Life Insurance and Early Death

Social Security has a benefit that many people don’t seem to know about. If you are contributing to Social Security and you die and have dependents they are entitled to benefits. You can find more detail of how much those benefits are here at the Social Security website. Like most things it is based on how much you have paid into SS.
Here is probably the most important information to know from talking with friends.

  • Your widow or widower who has not remarried can receive survivor’s benefits at any age if they take care of your child who is under age 16 or is disabled and receives benefits on your record.

Here is a picture from my SS website page of the benefits my wife or children would get.

The reason I am mentioning this is that I have had discussions with at least 2 friends lately about life insurance. Both expressed interest in life insurance because they were having children, or more children and were concerned about their wives being financially stable if they were to die unexpectedly. I think it is great that both of my friends are thinking about their wives futures. That shows a great husband.

Life insurance is something you pay into each month or year and if you die they pay your beneficiaries a lump sum, between $50,00 and $1 million depending on how much you pay each month. There are 2 ways to structure/pay for life insurance.
One friend was considering term life insurance. This is good and cheap insurance! This is life insurance that only covers you for a term of your life, measured in years, 10, 20, 30 years. You pay an insurance company each month, say $50-$200. If you reach the end of the term and you haven’t died, they get to keep all your money but you have not paid a lot in and you can stop paying. Hopefully by that time there is no one who wouldn’t be cared for if you died. Or, they would be able to live of the Social Security money as well as the investments you have accumulated by that time.

Alternatively, the other friend was considering whole life insurance. This is bad and expensive insurance. This insurance can cost $800/month or more! It will have the same payout ($100,000  up to $1 million + depending on how much you pay in). But it will likely have a monthly rate of 10x the term life insurance, or more! This money is then invested by the whole life insurance company in the stock market in the same investments you could invest in yourself. They keep some of the returns and they give you some of the returns as opposed to you getting all the returns if you invested yourself.. Eventually (after 20 or 30 years) the money that your money gains will be able to completely pay for your monthly premium. Whenever you die this money will be paid out to beneficiaries. You can also cash out a whole life policy after a certain amount of time and many whole life policyholders do eventually cash it out before they die because it is such a bad (money losing for policy holder) plan.

Let’s say you pay $100/month for 20 years to a term life policy. That’s a total of $24,000. And you will end up with $0 at the end of 20 years.

But look at whole life insurance, you pay $800//month for 20 years that’s $192,000. Your policy is likely not even worth that much to cash out at that time, or worth only a little more than that.

With the $700 a month you saved with the term life insurance you could have invested that money in a 401k, IRA or a normal brokerage account. That money would have grown much faster than the money you would have paid to the whole life insurance people.

You can get more precise numbers from this website where they have done similar comparisons.

My belief is there is already most of the knowledge we need available we just need to connect people to the knowledge they need. Hence I was not going to do all the calculations over again when someone has already done them for you and me. My goal is to make you aware of the benefits of Social Security for early unexpected death and point you to the calculations others have done countless times to show that term insurance in conjunction with investment of the saved money over whole life is a much better way to use your money than whole life insurance. I suspect and hope that in my lifetime whole life insurance will not be offered anymore because no one will want to buy it because it is such a bad deal for consumers.

What Color is the Sky? A Book Celebration (and review)

“It’s a wonderful thing to behold when you see someone take control of their finances AND their life.” – Finley

I finished my 2nd read of “What Color is the Sky” this weekend. What Color is the Sky is the 2nd book by a personal friend of mine, Michael Finley. As I said in the title, this is both a review and a celebration of a great book. I believe it is one of the best investment books available because it delivers useful, actionable, information instead of vague concepts. Because of this I have personally bought and given away over 40 copies of this book to friends and family  (and I hope to give more in the future, and that people read them!). A great feature of this book is that each chapter is 2 pages long and covers 1 topic. The book delivers a wealth of information in a short enough read for the average person. The average person doesn’t want to or have time to read 30 pages about stock market bubbles, timing the market or index investing. Finley delivers concise, precise, useful information that shouldn’t tax your attention span.

There are 5 stages in the book.

Stage 1 is simply Finley giving you a pep talk. He wants you to know that you are able to manage your own investing, or at least that you should be able to find someone to help you along but who won’t screw you (like 95% of financial “advisors” (salesmen) these days).

Stage 2 includes a lot of chapters informing you about what smart investing is NOT.
Smart investing is not trying to guess which one stock will do good each month.
Smart investing is not listening to your uncle who is not educated on investing.
Smart investing is not trying to find the best managed mutual fund and changing it each year or two.
Smart investing is not  investing in something because everyone else is (housing bubble, tech bubble, tulip mania).

Stage 3 includes a many chapters informing you about what smart investing IS.
Smart investing is investing in index funds (or target date funds which are made of index funds).
Smart investing means you are diversified through various classes of investments (US, international, bonds, REITS).
Smart investing is understanding opportunity cost, the rule of 72, taxes and different types of account you can save money in (401k, 403b, 529, IRA, ROTH or traditional).
You could skip right to stage 3 of the book if you are really bursting to get the knowledge of what you should do, but if you do you need to go back and read the start of the book. This whole book needs to be read, by everyone and I will buy it for you, if you need me too. As Mike often mentions in the book, he is not paid by Vanguard to promote their product, he just believes they are doing what they do the best. Similarly, I believe Mike is providing the most unbiased, useful, actionable (helps you actually make investment decisions) advice in an easy to understand format.


Stage 4 builds on stage 3 with more practical actionable advice.
Discusses buy and hold (vs selling constantly to buy “winners”), different asset classes such as large capitalization stocks, small capitalization stocks, REITS and bonds.
Discusses international vs domestic stocks.
It also discusses rebalancing your portfolio, asset allocation as well as one of my favorite topics the 1 and done fund, the Target Date Fund.

Stage 5 is rather short. It encourages you to continue your financial education with recommendations of some good books. It encourages you to seek fee-only advisors if necessary.

Finley also uses a chapter to provide his vision for the future. He speaks about institutional investors, who are collectively losing million of our dollars to fund “managers”. Many large state and company investment funds offer poor funds. He wants to change that. We must demand the change and to do that you must be informed.
Finally, Finley encourages you to share what you have learned. As is his life goal, educating and empowering others to become the best they can be, he encourages the readers to help others learn more about investing and personal growth. That is part of what I am trying to do by writing this blog and this post, teaching others what I have learned in hopes that it will make their lives better and ultimately, make the world a better place. Active fund “managers” are generally providing negative value to the world and we need to stop that, so do your part, learn, become educated, get rich and live a rich, fulfilling life.

You can find Finley’s book here on Amazon (as I said I get nothing from this, he doesn’t even know I wrote this until he will see it on Facebook). I will buy you the book if you don’t think you can afford it. Leave a comment below if you’d like me to buy you a copy. You can’t afford to not read this book and I can’t afford for you to not read this book! Changing the way the whole market operates is in my, your and the world’s best interest. Forward to a better future!

You Might Need $3 Million to Retire at Age 65

You might need $3 million to retire at age 65 (if you are 28 years old today, which I am). See how I came up with that number below.

The purpose of this post is not to scare you into thinking you’ll never save $3 million dollars. It’s to expose you to how to think about how much you need to save for retirement. You might not need $3 million. But how much do you need and how do you calculate that?

Most people have no idea how to save for retirement, how much to save, where to save that money, etc. In everyone’s defense, there seem to be a lot of questions and it seems daunting to learn. But in reality, it is not that difficult to invest your money for retirement. I have already written a blog post about how you should invest in a target date fund in your 401k (as much as you can a year) and call it good. You (may) not need any other investments.

But a good question people should have is “How much do I need to save for retirement?”
If you were to retire today some people say you need $1 million.
That number is created by using the 4% rule, meaning you can withdraw 4% of your money a year to live off of. $1 million x .04 = $40,000 a year to live off of (plus social security).

It can also be called the 25x rule. This means you need 25x the money you will need each year to live saved. If you want to live on $40,000 a year 25 x $40,000 = $1,000,000

This is fine for today’s retirees, but for people between the ages of 20 and 30 we might have a different number to shoot for.

We have to consider inflation. To account for inflation any number of year from now there is a very simple formula.

1.03^37 = 2.98 

(a quick review of powers, 1.03^37 means 1.03×1.03×1.03… 37 times)

$1,000,000×2.98=$2,980,000

What do the above numbers mean?

.03 shows an inflation rate of 3% per each year (which is a historical average of US inflation)

37 = 37 years in the future (when I’ll be 65)

2.98 gives you the answer of how much less money will be worth in those years (inflation).

So 37 years from now it will take $2.98 dollars to buy something that costs $1 today.

So you can take today’s money $1,000,000 and multiply it by the inflation rate 2.98 and get that you’ll need $2,980,000 (or basically $3 million) in 2054 to equal $1,000,000 today.

And that is why you might need $3 million dollars to retire.

So the basic formula

1.03^ (years until you turn 65) x how much you want to live on per year in today’s dollars x 25

Example:

(1.03^37) * $40,000 x 25 = $2,985,226

This means you would need $2.9 million dollars ($3 million) to retire.

Of course, this doesn’t take into account the fact that many basic services of today like food, healthcare, housing, transportation, will likely cost less in the future. You might not need near this much saved! But then again, you might. It never hurts to over plan. If you find yourself in a position with too much money you can always give it away.

I don’t want to scare people away from saving for retirement if they don’t think they’ll have $3 million. As this CNN article says, even though a lot of people say $1 million today the average person who’s 65 only has about $148,000 saved which would be $148,000 x 2.98 = $441,000 if you were to retire in 37 years. Now we agree that like CNN said, $148,000 is probably  a little low, but not starving low. So you likely want to shoot for between $441,000 and $3,000,000. Use the rule of 25x to think about how much you might need to withdraw from your investments but also remember to account for inflation!

If anyone would like to review their own personal retirement numbers with me don’t hesitate to contact me. I really enjoy reviewing these numbers with anyone.

My IRRATIONAL Fear – Short term market collapse

You NEED to understand that the market is risky, in the short term, but so is every other place to put your money, including under your mattress (inflation risk!). – Axel Hoogland (yes I quoted myself)

My IRRATIONAL fear is a short term stock market collapse (meaning stock prices go down for a year or 2, similar to 2008 market collapse) (Learn about what the stock market is here).I am afraid of this because I am continually telling people to invest their money in the stock market. Most people are already invested in the stock market (but don’t know how their money is being managed or what exactly they are invested in). Some are only invested in bonds (which is risky as you are losing money to inflation). Some will pull their money out of the stock market at the first sign of trouble or market dip, which happens often (dips) but usually the market recovers quickly and they would lose on the gains. When investing in the market people should always ask themselves “What do I need this money for?” You NEED to understand that the market is risky, in the short term, but so is every other place to put your money, including under your mattress (inflation risk!).

My greatest fear is being wrong. I hate to give people incorrect information. It is ok to be wrong on some things. If you recommend someone eat at a restaurant they will be upset with you if they don’t enjoy it they will choose to never eat there again and might just stop taking your advice on restaurants.

If you recommend something to do with investing people’s money, something that they don’t completely understand themselves, and they seem to lose money (even if it is only for a short time and then it comes back in a year or two) they may hate you forever. People will be sure that there was a better option for them to invest their money in. They will not know what that option was, but they will be sure it was better than following your advice.

Someone is is almost always better at doing something for you than you will be at doing it for yourself. Some things require training to learn how to do. Many people do not feel comfortable fixing their own car. They take it to an expert, a mechanic. They don’t feel they have access to the right tools or knowledge (and that’s often true) so they pay someone to do it for them.

Unfortunately many people are happy to let an “expert” manage their money, for a large fee! The problem is these people are not experts, they are “salespeople”! You don’t let the car salesman fix your car and you shouldn’t let a “financial salesman” manage your money. The truth is that as a whole all fund managers will underperform the stock market. This is because of the fees they charge and because they are bad at guessing (yes they are guessing) which companies will perform better than average on any given year. Whenever someone sells a stock remember someone is on the other side of that deal guessing that that stock is going up! As a whole, all managed money will underperform (measured by percent returns to clients after fees) the total amount of unmanaged (index funds) market. Certainly some money managers will pick good and outperform the market and many will underperform and pick worse stocks than the market average, but all charge high fees. That is why index funds generally are the best place to put your money. To further diversify you should put your money in a Target Date fund which automatically transfers your money to bonds (safer investments) as you reach retirement.

A question people often ask is

Q.The stock market is high, should I pull money out of the market?

A. I ask them “What will you do with your money it if you do “pull it out” of the stock market?” The stock market should always be at the highest it’s ever been because the world is growing in population, thus businesses are making more products to sell.

As Mr. Money Mustache recently posted about, there is always a recession coming, so instead of worrying about it, it is better to understand what might bring it about, understand what you are investing in and why, and ride the storm out. A benefit of all this is that if people understand what causes recessions, over spending followed by underspending, we (may) be able to avoid wild cycles and instead keep a nice steady rise in abundance in the future, that is my hope by helping to educate people on “The Stock Market”.

Now that I’ve shared my fear with everyone, and why it’s not a rational fear, you should continue to learn about investing and why it is probably one of the most important things you can understand for yourself and for the world. You can learn more about Target Date Funds (where everyone should start investing) from this post or this video.

Target Date Funds

Here is a link to a video I made about Target Date Funds.

These are great times to be investing! Today is literally the easiest time in all of history to invest. It is also the cheapest time in history to invest. There is an incredible product called a “Target Date Fund” available for “Joe Investor” that is actually a very good tool.

A target date fund is set up to buy thousands of stocks and bonds (diversity) for the owner of the fund. It also automatically transfers more money to bonds (safer) as the fund owner reaches retirement age. This can be the only fund you need in a retirement fund, if you want.

A target date fund usually has a name like 2055 Target Date Fund. Here’s a link to Vanguard Target Retirement 2055 Fund (VFFVX)
There are target date funds available for every 5 years. 2010, 2015, 2020, etc
You can see from the picture below the comparison of the asset allocation of a 2025 vs a 2055 target date fund.

You can see that the 2055 target date fund has a larger percent of stocks, since you will be retiring in the future so you’ll have time to recover from any stock market dips. You can see the 2025 target date fund has a higher percentage of bonds to reduce volatility.

Click below picture to zoom.

Here is a picture of the path that Vanguard uses to transfer money to bonds as you age.

Here is a link to the Vanguard site where they share more data.

vanguard target date

Here is some further reading on if a Target Date Fund is right for your or not.

The pros, cons of using target-date funds in 401(k) plans
5 things you should know about target-date funds

If you want to start investing and have no idea what fund to put your money in, figure out what year target date is available for closest to when you will be 65 and put your money in that fund while you learn a bit more about investing.

Expense Ratio

If you could make an extra $1,000 a year would you? Of course you would! If you have a retirement account there is a good chance you are “giving away” over $1,000 a year in expenses to your fund adviser. The first thing you should do when you start looking into your investments is understand how much you are paying the people managing your money and how they are getting that money.

There are 2 main ways managers get money from you.

  • Loads
  • Expense ratio

Loads are ALWAYS bad.

Expense ratios are necessary but should always be low, less than 0.3% if necessary (meaning $3/$1000 invested) or less than 0.15% if possible $1.50/$1,000 invested.This is possible at Vanguard and many other places.
There are many places that will charge you a 1% expense ratio, $10/$1,000 invested! That’s 10x more money than places charging 0.1% (which is also very achievable).

Remember the expense ratio is taken out each year also, not only one time.  
Take an example where someone has $100,000 invested in a 401K.
If they are paying a 1% expense ratio they will pay $1,000 that year to their fund manager.
If they were paying a 0.1% expense ratio they would only be paying $100 a year, saving $900 a year! Does that sound important? It is!

In the Example below I share the result of a .2% expense ratio ($2/$1,000 invested per year) vs 0.6% ($6/$1,000 invested per year). You can see after 10 years you end up paying $836 more in fees with the 0.6% expense ratio.

For more information on expense ratios you should watch this video I made on expense ratios. Then you should go into your 401K or other investment accounts and try to find what expense ratio you are paying.

Paris Climate Agreement

The USA is “leaving the Paris Climate Agreement”, in about 4 years, President Trump has declared by executive action. Many countries had ratified the agreement, meaning their leader and likely some congress/senate or other governing body agreed. About ¼ of the countries in the world signed it (including the USA) which means that probably just their leader agreed to it. That being the action that Obama took. That was a mistake on his side (although probably all he was able to do as there was likely no way Congress would have ratified it, being Republican at the time). Because of that, it was easily un-signed by Donald Trump.

(Picture from Business Insider)

As far as I can tell there were not really many actual ramifications to signing the Paris Agreement or leaving the Agreement for the USA from the rest of the world. You can read the Paris Agreement by clicking the link. You can also read the 5 page document the USA sent sharing what our plans were to meet the agreement.

Here are the important sentences along with an easy to understand graph.

“The United States intends to achieve an economy-wide target of reducing its greenhouse gas emissions by 26%-28% below its 2005 level in 2025 and to make best efforts to reduce its emissions by 28%.”-  USA First NDC (nationally determined contribution) Submission

“ The United States has already undertaken substantial policy action to reduce its emissions, taking the necessary steps to place us on a path to achieve the 2020 target of reducing emissions in the range of 17 percent below the 2005 level in 2020. “ – USA First NDC (nationally determined contribution) Submission

These were self professed goals to work along with other countries in the world to reduce all our emissions together.

The US is the world’s second-largest carbon emitter, after China. Together, the countries accounted for 45% of the world’s carbon dioxide emissions in 2014.” – Business Insider

The USA is near the top of emissions per capita.

http://www.wri.org/sites/default/files/uploads/per_capita_emissions.png

If you take the time to read (Framework Convention on Climate Change) FCCC/CP/2015/L.9/Rev.1  document, better known as “The Paris Agreement”, you wil lfind reference to the “Warsaw International Mechanism” which is another body of individuals that appears to be around to provide some guidance to help make decisions related to climate change.

There is a reference to “$100 billion dollars” “from developed countries to developing countries” that some people seem to think the US is on the hook for. That is false. Here is the statement regarding $100 billion.

“”54. Also decides that, in accordance with Article 9, paragraph 3, of the Agreement, developed countries intend to continue their existing collective mobilization goal through 2025 in the context of meaningful mitigation actions and transparency on implementation; prior to 2025 the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall set a new collective quantified goal from a floor of USD 100 billion per year, taking into account the needs and priorities of developing countries; “ – Paris Agreement

There is no set plan where that money comes from or how it is counted for. Some of it is in foreign aid, some is hoped to be in private loans. Basically, it is just a hope at the moment and certainly not something the USA is on the hook for.
What we have done is Contribute $1 billion since Dec 2015 (when the treaty was signed by Obama) to the “Green Climate Fund”. This was ⅓ of a pledged $3 billion from Obama. Trump has canceled the rest of that money.

As Trump mentioned later in his speech, the United States has given the Green Climate Fund $1 billion already. President Barack Obama pledged a total of $3 billion to the fund by 2020 as part of a global goal of $10 billion, but Trump promised not to finance it as a candidate and Congress has not made further contributions since the election.” – NBC news

The whole $3 billion represented about $9/person in the USA (over 5 years) and only a very small percent of our $40+ billion in foreign aid each year. (US budget for 2016)

(picture from Washington Post)

Another source of money for the developing countries is the Least Developed Countries Fund (LDCF) which is administered by the GEF (Global Environment Facility unites 183 countries in partnership with international institutions, civil society organizations (CSOs), and the private sector to address global environmental issues while supporting national sustainable development initiatives. Today the GEF is the largest public funder of projects to improve the global environment. An independently operating financial organization, the GEF provides grants for projects related to biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants.- Wikipedia)

So now that we’ve established that the Paris Agreement:

  1. Was not costing the USA anything financially
  2. The Green Climate Fund (separate from the Paris Agreement, was costing the USA very little, $2 billion as part of $40+ billion in foreign aid)
  3. Emissions reductions were self imposed at 17% currently planned and a projection of up to 28% reduction (compared to 2005 levels in the USA) by 2025.
  4. Was definitely abandoned by Donald Trump personally but not by individuals and businesses.

What do we do about that?

Assuming you believe in climate change (rising temperatures) and that it could have negative implications for people related to damaged crops, damaged houses and is already happening now, what can you do about it?

I actually hope Donald Trump abandoning the Paris Agreement is a good thing. I (naively) believe that maybe people will start to take individual actions to offset their own carbon footprint instead of thinking the government will do it.

Here are a few things you can do to offset your own carbon footprint.

  1. Support carbon offset companies/non-profits. Read this great article from Mr. Money Mustache about companies that do that.
  2. Plant trees! (You also don’t have to do that personally). Here is a company (OneTreePlanted) you can pay $1 to plant 1 tree or $100 to plant $100 trees! WOW. (I am not sure how effective they are at this yet. They seem pretty new, but maybe they’ll contact me after this mention, or maybe I’ll contact to them to get more information about their work.)
  3. Buy a more efficient vehicle!

The people of the USA need to get over the idea that what the President of the USA does has much direct impact on their lives.

While the President can certainly create policies which affect your life one way or another a few thousand dollars, the fact is that what the government is doing is really not that intrusive on your life, especially not related to how you personally pollute! Not in the USA. What people need to realize is that  people have power. We can choose to influence how businesses create products and we can vote for people who will represent our beliefs. If we choose to specify to pay a little more for renewable energy, companies will create it. You can do that for many electric companies.

You can do the same with businesses. You can “vote” with your dollar, instead of just your political vote. Vote every day.

Many business CEO’s and city Mayors in the USA have pledged to keep their businesses and companies to the Paris Agreement. That is laudable and it is really what they should do also. Why should a company start polluting more just because Donald Trump says he is going to? Many companies are already on the energy efficient path (which is inherently green anyway) due to cost savings. So that should not really be an issue. It is unfortunate that the global warming thing has been “sold” to people as “saving the earth”. Most people I know don’t care that much about it. But if it was sold as “saving you money” people would be all over it. Being more efficient is saving you money AND saving the earth at the same time. Let’s try to focus on that, individually, and collectively. Hopefully other countries, companies and individuals continue on that path, largely ignoring what Donald Trump says. As I have said, he really has little power in the arena of what most people and businesses do personally. I suspect that history will look back on him poorly for this action.

I really don’t know what Trump is thinking overall. He is certainly connecting with people who have a certain mindset, that the USA is somehow getting “screwed” by the whole world. I just do not see that. Would you feel “screwed” if you were helping a family member through a tough time? The whole world is our family, and it’s the only one we have and some of them are going through pretty tough times. We should be ashamed that a large percentage are starving while some are living in luxury. Some of the starvation is related to the damage we’ve done to the environment with our many years of technological advancement and our gluttonous use of fossil fuels for energy and transportation. Some is related to corrupt governments (which is something I’m thinking about also and I acknowledge it’s a BIG issue, but not the topic of the day, yet).  Once we all get on a path to being more efficient we will be doing everyone else a great service as well as future generations.