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    Shifei Chung
    Should a Financial Literacy Course be required in the...
    ELS session posted August 5, 2010 by Shifei Chung, last edited May 21, 2012 
    5092 Views, 42 Comments
    title:
    Should a Financial Literacy Course be required in the General Education Program for All College Students?
    names(s), affiliation(s):
    Shifei Chung (Rowan University) & Ramesh Narasimhan (Montclair State University)
    date:
    August 3, 2010 6:00pm - 7:30pm

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    • Robert E Jensen

      Why a $1 million retirement nest egg just isn't enough unless a nearby soup kitchen is not available
      "For Retirees, a Million-Dollar Illusion," by Jeff Sommer, The New York Times, June 8, 2013 --- Click Here
      http://www.nytimes.com/2013/06/09/your-money/why-many-retirees-could-outlive-a-1-million-nest-egg.html?ref=business&_r=1&pagewanted=all&

      In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment or come remotely close to paying the average salary of an N.B.A. basketball player.

      Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.

      But in many ways, it’s not.

      Inflation isn’t the only thing that’s whittled down the $1 million. The topsy-turvy world of today’s financial markets — particularly, the still-ultralow interest rates in the bond market — is upending what many people thought they understood about how to pay for life after work.

      “We’re facing a crisis right now, and it’s going to get worse,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Most people haven’t saved nearly enough, not even people who have put away $1 million.”

      For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

      Suddenly, that risk-free bond portfolio is looking risky. “The probabilities are remarkably grim for retirees who insist on holding only bonds in the belief that they are safe,” says Seth J. Masters, the chief investment officer of Bernstein Global Wealth Management, a Manhattan-based firm, which ran these projections for Sunday Business. “Because we live in this world we tend to think of it as ‘normal,’ but from the standpoint of financial market history, it’s not normal at all,” Mr. Masters said. “And that’s very clear when you look at fixed-income returns.”

      Several rounds of intervention by the Federal Reserve and other central banks, aimed at stimulating a moribund economy, have helped to suppress rates, and so has low inflation. Low rates have led to cheaper mortgages and credit cards, helping to balance family budgets.

      But for savers, low rates have been a trial. The fundamental problem is that benchmark Treasury yields have been well below 4 percent since early in the financial crisis. That creates brutal math: if your portfolio’s income is below 4 percent, you can’t withdraw 4 percent annually, and add inflation adjustments, without depleting that portfolio over time.

      And with rising life expectancies, many people will have a lot of time: the average 65-year-old woman today can be expected to live to 86, a man to 84. One out of 10 people who are 65 today will live past 95, according to projections from the Social Security Administration.

      “If you’re invested only in bonds and you’re withdrawing 4 percent, plus inflation, your portfolio will decline,” said Maria A. Bruno, senior investment analyst at Vanguard. “That’s why we recommend that most people hold some equities. And why it’s important to be flexible.” In some years, investors may need to withdraw less than 4 percent, she said, and in some years they can take more.

      Clearly, such flexibility depends on individual circumstances. Billionaires can afford to be very flexible: just 2 percent of a $1 billion portfolio is still $20 million. With economizing, even a big spender should be able to scrape by on that. But $20,000 — the cash flow from a $1 million portfolio at 2 percent — won’t take you very far in the United States today.

      And if you’re not close to being a millionaire — if you’re starting, say, with $10,000 in financial assets — you’ve got very little flexibility indeed. Yet $10,890 is the median financial net worth of an American household today, according to calculations by Edward N. Wolff, an economics professor at New York University. (He bases this estimate on 2010 Federal Reserve data, which he has updated for Sunday Business according to changes in relevant market indexes.)

      A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent. Yet even such families may have difficulty maintaining their standard of living in retirement.

      “The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”

      Professor Munnell said that in addition to relying on Social Security, which she called “absolutely crucial, even for people with $1 million,” other options include saving more, spending less, working longer and tapping home equity for living expenses. “There aren’t that many levers we can use,” she said. “We have to consider them all.”

      THE bond market has always been a forbidding place for outsiders, but making some sense of it is important for people who rely on bond income.

      Low bond yields have been a nightmare for many investors, but that’s not the only issue. Today’s market rates aren’t stable. Steve Huber, portfolio manager at T. Rowe Price, said, “Current yields are an anomaly when you consider where rates have been over the last decade or more.”

      Rates are expected to rise. While that will eventually mean more income for bond buyers, it will create a host of problems. Already, the market has been rattled by speculation that after years of big bond-buying, the Fed may soon begin to taper its appetite. In May, a half-point climb in the yield of 10-year Treasury notes produced the biggest monthly bond market losses in nine years. (Yields and prices move in opposite directions.) Yet yields remain extraordinarily low on a historical basis. The yield on the benchmark 10-year Treasury note is just under 2.2 percent, compared with more than 6.5 percent, on average, since 1962, according to quarterly Bloomberg data.

      And bond investing is likely to remain challenging for years to come. Investors may face a double-whammy — low yields now and the prospect of significant losses as yields rise. On Friday, after the Labor Department reported that the unemployment rate edged up to 7.6 percent from 7.5 percent, yields rose further, amid uncertainty about the Fed’s intentions.

      Despite this market instability, bonds tend to be the investment of choice as people retire, because they throw off steady income. But as the projections from Bernstein Global Wealth Management suggest, over-reliance on bonds leads to financial quandaries.

      These projections, based on proprietary market and economic forecasts and portfolio analyses, as well as on standard actuarial and tax data, estimate future probabilities for investors. That’s a quixotic task at best, intended to illustrate possible outcomes rather than to provide precise forecasts, said Mr. Masters at Bernstein.

      Still, they are worrisome. Consider again the 65-year-old couple who are starting to draw down $1 million in savings this year: if they withdrew 3 percent, or $30,000, a year, rather than that standard rate of 4 percent, inflation-adjusted, there is still a one-in-three chance that they will outlive their money, under current market conditions.

      There are ways to improve these outcomes, but they have their own hazards. Adding stocks to a portfolio is an obvious counterbalance. And there is now a broad consensus among asset managers and academics that stocks have an unusually high likelihood of outperforming bonds over the next decade. That was the finding of a recent study by two economists at the Federal Reserve Bank of New York.

      The Bernstein projections concur that adding stocks to a portfolio reduces the risk of outliving your savings. But it also increases the risk of big losses.

      Continued in article

      This is another reason why financial literacy should be a general education requirement in every college ---
      http://www.trinity.edu/rjensen/HigherEdControversies.htm#FinancialLiteracy

      Bob Jensen's personal finance helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      "The Truth About Paying Down Your Mortgage Early," Business Insider, June 21, 2013 ---
      http://www.businessinsider.com/paying-off-mortgage-with-leftover-money-2013-6

      Jensen Comment
      Much depends on what your intend to do with the funds that you would otherwise use to pay down part or all of your mortgage. If it all goes to wine, women, and casino gambling then pay down at least part of your mortgage. If it goes to buy gold coins then pay down your mortgage (I'm against buy gold coins in any circumstances since the transactions costs on resale are so high).  If it goes for home improvements the answer is uncertain and depends upon your particular real estate market and how much those improvements add to the monetary and personal value of your home.

      Of course your particular income, savings, and tax situation trumps almost everything.

      I have an enormous refinanced mortgage that will not be paid off until I'm nearly 100 years of age. My strategy is to carry a jumbo mortgage for tax purposes and invest in an insured tax-exempt fund where the after-tax returns of my annual tax-exempt cash flow exceed the after-tax cash outflow of my mortgage costs. Of course this is not a good strategy for everyone because there are risks in tax-exempt fund values, and tax-exempt bonds are not good inflation hedges. Old guys like me don't worry so much about inflation. Young investors should worry about inflation.

      What I'm saying is that your outlook on investments and life change with the seasons of your life. When I was young I always purchased the highest price home with the biggest mortgage that I could possibly afford. When on the faculty at the University of Maine in the 1970s  I had a big and beautiful house in town plus a cottage on 12 acres of ocean front. In those days real estate values just kept going up and up and up.

      Two things have changed in my life. One is that I'm no longer young with worries about inflation and home real estate values. My children will inherit enough to a point that I'm not worried about inflation or the value of my home over the next 20 years --- Ka Sara Sara!

      The other thing that has changed in my lifetime is the real estate market. Up in the mountains where I now live expensive property is just not selling. The market is also limited for other types of property since northern New England is in an economic and population growth slump. Also the market for second (vacation) homes is changing --- in part due to higher risk of losing money on these investments. I sold an Iowa farm a few years ago. This is a totally different type of investment where values have been rising in large measure because of the corn ethanol disaster for consumers. Today, however, I think Iowa farm land is a better investment for farmers who actually drive the tractors on Iowa farm land relative to far away landlords with no intent to farm the land themselves. Having said that, farm land is a pretty good long-term inflation hedge for investors not needing much interim cash flow. At the moment Iowa farm land may be too high priced. Who really knows? Nobody!

      My point is that both your economic and personal situation changes with seasons of life and states of the economy and tax reforms that might finally get enacted. Advice is cheap and possibly misleading. It's best to study your particular situation to a point where you can advise yourself.

      Bob Jensen's personal finance helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      Controversy and Scandal Surrounding John Hancock and the Compounding of Interest
      "Our signature 1776 revolutionary:  John Hancock's role as treasurer left an uneasy Harvard," Harvard Gazette, July 2, 2013 ---
      http://news.harvard.edu/gazette/story/2013/06/our-signature-1776-revolutionary/

      Jensen Comment
      To this day, many people in the USA do not understand the difference between simple interest versus annual compounding versus continuous compounding ---
      http://en.wikipedia.org/wiki/Compound_Interest
      Except for very long holding periods, continuous compounding does not add all that much to annual compounding. But compounding adds a huge amount relative to simple interest.

      For example, if the Lenape Indians in 1626 had invested the $24 they received for Manhattan at 6% compounded annually they could perhaps buy the island back in 2013 for the accumulated savings of  $149,135,522,178.18.  In my first course in economics this was a footnote in the famous textbook by Paul Samuelson (with slightly different numbers). If this was indexed over time for inflation and exempt from taxation the Lenape's could perhaps buy the entire State of New York in 2013.

      It's no wonder that in 1793 Harvard University badly wanted $529 accumulated compound interest owed by the John Hancock estate.

      Bob Jensen's personal finance helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      Accounting for Non-Accountants
      "How can finance professionals help their non-financial colleagues understand corporate financial statements that land on their desks?" by Manuel Sicre, Business Finance, August 12, 2013 ---
      http://businessfinancemag.com/tax-amp-accounting/accounting-non-accountants

      Bob Jensen's threads on financial literacy ---
      http://www.trinity.edu/rjensen/HigherEdControversies.htm#FinancialLiteracy

      Bob Jensen's threads on Economics, Anthropology, Social Sciences, and Philosophy tutorials are at
      http://www.trinity.edu/rjensen/Bookbob2.htm#Social

    • Robert E Jensen

      "Wallet.AI Aims to Serve Up Location-Based Financial Advice:  An app called Wallet.AI wants to put a financial advisor in your pocket," by Rachel Metz, MIT's Technology Review, September 23, 2013 --- Click Here
      http://www.technologyreview.com/news/519346/walletai-aims-to-serve-up-location-based-financial-advice/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130924

      Bob Jensen's personal finance helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      21 Scams Used By Devious Car Dealers — And How To Avoid Them ---
      http://www.businessinsider.com/how-to-avoid-21-car-dealer-scams-tricks-2013-9

      Jensen Comment
      When I was teaching the mathematics of finance one of my favorite illustrations was not mentioned in the above "scams." Scam 22 should be understating the annual percentage rate (APR) of a car financing contract. My bottom line advice to my students is to never, never indicate that the purchase will be anything other than a cash purchase until the very last moment before signing the purchase contract.

      Presumably a buyer is shrewd enough to have negotiated a rock-bottom cash price. For new cars this is easy since there are various Web sites for comparing new car purchases. It's bit more difficult for used cars since every used car is unique.

      "For Those Who Need Help Picking a Car, There Is CarZen," by Erick Schonfeld, The Washington Post, October 19, 2008 --- http://www.washingtonpost.com/wp-dyn/content/article/2008/10/20/AR2008102000013.html?wpisrc=newsletter&wpisrc=newsletter

      Are you compatible with your car? A new site set to launch in a few days called Carzen (http://new.carzen.com/) aims to help you find the car that is perfect for you. The main feature of the site is a car consulting tool that asks you basic questions about the qualities you are looking for in a car (price, size, fuel economy, reliability) and then spits back a list with the best matches

      CarZen is extremely detailed. You can narrow your search by brand, options (sunroof, power seats), cargo capacity, safety, or performance characteristics. Looking for a car with a high baby-seat score or on ethat is particularly easy to park in tight city spots? No problem. Once you finish answering the questions, which at times seem more like a personality test, the site generates a list of cars that can be sorted by best match, price, miles per gallon, or brand.

      If you are looking for a new car and don't already know what you want, it is a good way to generate an initial list. You can drill down to get more details for each car. There is even a button to get a price quote, although that doesn't seem to be working at the moment. (Nevertheless, the business model is to create a trusted research tool for car buyers and generate lead-generation fees). The site is still in private beta, but you can check it out by clicking on the "learn more" button in the widget below and then clicking through to the site.

      Jensen Comment
      There is also a page entitled "Advice" for advice on such things as lease vs. buy --- http://www.carzen.com/advice

      After negotiating the rock-bottom cash price is the time to then ask about financing alternatives. Devious dealers who report low APR financing rates often do so on the basis of a car price higher than the rock-bottom cash price. Shrewd car buyers will whip out a financial calculator, tablet computer, or laptop and then verify the true annual percentage rate of the car dealer's financial deal.

      Example calculations using Excel are provided in my EarlBob Car Salesman file at
      www.cs.trinity.edu/~rjensen/Excel/FraudEarlBob.xls 

    • Robert E Jensen

      "How to Choose a Charity Wisely," by John F. Wasik, The New York Times, November 7, 2013 ---
      http://www.nytimes.com/2013/11/08/giving/how-to-choose-a-charity-wisely.html?ref=giving&pagewanted=all&_r=0

      DONATING to charities this time of year used to be relatively efficient and painless. After watching the Macy’s Thanksgiving Day Parade, you plunked some money into a Salvation Army bucket, wrote some checks, contributed some household items and were done.

      Yet with charities increasingly involved in awareness campaigns, complex networks of cause marketing and often exorbitant overhead, donating to the most effective charity has never been more challenging.

      If you are a discriminating giver, you will need a set of guidelines that can tell you if your donation will mostly be spent on a charity’s mission and not peripheral activities. These days you have to use your head far more than your heart to see that your charitable dollars are well spent on causes you care about.

      There are services and strategies that you can use to make an informed decision. Most of them can help you determine if your dollars will reach the charity’s “mission” — and whether a nonprofit organization is effective in what it is striving to do.

      Charities are already witnessing greater selectivity among donors, probably driven by the pinch of a sluggish economy. According to The Chronicle of Philanthropy, a trade newspaper for the nonprofit sector, donations to the top 400 fund-raising charities are slowing this year after gaining 4 percent in 2012. Last year, the top nonprofits took in about $81 billion.

      Although such things are hard to measure, it is possible that donors have become more sophisticated in their giving as useful information on charities has become more detailed. Yet it is easy to get distracted by ubiquitous causes that blanket every corner of society. Herewith, a guide to navigating the thicket.

      The Major Services

      One of the first stops in searching for charities is GuideStar, which contains records from 1.8 million nonprofits registered with the Internal Revenue Service.

      The free component of the GuideStar website provides access to each organization’s Form 990, the basic I.R.S. filing document for nonprofits. That is useful on the front end if you want basic information on a charity’s income, spending, mission and executive salaries.

      As with the other services, you can also pay for “premium” services from GuideStar that provide more financial analysis and access to a nonprofit’s contractors. This would help if you wanted to perform detailed comparisons of charities or to explore their financial ratios or executive compensation in greater depth.

      What GuideStar does not do is give a qualified rating of a charity. It tries to remain neutral and “is not a charity evaluator,” says Lindsay J. K. Nichols, a spokeswoman. For more intensive evaluations, you need to go to the BBB Wise Giving Alliance or Charity Navigator.

      The BBB Wise Giving Alliance, affiliated with the Council of Better Business Bureaus, has free reviews of 1,300 national charities; local BBBs have evaluations on an additional 10,000. The group applies 20 “accountability” standards — governance, oversight, effectiveness and the like — once every two years at no charge to the charities, but it does not explicitly rate them using a star or letter system.

      The alliance will specify if a charity does not meet BBB standards or “did not disclose the requested information.” About 40 percent of the charities evaluated meet all 20 benchmarks; ones that do are designated a “BBB Accredited Charity.”

      Organizations accredited by the alliance can then pay a sliding-scale fee based on their size to obtain a license to use the BBB Charity Seal on websites and fund-raising material. About 60 percent of those qualifying elect to pay the fee for the seal.

      Like GuideStar and Charity Navigator, the alliance cautions against paying too much attention to the percentage spent on nonprogram expenses, also known as the “overhead ratio.”

      The alliance’s approach appears to be more rigorous than the other two services’, although its findings are not compiled into an overall rating. Organizations are deemed “accredited” (met standards), “standards not met,” “unable to verify,” “did not disclose” and “review in progress.”

      Still, the group’s focus on audited financial statements and accountability — it also publishes in-depth newsletter articles on the subject — is a pragmatic way to view a charity’s operations.

      Art Taylor, the alliance’s president, said the group “sees where the charity is at on our 20 standards, which goes to the heart of how a charity functions.”

      To customize a search and get charity-specific ratings, Charity Navigator, which evaluates about 7,000 nonprofits, has an easy-to-use interface to find charities that match your interests.

      Focusing on financial health, accountability and transparency, Charity Navigator applies an analysis to each of its charities to come up with its star ratings (with four stars as the highest rank). It examines federal Form 990s to see how much of a charity’s income goes toward programs and what percentage is spent on administration and fund-raising. Of the three major services, Charity Navigator is the easiest to use.

      Generally, a good benchmark for a worthwhile charity is having at least 75 percent of income spent on programs, or the nonprofit’s mission, according to Sandra Miniutti, a spokeswoman for Charity Navigator.

      Aside from vetting a charity’s financials, Ms. Miniutti suggests, donors should “understand the charity’s mission — pick just a few, do your research and stick with them over time.”

      Getting Granular

      Want to dig deeper and go beyond the charity information services? You can use them to find basic information on revenue, fund-raising and spending, but you will need to go several layers deeper if you want additional scrutiny. Here are some major issues to consider:

      Have you compared the charity’s Form 990 with its annual report and audited financial statements?

      The 990 can often be opaque and may not tell you particulars on an organization’s specific programs. You may need an accountant or financial adviser acquainted with nonprofit accounting to review these documents; the audited financials contain much more detail.

      Does the charity practice “joint cost allocation?”

      This is accounting jargon for lumping in fund-raising or solicitation with the charity’s program expenses. According to the BBB Wise Giving Alliance, more than 20 percent of nationally solicited charities it reviews employ this practice, which could muddy the waters in gauging how much is really being spent on the charity’s mission. To get a clearer picture, you will need to identify the charity’s primary purpose. If it is mainly a grass-roots lobbying or public awareness organization (which means you may not be able to deduct your donation), then joint cost allocation may make sense. If it devotes its efforts to financing research, then the allocation may be a red flag.

      How does the charity evaluate its effectiveness?

      You should be able to see some examples in its annual reports. Also, ask the charity directly about its successes. Does the organization use independent auditors to benchmark its performance? Where has it failed? A transparent charity should provide this information along with progress reports.

      Eric Friedman, author of “Reinventing Philanthropy” (Potomac Books, 2013), says charities that cannot gauge their effectiveness through benchmarks “may have effective programs, but it’s hard for donors to understand how effective or compare them to other options. I’ve stopped focusing on financial measures, which can be misleading.”

      Is the mission supported by academic research?

      Organizations may be funding ineffective ways of addressing their mission. A boutique charity information service like GiveWell recommends only three organizations a year out of the hundreds it has considered since its founding in 2007. GiveWell performs extensive research to show that recommended charities are “proven, cost-effective, scalable and transparent,” said Alexander Berger, its senior research analyst. “Because we’re aiming to find the best giving opportunities possible — not to rate every charity — we don’t research charities that are unlikely to excel on our criteria.”

      Watch out for red flags.

      Because nonprofit accounting and reporting can be incomplete, suspicious activity can be hidden. Daniel Borochoff, president of CharityWatch, formerly known as the American Institute of Philanthropy, rates 600 charities with a grading system from A to F — and takes a watchdog approach that tries to expose nonprofit abuses. “There’s a lot of sneaky reporting going on,” Mr. Borochoff said. He said chicanery could often be found in “gifts in kind,” where donations may be overvalued, or in organizations with emotional appeals — some charities involving animals, children, first responders and veterans. They may be little more than aggressive fund-raising operations that do little for their missions, or funds that are diverted to officers or other purposes.

      Do you need comprehensive advice?

      If you are also concerned about tax or estate planning considerations, it would make sense to work with a wealth manager, estate-planning lawyer or certified financial planner. Many advisers also have insights into nonprofit accounting that can help you vet a charity on a deeper level. Robert J. DiQuollo, chief executive of Brinton Eaton Wealth Advisors in Madison, N.J., said he could scrutinize nonprofit line items like executive salaries and program-related expenses. “We always approach the charity directly,” Mr. DiQuollo said, “to make sure that the charity is spending money on what the donor wants.”

      Is the charity sitting on too much cash?

      You need to know if the charity is putting its cash to good use or reserving it for some other purpose. According to Wise Giving Alliance standards, “the charity’s unrestricted net assets available for use should not be more than three times the size of the past year’s expenses or three times the size of the current year’s budget, whichever is higher.” This is something you may need an experienced accountant to evaluate. The bottom line: As a donor, you need to know if your money will be put to work immediately or sidelined.

      Due Diligence

      ¶ What can you do with these ratings and reams of financial information? Although you can become immersed in nonprofit accounting arcana and employ all of the charity research services, your efforts may still not tell you if a charity is worthwhile.

      Continued in article

      Bob Jensen's personal finance helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      The Financially Literate
      America's Wealth Is Staggeringly Concentrated In The Northeast Corridor ---
      http://www.businessinsider.com/americas-wealth-is-staggeringly-concentrated-in-the-northeast-corridor-maps-2013-12

      The Financial Illiterate
      20 Lottery Winners Who Blew It All ---
      http://www.businessinsider.com/lottery-winners-who-lost-everything-2013-12

      Bob Jensen's threads on financial literacy ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      Alliance for Financial Inclusion (financial literacy initiative funded by Bill and Melinda Gates) ---  http://www.afi-global.org/
       Also see Bob Jensen's related helpers at http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      Teaching Case
      From The Wall Street Journal Accounting Weekly Review on January 10, 2014

      Delaying IRA Contributions Can Be Costly
      by: Jonnelle Marte
      Jan 05, 2014
      Click here to view the full article on WSJ.com
       

      TOPICS: Individual Income Taxation, Individual Taxation, IRA Contributions, IRAs

      SUMMARY: Taxpayers can contribute up to $5,500 each year to individual retirement accounts--$6,500 for those over 50. "An analysis of traditional and Roth IRA contributions made by Vanguard Group customers for the 2007 through 2012 tax years showed that, on average, 41% of the dollars contributed to IRAs for any given tax year are invested between January and April of the following year. Half of those dollars are contributed in the first half of April...and only 10% of dollars are contributed in January of the corresponding tax year...." A time value of money comparison in the article shows that this habit-which most advisers think stems from investor laziness-can cost a substantial difference in final savings available at retirement

      CLASSROOM APPLICATION: The article may be used in a class on personal taxes or when covering topics in the time value of money.

      QUESTIONS: 
      1. (Advanced) What is an individual retirement account? A Roth IRA?

      2. (Advanced) According to tax law, when are taxpayers allowed to make IRA deductions?

      3. (Introductory) According to findings by Vangauard Group from analyzing their customer deposits to IRA accounts, when do most taxpayers make IRA contributions?
       

      Reviewed By: Judy Beckman, University of Rhode Island"

      "Delaying IRA Contributions Can Be Costly," by Jonnelle Marte, The Wall Street Journal, January 5, 2014 ---
      http://online.wsj.com/news/articles/SB10001424052702304477704579256610849790176?mod=djem_jiewr_AC_domainid

      It's a new year. And that means it's time for investors to do what they could have done last year—but didn't.

      Namely: make contributions to their 2013 individual retirement accounts. Indeed, an analysis of traditional and Roth IRA contributions made by Vanguard Group customers for the 2007 through 2012 tax years showed that, on average, 41% of the dollars contributed to IRAs for any given tax year are invested between January and April of the following year. Half of those dollars are contributed in the first half of April—the final weeks when contributions for the previous year can be made.

      The study found only 10% of dollars are contributed in January of the corresponding tax year, the earliest month contributions can be made. "We are trying to encourage people to change their way of thinking and think about it sooner," says Maria Bruno, a senior investment analyst with Vanguard Investment Strategy Group. Valid Excuse?

      There are legitimate reasons that big dollars flow into IRAs near the tax-filing deadline. At that point, taxpayers typically know whether their income for the prior year was low enough to qualify for deductible contributions, and can see by exactly how much a contribution would lower their tax bill.

      But some advisers say the habit is one of the ultimate examples of investor laziness, nearly on par with not maxing out the company match for 401(k) contributions or not seeking retirement advice until after retirement.

      "As humans we naturally procrastinate," says Mackey McNeill, an accountant and financial adviser in Bellevue, Ky.

      Procrastination can be costly. The problem, advisers and retirement consultants say, is that investors who make IRA contributions at the last moment miss out on 16 months of potential gains (from January of one year until April of the following year), as well as the chance for those gains to compound over many years. Even if two investors contribute the same amount of money over the years, the person who starts earlier could end up with significantly more savings down the line.

      Compare a saver who makes the maximum annual IRA contribution of $5,500 for those under age 50 in January of each year with another saver who contributes the same amount each April 15 of the following year. Over 31 years, assuming the money is invested in a moderate portfolio earning a hypothetical 7% annual return, the saver who makes full contributions in January could end up with $83,000 in additional savings after 30 years, even though both investors contributed equal amounts—about $170,500—overall, according to an analysis by Ms. McNeill. Tax Burden

      Another downside to putting off contributions: It could add to your tax bills. Money in a taxable account over that 16-month period may incur gains that would have been deferred in an IRA, says Ed Slott, an accountant and founder of IRAHelp.com, a website for retirement savers.

      Some pros say investors' excuses for not contributing as early as possible are looking thin. Most people don't see their income swing wildly from one year to the next, Ms. Bruno says. They can likely use last year's tax return to decide whether to make a contribution for the current tax year each January.

      Procrastinators still have time to change their ways. Some can catch up if they now make their 2013 and 2014 contributions—a total of $11,000 for those under 50 contributing the maximum for each year, Ms. McNeill says. Those investors can then get in the habit of making their IRA contributions at the start of each year. (Investors 50 or older can contribute as much as $6,500 to their IRAs each year.)

      While a doubled-up contribution is a lot to set aside at once, she says: "You've only got to make this change for one year."

      Bob Jensen's personal finance helpers are at
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

       

    • Robert E Jensen

      "The Crushingly Expensive Mistake Killing Your Retirement:   401(k) fees are costing you hundreds of thousands of dollars over your lifetime," by Matthew O'Brien, The Atlantic, February 15, 2014 ---
      http://www.theatlantic.com/business/archive/2014/02/the-crushingly-expensive-mistake-killing-your-retirement/283866/

      Jensen Comment
      Investors should probably question whether they need to pay a financial advisor on top of the unavoidable expenses of managing a mutual fund. Investors should also seek out lower cost fund management funds such as Fidelity, Vanguard, and TIAA/CREF. Most of the more expensive funds are delivering addedreturns that justify the added costs unless they have taken you into financial risks you don't understand.

      The big funds offer a lot of free advising services that you should investigate before running down to a personal advisor in a glitzy office building.

      Bob Jensen's personal finance helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      The 5 Worst Mistakes To Make When Buying A New Car --- http://www.businessinsider.com/worst-mistakes-buying-a-new-car-2014-4
      Or go to
      http://money.usnews.com/money/blogs/my-money/2014/04/16/the-5-worst-new-car-buying-mistakes?int=993208#ixzz2zQL8sZfA

      Jensen Comment
      I think the worst mistake is not pretending to be a cash buyer. My advice is to always pretend that you want to pay cash for the car or truck or tractor. Then after you negotiate the dealer's rock bottom cash price you can inquire about financing deals.

      You should be able to compute or have a knowledgeable friend be able to compute the financing interest rate based upon the rock bottom cash price that you negotiated. Dealers have a way of making finance rates look lower by using some price higher than the rock bottom cash price that you negotiated ---
      I provide a free Excel workbook on how to compute financing rates ---
      www.cs.trinity.edu/~rjensen/Excel/FraudEarlBob.xls

      If you don't put a lot of miles on a car each year I would also look into negotiating a leasing deal with an option to buy the car at the end of the lease. Because interest rates are so low for dealers and banks, leasing has become a much better option than in the old days of higher interest rates.

    • Robert E Jensen

      The Average American Can't Answer These Three Simple Finance Questions ---
      http://pragcap.com/the-worlds-shocking-financial-ignorance#ixzz31FaNinGB

      Here’s a frightening fact via The Atlantic’s Moises Naim.  Roughly half of the world can’t answer these three questions correctly:

      1.  Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.

      2.  Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.

      3.  Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer.

      Even worse – 70% of Americans can’t answer all three questions correctly.  And we wonder why the world seems to have so many persistent financial problems.  We don’t even come close to understanding the construct of money or how it should be used.  The world desperately needs to become better educated on the topic of money, finance and economics.  It certainly won’t solve all of our financial problems, but information really is power when it comes to money.   Unfortunately, we don’t even teach basic finance in most schools and economists can’t even agree on what “money” is in the first place.  We have a long road ahead of us but it’s not too late to get started….

      Continued in article

      Jensen Comment
      People who cannot answer the above questions cannot answer the question of why the Feds low interest strategy (Quantitative Easing) has wiped out savings of tens of millions of people young and old. This is especially troublesome for the elderly. My parents, for example, used to draw off upwards of 6% interest on certificates of deposit (CDs while leaving the investment amount intact. Today they would have to cut into the savings with CDs earning less than 1%. That's what is happening to senior citizens today. They are eating their seed corn and when the savings are gone they have little left to live on except for their meager Social Security checks.

      My question would be how long it would have taken my parents to double the value of a 6% investment compounded annually if all interest payments are plowed back into savings at the same 6% (ignore inflation and taxes)? This is a question raised years ago in the popular economics textbook by Paul Samuelson. My parents had sufficient income from their pensions and farm to enable them to leave some CDs untouched for 12 or more years. Of course they faced the realities of inflation (higher than today's inflation rate) and taxes (higher than today's taxation of the middle class).

      My guess is that 90% of the adults in the USA could not answer the above question, especially if complications of taxes and inflation were thrown into the problem.

      Financial troubles are a bigger cause of divorce and sexual troubles. It's especially dangerous for couples to pile on debt for such things as student loan repayments, mortgage loans. car loans, and ever deepening credit card debt reflecting spending sell beyond income. This creates tension in individuals and families. Fights ensue over money and debt. Many couples declare bankruptcy but there are some debts that carry on after bankruptcy declarations.

      What person wants to marry a spouse carrying $65,000 student that cannot be eliminated by declaring bankruptcy?

      My opinion is that financial literacy should be a part of college core skills requirements for the sake of financial sanity in the USA ---
      http://www.trinity.edu/rjensen/HigherEdControversies.htm#FinancialLiteracy

      Khan Academy provides some great financial literacy free learning videos ---
      https://www.khanacademy.org/economics-finance-domain/core-finance

      Bob Jensen's personal finance helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      From the CPA Newsletter on July 10, 2014

      American 15-year-olds rank below average in global financial-literacy survey
      The U.S. scored slightly below average, at 492, for financial literacy among 15-year-old students, according to a study by the Organization for Economic Cooperation and Development. Students in Shanghai, China, scored the highest with 603, followed by Belgium and Estonia. The U.S. came in at No. 9. The average score was 500. The AICPA's 360 Degrees of Financial Literacy program helps Americans understand their personal finances through every stage of life. USA Today (7/9)

      Financial literacy should be a required skill for all high school and college graduates ---
      http://www.trinity.edu/rjensen/HigherEdControversies.htm#FinancialLiteracy

      Bob Jensen's financial literacy helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

    • Robert E Jensen

      Fees = Transactions Costs (when buying or selling shares) plus Fund Management Fees (paid annually to professionals who manage your portfolio like the managers at TIAA/CREF, Fidelity, Vanguard, etc.). manage your retirement funds.

      Taxes = Capital Gains Taxes (that apply even on retirement funds like CREF when you make eventual withdrawals). Note that capital gains taxes must be paid by your estate on the balances left in your retirement funds. Most of us won't get hit with estate taxes (due to high estate tax exemptions), but we all get hit with capital gains taxes on the retirement funds and farms we leave behind for heirs.

      Inflation = Loss in Buying Power of Saving Dear Money That Turns Into Cheap Money (even under your mattress)
      The government is now misleading us about inflation by taking price increases for food and fuel out of its reported  inflation index so you think that your dollars are still dear when they are cheap in terms of things that you buy day-by-day. Economists are whores for politicians. Government deficit spending and obligations for $100 trillion in unfunded entitlements (like Medicare and Medicaid) make inflation the biggest worry of the three diseases on retirement savings --- fees, taxes, and inflation.

      "Here's How Little You Earn On Stocks After You Pay The Man, Uncle Sam, And The Invisible Hand," by Myles Udland, Business Insider, August 29, 2014 ---
      http://www.businessinsider.com/thornburgs-real-real-equity-returns-2014-8

      Fees, taxes, and even inflation just kill your investment returns.

      A Thornburg Investment Management study of "real, real returns," which was alerted to us by Cullen Roche at Pragmatic Capitalism, shows how various costs eat into your stock market returns. 

      Real, real returns take into account expenses (the man), taxes (Uncle Sam), and inflation (the invisible hand).

      Thornburg's study notes that "nominal returns are a misleading driver of an investor's investment and asset-allocation planning... because they are significantly eroded by taxes, expenses and inflation." The risk then, as Thornburg sees it, is that a failure to understand real, real returns could lead to investment decisions that miss potential diversification opportunities. 

      This chart from Thornburg shows how the annualized nominal return of $100 invested in the S&P 500 between 1983 and 2013 is about 11%, making that investment worth $2,346.

      However, on a real, real basis that investment returns 6%, making it worth just $570.

      A pretty stark difference between expectations and reality.

      Jensen Comment
      There are ways of partly beating the tax man by investing a portion of your retirement funds in a tax-exempt mutual fund that holds bonds of school districts, towns, cities, counties, and states. However, I say "partly beats" in the sense that value changes in those funds are subject to capital gains taxes even if the interest on those bonds that builds up your savings are not taxed while your earn that interest or when you withdraw that interest. A second  drawback is that there is relatively more risk in investing in a given tax-free municipal bond versus a taxable high-grade corporate bond. But huge diversified tax-free mutual funds like those of Fidelity and Vanguard. A third drawback in theory is that tax-free bonds should earn less interest than corporate bonds. This is not always the case in this era of stupid quantitative easing by the Federal Reserve that keeps interest rates on CDs and high-grade corporate bonds close to zero. Tax-free interest rates have held up batter in this idiotic era of quantitative easing since the crash of 2007.

      Remember that higher return investments also carry higher financial risks beyond the savings killers of fees, taxes, and inflation. For example land investments have less inflation risks but are subject to many other financial risks. For example, think of paying a million dollars for an Iowa farm that sold ten years ago $500,000 and doubled in value because of the corn ethanol government mandate for gasoline. The added financial risk for your new farm is that one day soon the government will come to its senses and remove the ethanol mandate for fuel, thereby leaving the corn for cows and hogs. Your million dollar farm may plunge in value --- thus the added investment risk beyond the retirement savings killers of fees, taxes, and inflation.

      Bob Jensen's Personal Finance Helpers ---
      http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers