safe withdrawal rates’) – even ignoring the current market meltdowns – or the true cost of high-income housing, etc. … so, only use these as a guide to help you with this exercise.