Commentary (Page 436)

The US government is very concerned with your longevity. Not that they really care about you personally, but the vast majority of US citizens need to pay into the Social Security fund. The government needs to know how long you are going to pay into the system and how long they need to pay you.

To accomplish this goal of predicting the death of US citizens, the government turns to actuaries. Actuaries put a price tag on risk. They are the leading professionals in finding ways to manage risk, and are experts in:

• Evaluating the likelihood of future events.
• Reducing the impact of undesirable events.
• Designing creative ways to reduce the likelihood of undesirable events.

Actuaries apply their mathematical expertise, statistical knowledge, economic and financial analyses, and problem-solving skills to a wide range of business problems. They help companies evaluate the long-term financial implications of their decisions; they develop new ways to manage risk, and they estimate the costs of uncertain future events ranging from tornadoes and hurricanes to changes in life expectancy.

The Social Security office publishes an actuarial table that gives the life expectancy of males and females. You can find the table at http://www.ssa.gov/OACT/STATS/table4c6.html. The table was published in 2006 but it is close enough for our purposes. As we look at the table there are a couple of things that quickly become obvious:

• If you were born today as a male, you would probably live to be 75. Your twin sister would likely live to be 80.
• If you are 50 today as a male, you would likely live to be almost 79. Your 50-year-old wife can plan on sticking around until she is over 82.
• If you were retiring from work at the age of 67 today, than as a male you could expect to pay bills until you are over 82 and your wife will probably make it over 85.

These are “average people” expectations so it is just as likely that you will beat the age as it is to not make it there.

The interesting thing about these actuarial tables is that it shows that the longer you have lived, the longer you will live. This is simply because you have avoided death up until now when some others have not. You were not killed in a car wreck or killed in a war. You didn’t succumb to a deadly childhood disease. You also didn’t commit suicide over a lost love. Instead, you have surpassed some things that have afflicted others born the same year as you; therefore you will live longer than then some of your peers.

Also, the longer you live the more the averages work for you. For instance let’s look at a male baby born today. If he unfortunately dies a year from now, it takes a lot of people living past 75 to offset his death in the tables – you can guess that it takes 74 males living to the age of 76 to average it out to 75. This is a simplistic example as actuarial tables are not just simple averages but they tend to act very similar to an average.

So for every person that graduated from high school in your year that has since passed away, you need to live longer just to make the averages work out. In essence, you are alive; therefore, you will probably beat the average of those that were born the same year you were born.

Which begs the question, how long should you plan to live? For arguments sake, I suggest 90-100 years. The tables show that most 80-year-old men are not going to see 90. They also show that very few 90-year-old men will see 100. The same is true of women although you could add a few year years to that guess and surmise 92-102 but the difference is nominal.

With the advances of current healthcare, you should also consider that you will be quite active until you are at least 80 or 85. By active, I am saying that you will want to take several plane trips per year to vacation destinations. You will want to visit your children and grandchildren. You will still be interested in a game of golf (or fishing or some other leisure sport) and you will be active in at least a couple of your hobbies. The dentist will make sure that you can still enjoy a nice meal at a restaurant and that bottle of wine will still taste as good then as it does now. In short, at 80 years old you will still have a wonderful life and want to spend money.

The only way to make your savings last until you are 100 is to effectively manage your portfolio. You need your money to grow. I suggest that you Grow on Other People’s Money (GOPM). GOPM will allow you to increase your financial security and enjoy the twilight of your life in luxury. Isn’t that what we all want?

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

As I talk to people about the best techniques to invest, I am disappointed at the understanding that many people have about finance. Many of these people are younger and they simply did not understand the realities that their parents were dealing with in their daily lives. Maybe the parents thought that education of their children was up to the local school system. While I don’t want to condemn most school systems, it is not likely that they are the best at educating young people on markets and finance.

It also could be that the individual parents may have felt inadequate to discuss the issues. I assure you, if you care enough about finance and the stock market that you regularly read this site, you are well on your way to give your children a jump start!

I recently came upon an article titled, “14 Secrets Every Parent Should Know Before Talking To Their Kids About Money” on the site Man Vs Debt. I am not going to copy the entire article here but the 14 points are below.
 

1. You can’t be a hypocrite.
2. Treat them like adults.
3. Know when to shut up.
4. Tell them why.
5. Stop chasing them out of the room.
6. Let them watch you negotiate (and fight “nicely” over money).
7. Show them the checkbooks.
8. Be humble with the good.
9. Be honest with the bad.
10. Make them feel like a member of the team.
11. Teach them concrete tips, not vague clichés.
12. Help them get started.
13. Let them know it’s OK to screw up.
14. Let go.

 
I think the most important thing to remember in this entire exercise is to communicate to your children. This way they learn from your learning and your mistakes. You want your children to have advantages that you did not have – teach them about money so that they can live a stress free life. If you really want to help them, I suggest that you give them a copy of my book, The Confident Investor.

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

As a general rule of thumb, I never own a company that sells more that 10% of itself (e.g. spins off a division) or buys another company that is larger than 10% of the original company (e.g. they acquire a company as a new division or subsidiary). These extraordinary events can radically change a company and divert its attention. While many such events will result in a stronger company, you cannot be confident in the short term that your investment is safe. It is usually safer to invest your money and time elsewhere while the dust settles.

Small changes are common in most companies. These types of acquisitions are typically handled by mid-level employees in a small part of the company. I am not talking about the actual signing of the change as that almost always requires the CFO and CEO to sign those documents. However, mid-level managers typically handle the details of how the new business is going to be integrated or which individuals and buildings are going to be spun off. This causes very little disruption in the core business since most of the employees are not worried about how the event affects their lives.

Major acquisitions or divestments are a problem. They often cause conflicts throughout the organization. If people are concerned with the personal affects of the change, they won’t work hard that day/week/month. You have certainly seen this in your life – when a significant change happens it becomes all consuming. Even your personal acts such as buying a new car can be all consuming and can cause you to skip mowing the lawn that day or that weekend. The acquisition of a new subsidiary can be that unsettling for the organization – they can put off doing the ordinary things that made them excellent for a couple days.

The crucial question is how long should you wait.  I typically hold off for one or two quarters. This gives the employees a chance to wake up and get back to work. It allows most of the planning for the change to stop and execution to begin.

Even if I like the reason for the change, I wait to make sure that the managers don’t screw it up. Both Peter Lynch and Warren Buffett have been quoted as saying, “Buy into a business that’s doing so well an idiot could run it, because sooner or later, one will.” http://quoteinvestigator.com/2010/05/31/any-idiot-can-run/ When significant change occurs in a company, the idiots can seem to come out of the woodwork.

I want to be as helpful as possible to the investment community. This was the reason I originally wrote my book, The Confident Investor. It is also the reason I created this site and maintain my Twitter page.

I have dozens of topics in the works for future articles. I rarely lack for things to say but rather, time to say it. I would like to prioritize your questions about investments as I write my articles.  You can always send me a note via Twitter or on my Facebook page. You can also send me a note in the form below. I won’t promise that I have an answer for your question, but I will try to do my best.

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If you are reading this site, I assume that you are concerned about your retirement. I assume that you have probably taken some steps to securing your ability to retire in comfort but you want to do more. Rather than just being comfortable, you want to have a luxurious lifestyle. Rather than working at the local Wal-Mart as a greeter, you want to spend that time on a hobby, socializing with friends, or visiting with your family.

It is important to understand that I am not suggesting you will retire with wealth. I am not suggesting that you will be able to own a mansion on beach, a ski chalet in the mountains, and a condo in downtown New York with a private jet and a Bentley to assist you in your roaming. This is a goal that is simply out of reach for most people unless they are already wealthy.

Retiring in a luxury lifestyle means:

• Enjoying the best the world has to offer. When you travel you get to fly in first class. You stay in the best five-star hotels.
• The car that you drive is no more than a few years old. It is equipped with all of the safety and creature comforts that you could want in a car.
• If your interests include golf or tennis, then you belong to a private club. Regardless, of your interest in an athletic hobby, you belong to the finest health club to keep you fit and happy.
• Fine dining is a must. There are many restaurants with the world’s greatest chefs creating amazing meals.
• A beautiful luxury dream home to relax in is a wonderful reward for all the long hours and hard work. This will allow you to host parties for friends and family.
• Looking your best so that you turn heads when you walk down the street is a great boost to your self-esteem; so knowing the best women fashion designers and the best men’s stylists is important.
• Having relationships are important especially when celebrating success. Sharing life with loved ones makes life worth living.
• Personal development is very important. Working on your spiritual side to be your best and helping others do the same is another of life’s great rewards. This includes charity work.

The secret to a retiring in luxury is to realize three main facts:

1. You are going to live longer than you thought you would
2. You need more money than you think to retire in luxury
3. Most mutual funds don’t earn enough to really beat inflation

It is my hope that this site and my book will help you achieve the goals of being able to retire in luxury.  You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

I suggest that you continue to read my site. You can make sure that you are receiving my updates by subscribing to me in several forums:

• RSS of my articles on this site can be found here.
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I hope that you enjoy the continued conversation.