Book Review: Julie Jason's AARP Retirement Survival Guide

Julie Jason's book is entitled: "The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad".  It's a title done by committee.  Really it's a guide to avoiding the sharks swirling around you in retirement.  It's filled with hints of things to watch out for, with sections called "Julie's Don't-Be-Fooled Rules".   I liked her clear explanations and approved of her hints and warnings.  I think it did good coverage of the issues and clearly specified which issues she was NOT covering as beyond the scope of this book.  I appreciated that and approved of the scope she chose as wide-ranging enough for most people.

There was not enough about budgeting.  Budgeting skills are HUGE in retirement, and having a decent handle on your budget is the foundation of all the other pieces.  (How much annuity should you buy?  Depends on your budget needs.  Should you take that lump sum or a pension?  Depends on your budget needs.  Should you delay taking social security?  Yes, if you have assets to plug the budget gap until you're 70.  Should you get Medicare Part D?  Depends on your medical spending habits.  Budgets are HUGE and she did a very cursory version of this.  I preferred "Getting Started In A Financially Secure Retirement: Pre- and Post-Retirement Planning In a Time of Great Uncertainty" by Henry Hebeler for a more thorough treatment of budget issues including potential budget busters to watch out for.

My other quibble with Julie Jason's book is that her guide to finding an advisor would find only her.  She's a "Retirement Income Advisor". Huh?  Personally, I'm a CPA.  My clients come to me each year to discuss their finances in the context of paying taxes on their income.  I expand on that service to offer them advice on how to get a handle on their budgets, how to build net worth by managing debt and saving and investing, and keeping an eye on financial planning issues like saving for college or planning for retirement, disability or death.  I do not sell securities.  Many of my clients do their own investing and I guide them in asset allocation buying low cost index mutual funds or ETFs, although some of my clients also have a financial advisor who gets a fee for assets under management who might do budgeting and planning, I don't know.   Some do, some don't.  A few of my clients have brokers who just get paid on commission and never talk to my clients.  I advise my clients to save the money and just invest it themselves.  Some do, some don't.  (Store-front commission-based advisors are lacking in fiduciary responsibility, I've noticed.)

Most of my clients also have a lawyer to draw up wills and POAs and possibly estate planning documents like bypass trusts.  But a "retirement income advisor"?  Seriously.  I'm glad she has a niche clientele in her Stamford Connecticut practice.  But 99% of the readers of this book aren't going to find a "retirement income advisor".  Sheesh.  Ask the CPA or personal financial planner or lawyer you already USE these questions!

But I liked her writing style and I'd read other books by her.

Book Review: "All Your Worth" by Elizabeth Warren

I've heard wonderful things about Elizabeth Warren and I was intrigued by the concept of this personal financial husbandry book.  The title of the first books I read, "All Your Worth", made me cringe as it makes me think of a misspelled contraction.  But it's not a pronouncement or a discussion of what you are worth.  Instead, it is a suggestion that you might be better off if you built some net worth.

The basic breakdown of this book is that you should set up your personal financial situation so that your "must haves", non-discretionary stuff that you couldn't cut back on if your paycheck went away for some reason - should be no more than 50% of your income.  Savings and other things to build net worth should be 20% of your income.  And, voila, now you have 30% for fun money.  See, wasn't that easy?  Don't try to arrange your budget by cutting out the fun stuff, arrange it by cutting out the FIXED NECESSARY stuff.  Get a room-mate.  Drive an old car.  Don't send your kid to private pre-school.  Don't buy a house you can't afford on just one salary.

The premise here is that if you stay in these guidelines you won't have problems with debt or feeling deprived.  It's a workable budget.  I like the premise and have loosely followed it my entire life, although we did it slightly differently: I always saved 10%, not 20%, and we more or less set up our finances so that the fixed stuff was covered by my husband's regular salary and all the intermittent (and largely discretionary) stuff was covered by my intermittent income (combine with occasionally discretionary extra hours).

It's a nice idea.  I liked this book, although I felt a lot condescended to by the crooning voice.  (I listened to it as a book on tape as well as read the hard copy, depending on my location as I read/listened to it.)

Then I went on to read her "Two Income Trap".  It's more the research version that lead to her upbeat positively framed prescription of how to live your life in "All Your Worth".  The "two income trap" is the results of her in depth multi-year research project into why people declare bankruptcy.  What went wrong?  Why are the middle class in such awful shape? 

Her conclusions are that we raised the ante on what we wanted and expected when we had two available workers, and therefore went off and bought higher priced homes and more effective (and expensive) health insurance and paid through the nose for expensive education.  And at the end of the day we have less savings and less discretionary spending than ever because more of the expected income is dedicated towards these big three things and now we're more vulnerable because we need BOTH workers to be working and we've doubled the chances that one will be injured or die or be laid off in any given year.  At the same time we've lost the safety net of having a spare worker that can swing into action and/or provide necessary care-giving and home economics chores.  This is the main insight into this book and is an interesting concept worth pondering.

But she doesn't just illuminate, she pontificates.  Her solution is to suggest that women should stay home and live a reduced lifestyle because if something happens then they will have to live the reduced lifestyle anyway.

I boggle at this conclusion at many levels.  So, since there's a 1 in 7 chance of financial failure from this arrangement we should make it a 100% chance of failure by not engaging in it at all?   Does this make sense to anyone?  And where is the acknowledgement that we are actually spending our money on extra things we WANT?  Buying more effective health care, larger more comfortable houses and more specialized education are actually things we WANT!  Want bad enough to send the second spouse into the workforce to get!

And why must the WOMEN stay home?  We live in a world where men's skills and strengths are not as valued anymore, where the majority of the good jobs are more in line with women's skills and education.  Where in all of her points does she make the leap that suggests that stay-at-home spouse should be the women?  This really bugged me at a very deep level: it's not just the weird sexism, but also the total lack of grasp of the nature of the 21st century workforce and/or distribution of educational achievements.

A lot of the book is designed to push policy objectives, some of which make sense.  I found her to be fairly independent-minded politically - she said things that would piss off both Republicans and Democrats - but even though I largely agreed with her main points (regulate interest rates that banks can charge) I still found myself irked with the conclusion that people are stuck because of the system that leads them astray.  It's like blaming McDonald's for obesity.  Her refrain of "there oughta be a law" started to bug me.  (Perhaps, to be fair, it bugged me because of my own personal belief that our political system is completely incapable of effective solutions to any problem and you just waste time and energy by pursuing that.  I acknowledge that my cynicism isn't universally shared.)

I like her compassion.  I like her scholarship.  I like most of her common sense advice.  But in the end I find her solutions to be annoyingly flawed primarily because they ARE so close to the truth.  No, you should NOT pledge all your income to fixed expenses precisely BECAUSE stuff will come up that you didn't expect.  I think she would have done well to devote more attention to outlining for people the things that they should attempt to put in their budgets rather than just wave hands and say, "shit happens".  In my experience a whole lot of the shit that happens can be reasonably predicted: cars will need repairs, dogs will need vet visits, Christmas presents will probably be purchased again this year.  Intermittent expenses creep up on people and a decent budget accounts for them.  She just called for  50% for fixed, 20% for savings and 30% discretionary and done.  It has beauty in simplicity, but also stupidity in simplicity.

But, still, it's a reasonable concept and worth consideration.  I like rules of thumbs for people with thumbs, i.e., they do tend to work most of the time.

All in all, "All Your Worth" was a lot more useful than the "Two Income Trap".

Book Review: "Your Money & Your Brain"

"Your Money & Your Brain" explains just how stupid you really are  

I've heard this mentioned a couple of times and so, when I saw it on the shelves at the local library (what, you don't cruise the 332 section of the library just on spec?) I picked up Jason Zweig's "Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich."   I liked it.

I dislike the subtitle, though.  I bet there was a huge battle about it between the author and the publisher.  "I'm not telling them how it will make them rich!"  "You have to pretend to say that to sell the book!"  It's really not about how to make you rich.  It's how to try to keep you from being so stupid that you lose your money.  His basic premise is that human brains did not evolve to handle investment decisions and will almost always reflexively choose the wrong solution to every financial puzzle.  He wants you to fight these reflexes and use your REFLECTIVE brain, instead.  He points out common thought traps and some solutions for navigating around them.  This book is all about staring at human frailties and then dealing with them.   He starts out each chapter with a homey little anecdote: does bread always land butter side down?  How come?  And then he goes into the science of what ever he's talking about.  It kept my attention almost the entire way through.  Just when it started to drag a bit I discovered that the last quarter of the book are appendices.  (He and his publisher probably fought about *that*, too.)

The author is a journalist, not a scientist, and I think it's important to realize that pop science writing like this is probably about as accurate as Wishbone's version of Don Quixote.  But, speaking as someone who learned most of the opera she knows from an episode of Gilligan's Island, sometimes pop culture *is* the best lens through which to learn this stuff.  I thought this book was worth the read and his warnings were well worth heeding.

In brief, he wants you to stop and think.  If you like a stock at $x, why wouldn't you want to buy more when it goes on sale?  Instead, people tend to sell when a stock drops.  Don't do that.  Buy the company, not the stock.    He writes:

Take the global view.
Hope for the best, but expect the worst.
Investigate, then invest.
Never say always.
Know what you don't know.

The past is not prologue.
Weigh what they say.
If it sounds too good to be true, it probably is.
Costs are killers.
Eggs go splat.

Think twice, get it?

By the way, he thinks you should stick all your money in a Vanguard Target retirement fund and be done with it.   I'm inclined to agree.

Book Review: "Show Me the Money"

First, buy a stock right before it goes up...  

One of my clients passed along a book for me to read: "Show Me The Money: Covered Calls and Naked Puts for a Monthly Cash Income" by Ron Groenke.    It was all about the uses of covered calls and naked puts and how much money a few good stocks you have in your portfolio could make for you by selling these options to other people, essentially making money renting out the option to buy your stocks to people.  What a grand idea: ignore dividends and capital appreciation, just make money because you OWN the stocks.   I read it with some interest.

It goes like this:  first you use your superior stock picking skills (or buy his software) to pick good stocks that are about to go up.  You can tell which ones those are from their technical charts, they're the ones currently at their 52 week lows, among other criteria.

Then you sell options at a high premium, something like 10% of the stock's underlying value, knowing that it's likely to expire.  Apparently someone will take the other side of this trade because someone somewhere wants to pay high premiums for things that are likely to be worthless to them.  Which is interesting, because every time I've looked at this the premiums are so low that the commissions eat a significant portion of their value.   But, anyway, the way he tells it you just buy these great stocks and sell people the option to buy them from you for good money.

Then you sit back and let the money flow, putting on new covered calls every month or three on the same stocks as they keep expiring worthless, picking fruit from your money tree.  (Without, of course, the premium people are willing to pay being reduced.)

The book thoughtfully takes you through a gedanken exercise where some of your stock picks go bad.  After all, it happens to the best of people (although what could go wrong when you buy a stock at its 52 week low?  It's already low!  It must be about to make a sine wave shape!)  The author allows that maybe 15% of the time you could lose a little money.  He figures that you'll make some capital gains along the way when you have to produce a stock for an accepted call at prices above your cost, and that will more than offset any commissions you might have to pay on these calls so he discounts that in his calculation.

See, it can't go wrong!  o.O

As a tax accountant I truly hate the options markets.  My clients always lose money.  Always always lose money.  It's like the new Amway pyramids: someone somewhere made it work for a while and passed along a rumor that they got rich and it just sends droves of pawns into the market.  Oh, there'll be wins.  Short-term capital gains wins, that is.  In MA short-term capital gains are taxed at 12%, so someone in the Federal 25% bracket will pay 37% of their winnings to taxes.  But, of course, they don't have winnings over time, because options premiums are NOT priced irrationally.  So eventually they slink away with their losses, leaving survivor bias to carry the banner.  And they are big honking carryforward losses until they have no more portfolio left to generate any corresponding gains.  In MA you can only use capital losses against investment income, which of course there isn't any if you aren't bringing in any dividends or interest because your money is tied up in short-term stocks.  You never even USE those losses.  Sigh.

I can see *MAYBE* doing a naked put if I'm sort of maybe interested in buying a stock if it goes low and I'm too lazy to keep an eye on it myself.  But here's the thing: it's utter hubris to think that I can pick a stock.  I pick stocks just about the same way I picked horses at Churchill Downs: I look over their information using my own personal training (as a CPA with a MBA for financial statements on the one hand, and as the daughter of a man who raised and raced thoroughbreds on the other) and then I listen to my hunches and make my pick.  I am right just about the exact amount of time that random odds suggest I would be.  Maybe I'm fooling myself about my level of ability to evaluate, maybe I'm not.  The markets can stay irrational longer than I can stay solvent.

But I'm trying to understand and appreciate the wonders of options.  I really am.  But I just keep getting stuck on the initial premise: that you can look at history and it will tell you the future.  Yes, that works in some arenas.  But stock picking?  Really not.

Oh, and I hate it when my clients raise horses just as much as I hate it when they play the options markets.  Don't even get me started on the folly of the thoroughbred industry!

Three book reviews on investing

Pie and Pie Charts  

I'm reading up on retirement planning both because I'm trying to rationalize why I bought a vacation property (it's part of my retirement portfolio!  Really!) and because I'm supposed to be making a living counseling people on financial matters.  (Perhaps I should be quiet about the cottage.)

I've recently read three books that say the same thing in vastly different ways.

The first is "The New Coffee House Investor: How to Build Wealth, Ignore Wall Street, And Get On With Your Life" by Bill Schultheis.  To say that this book is fluffy is putting it mildly.  He's supposed to be inspirational as he gives you his simple message.  Hmmm.  I mostly just noticed a simple message.  Very simple message.  Really really really simple message.  "Save some money and put the stock portion of your savings in index funds."  I wish I could say that the 192 page book expands on that somewhat, but it really doesn't.  There are two pages in which he says, "Hmmm, you should probably get some bonds, too."  And there's one page where he says, "You might want to add up what you're spending now."  But then he talks about his golf game and his mountain climbing and how much he likes pumpkin pie and to sit with his friends and drink coffee in the coffeehouse.  His credential for writing this book is similar to Suze Orman's: he was a failed stockbroker who made a bunch of mistakes in his life and wants to tell you about them, possibly to help him feel less dumb.  I guess I could recommend him for anyone who would aspire to read Suze Orman but is put off by her aggressively X chromosomes.  Personally, I'm keeping it on my shelves because I like the pumpkin pie recipe he puts in it.


The middle version of this theme is "The Investor's Manifesto: Preparing for Prosperity, Armageddon and Everything in Between" by William J. Bernstein.  It's not too light and not too heavy, just right for most people.  It's a pro-indexing book that talks more about asset allocation and talks about the value of your human capital in your asset allocation, the annuity value of your social security and the value of delaying taking it. and about the burn rate you choose.

His idea of Armageddon is decidedly different than mine, though: he appears to mean the Dow might drop 30%.  He says, "Gold and gold stocks have also become an asset class du jour, with high recent returns and a good deal of publicity.  Unless you are going on the lam, buying gold bullion itself, gold coins, or an ETF that invests in them is rearely a good idea.  The long-term, real return of the yellow metal itself is zero - an ounce of it bought a fine men's suit in Shakespear's time, and still does today."  He says that like it's a bad thing.  I wonder how much a men's suit costs in Confederate Dollars?

The seriously heavy book is "Getting Started in a Financially Secure Retirement: Pre- and Post-Retirement Planning In a Time of Great Uncertainty" by Henry Hebeler.  Apparently Hebeler hung out in the coffeehouse with Bill Schultheis and got frustrated and wrote the book Bill Schultheis couldn't.  Oddly, the forward to this book is by Bill Schultheis and his two page forward has more actual content than Schultheis put in his entire 192 page book mentioned above.

The Hebeler book is really wonkish.  It keeps throwing in worksheets and annuity tables and references to websites and his own online worksheets.  It's *GREAT*.  This is the book I was waiting for, the one written by one of the smartest people I'll ever meet who just cast his attention to this subject when he got old enough to have it be his top priority.  (He has three degrees from MIT and spent his career being a rocket scientist and economic advisor on citizen advisory counsels.)

The only down side to this book is the sternness of his lecture.  He is really adamant that you aren't saving enough.  He doesn't know how much that is, but save more!  Much more!  Doom is coming!  No matter how much you plan it will NOT be enough, so step to it and do more!  Now!  It's a bit off-putting, really, except it comes from someone who actually *is* retired and reporting from the trenches.  He reports on the unexpected things in realistic ways. 

For example, one of the main threats to people's retirements is turning out to be their forty year old children who are out of work and asking for hand-outs from their "rich" parents who are only "rich" because they saved up so they could stop working for the next 30 years and probably haven't saved near enough.   Oh, and real estate taxes, utility bills and travel expenses to go see family are likely to be a lot more than you expect, too.  Not to mention medical expenses.  Which he does mention.  This man mentions everything.  How's your roof, he asks?  Got a replacement fund going for those 20 year shingles?

I kind of love Henry Hebeler.  I'm going to spend a lot more time with his website and then use this to teach my own clients.  I just have to figure out how to make the message sound a bit more fun, to inspire people to do this rather than drive them to it out of fear. 

I've also got the Boglehead guides I'm picking my way through chapter by chapter.  I like that about them: they are a series of articles that are well-written and well-edited on subjects I want to read on.  I have a couple of books by Jack Bogle but I find him annoying to read.  I much prefer the works of his acolytes.  Honestly, I wouldn't need to buy the books if I had an iPad and could just browse the webforums.  But I still read books.  Which, by the way, is why I get to make money teaching people this stuff.

Book Review: Ernst & Young's Personal Financial Planning Guide

The index has neither an entry for "inflation" nor "deflation".

I could say more, but that about sums it up.

Book Review: "Parlay Your IRA into a Family Fortune" by Ed Slott

I've been having a mid-life crisis of sorts regarding the value of tax-deferred savings.  I decided to go back and reread the "conventional" wisdom before I disrespect it in front of my clients.

Ed Slott is one of the foremost experts on IRAs in the country.  He knows every single nuance of how to milk an IRA to the absolute tip top tax advantage possible.  He speaks from the same perspective as I do as a CPA tax accountant, except he writes for Money Magazine and the Wall Street Journal and I write for, uh, you.

I have to admit, I learned a thing or two that I either never knew or forgot about the nuances of inheriting IRAs.  I'm glad I read this book as it is quite possible that I would be better able to advise clients regarding inherited IRAs after reading this.

My main problem with this book was that he lives in a bizarre world totally unlike mine.  In his world people have millions of dollars in their IRAs and the main problem they have is how to keep from having to take any of their money out of there so it continues to defer taxes.  In his world elderly parents die leaving their untouched retirement savings instead of living into their 90's in an $100K/year nursing home.   In his world IRAs make 8% on average after inflation every year!  (I want to visit that world!!!)

My clients almost never come to me to say, "My Mom left me $25K in an IRA, how should I best stretch that so that it grows tax deferred as long as possible?"  Instead, they come to me at tax time and say, "Oh, and I got this weird piece of paper I don't know what to do with from when my Mom died and I inherited some money from her." I try to teach them to call me first, but usually I lose any chance to fix it before they break it.

There are some occasions when converting an IRA to a beneficiary IRA and taking distributions over the lifetime of the beneficiary is a good plan.  I've got exactly one non-spousal person doing that right now out of 400 clients.   What I'm telling you is that it is a RARE problem in my world.

This book assumes as a basic premise of all these calculations that you do not actually need any of this money for any reason at all during your lifetime or even your children's lifetimes, or even... uh... ANYONE's lifetimes.  The whole point of the IRAs in this book is to defer the taxes for some unknown moment.  He shows chart after chart detailing the miracle of tax-deferred compound interest.  It really is a thing of beauty... if you don't take out the money.

In my world the moment actually DOES come when people need to access the money in their IRAs, and it almost always turns out to be paid at a higher tax rate than they have ever paid in their lives.   Traditional IRAs are a sweet kiss of a tax deduction when you're earning money, but they slap you harshly when you go to withdraw it under most real life circumstances.  I spend my time trying to convince people to STOP deferring taxes in years when they're in low brackets: convert to a Roth, withdraw it and buy tangibles, whatever: if you're in a 0% or 10% or even a 15% bracket now, what are you waiting for?

This book did not discuss what happens to you when you withdraw $100K from your IRA to buy into an assisted living center, how it makes your medicare be surcharged for being a "high earner" and how taxes phase in on your social security income or how it pushes your income into a higher bracket than you've ever been in during your lifetime.

Nor did this book discuss what happens when your only savings are in tax-deferred accounts and the inevitable happens and you need the money - because it is de facto your emergency account if that's the only place you have savings - and you end up being taxed at a higher bracket than ever before PLUS a 10% penalty.

Nor did this book discuss what happens when you put your money in a mutual fund with a 2% annual expense ratio and hidden fees of $2,000/year get siphoned off your income from your $100K nest egg.  Or what happens when you put it in a CD making 2% when inflation is 3%.

In fact, this book did not discuss in the slightest bit the effective tax rate after inflation decreases the buying power of your nest egg and yet you have to pay taxes on the nominal value, leaving you with less actual buying power than ever. 

Instead, Ed Slott works for the benefit of the governmentally-incentivized mutual fund industrv bonanza that is the modern IRA culture.

I'm not sad I read this book.  It was a good overview of IRA laws.  But it did nothing for helping me figure out how to plan for retirement.  What it did do was to remind me to go make sure my beneficiaries were updated and fully filled out on each of our retirement accounts.  That was nice.   If you have an IRA you should do this.  That's a good tip.

Here's another: don't buy this book unless you're deeply concerned with the burdens of dynastic wealth.  But if you happen to be sitting on IRA money you don't need, and/or you just inherited one you don't plan on using right away, it's worth taking out of the library.