Tag: Dennis Miller

Getting the Most Value from Your “Geriatric Cruiser”

By Dennis Miller

For many a car lover, retiring rich requires the end of a lifelong love affair. I empathize with them all; I’ve had my own romance over the last 50-plus years.

Cars have a special resonance for people of my generation. George Lucas’ classic coming of age film American Graffiti is proof positive of that. As teens we flocked to auto dealers when new models came out and fantasized about actually being able to own our favorite. And let’s face it: cool cars were chick magnets. In our 20s and 30s, with the help of a friendly finance company, those dreams became reality, and every few years we’d get the new car itch again.

As children left the nest, many of us upgraded to the luxury brands befitting our positions in life. My first luxury car was a Cadillac, though a friend told me I was too young to drive one.

When my parents moved into a senior community in Sarasota, Florida, I asked Dad, “Do all retired people drive white Buicks?”

Dad grinned and said, “No, some drive Toyotas, Chevys, and Fords—practical cars. But yes, most are white.”

My niece calls these cars “geriatric cruisers.” And I should confess to agreeing with that stigma for quite some time. At 74, I’m not quite ready to throw in the towel and buy a geezer-mobile. Nonetheless, our children were horrified when we traded in our Lexus and bought a Toyota Sienna. There’s nothing cool about a minivan.

Let’s face it: for many of us, our car is strongly linked to our self-image. But with age comes wisdom (hopefully). Unless your portfolio is exceptionally flush, retirement is a good time to break up with luxury cars and use some logic. Cars are for transportation, and they are very expensive.

The Real Price of the Crown Jewel of Geriatric Cruisers

A nicely equipped 2014 Buick Regal—the crown jewel of geriatric cruisers in our part of the world—should cost around $40,855 out the door. Let’s put that in perspective for a retiree: If you have a $1,000,000 portfolio earning 5%, you have $50,000 in income. After paying taxes on your investment income, that Buick Regal will wipe out your net income for the year.

Then there’s the cost of operating the vehicle: gas, oil, maintenance, insurance, licensing, and other fees. The biggest ongoing cost, however, is depreciation. Although no one writes a “depreciation check” each month, it’s still eating away at your net worth.

Depreciation is the reduction in an asset’s value over time. For automobiles, the first hit comes in a matter of minutes. Drive the car around the block, and it’s no longer a new car; it’s used.

The average first-year depreciation for a car is 28%. While all vehicles depreciate differently, our Buick Regal is estimated to decrease in value by $11,439.40 in the first year. By the end of year three, its accumulated depreciation is $26,147.20, or 64% of the purchase price. Ouch!

The chart below shows a car’s estimated depreciation percentage by year:

Sad to say, but keeping your vehicle in pristine condition won’t prevent rapid depreciation. If you’re lucky, it might net you a few hundred dollars more when you sell it.

The Optimal Time to Trade In Your Car

What would happen if you traded in the Buick every five years and bought another similarly priced vehicle? Over the course of 10 years, your accumulated depreciation between the two cars would be $63,733.80.

On the other hand, if you kept your original vehicle for 10 years, the depreciation would drop off significantly in the last five. If you are a low-mileage driver, after 10 years your accumulated depreciation would be $37,995.15, $25,738.65 less than if you had traded in at the five-year mark. That’s money most retirees would be much better off investing where it will appreciate—not depreciate.

Though hanging onto the Buick for 10 years means your maintenance costs will be higher, you can purchase extended warranties covering catastrophic events and still have a lot of money left over.

I don’t recommend buying the cheapest car you can find. Even if it costs a little bit more, buy the one you really want of those you can afford. Shop for the best price, and enjoy it for as many years as the mileage and maintenance costs make it practical to own.

The real savings comes from reducing your car’s annual depreciation. If you trade the Buick every five years, the estimated annual depreciation cost is $6,373.38. Hold it for 10 years, and it drops to $3,799.52—an annual savings of $2,573.86. If gas costs $4.00 per gallon, your average annual savings could buy 644 gallons. If you average 16 miles per gallon, your savings would buy enough gas for 10,295 miles. If you’re able to drive your car for 10 years instead of trading in after five, the money you save could buy about 102,955 miles worth of gasoline.

Can Financing or Leasing Help?

It’s good practice not to finance a car (a.k.a. rent money) unless you can earn more than the interest costs via solid investments. According to Kelly Blue Book’s website, 2% interest is a reasonable estimate to finance the proverbial geriatric cruiser at 20% down (before fees and taxes). That translates into an $8,171 down payment, plus 60 monthly payments of $583, or $33,285.00.

There are plenty of safe investments where you can earn well over 2%. However, if you decide to go this route, I recommend holding the cash you would have spent in a separate account and using the income to make those monthly payments. That keeps the option of paying the car off early wide open.

What about leasing? Leasing does not reduce the cost of ownership. The lessor charges the lessee (you) for anticipated depreciation, plus a fee for using their money. If you want to own the car at the end of the lease you still have to buy it, and that can be very expensive. Had you financed it and just made your last payment you’d be in much better shape. Driving a five-year-old, paid-for vehicle that you enjoy is quite cost effective.

The Slightly Used Car

Lots of people buy two-year-old cars that have already taken the biggest depreciation hit: approximately 48%. It’s a good idea. Still, note that the 48% depreciation rate represents what a dealer would pay for a two-year-old car, not what he would resell it for. Expect to pay a little more to cover the dealer’s profit.

Be a good shopper. You want low mileage and good condition so you can drive a slightly used car for many years. Be sure to get a CARFAX report and check it thoroughly.

Many dealers offer “Dealer Certified” used cars. They advertise multi-point checklists that they use to certify vehicles. I have friends who owned dealerships tell me that some dealers certify a car by purchasing an extended warranty and adding it to the price of the car. If you are going to spend thousands of dollars for a used vehicle, have it checked over yourself. Being a good shopper also means checking the extended warranty:

• What does the dealer warrant as part of the certification, and how does that compare to what a good warranty policy would cover?
• What would it cost if you bought a separate warranty yourself?

I’ve bought extended warranties on used vehicles and found it best to go to the local dealer for that particular make. If you buy a Buick, go to a Buick dealer and ask for a quote from Buick on their extended warranty packages. Then frequent that dealer for oil changes and routine maintenance, and get to know the service manager by name. Should a problem arise, it’s good to have built a relationship.

I know many wealthy people who can afford to buy all the luxury cars they want but prefer to own more practical, middle-class automobiles. Once you retire, it’s time to come to grips with the need for reliable, comfortable transportation at a reasonable cost. The more capital you have working for you instead of depreciating at near warp-speed, the richer your retirement will be.

In our free weekly missive, Miller’s Money Weekly, my colleagues and I share practical ways to make your retirement richer, healthier and more dynamic. Whether you’re retired, planning a second career, or just enjoy no-nonsense guidance on buying a new car, investing in gold and real estate, funding your children’s college educations, slashing your tax bill and everything in between, you can receive our free e-letter directly in your inbox every Thursday by signing up here.

A Bridge Party and a Trip through TSA—When Stock Diversification Gets out of Hand

By Dennis Miller

There are only a handful of ways to protect your investment portfolio, and proper diversification is chief among them. No matter how well you do your due diligence on a single investment or how disciplined you are at executing trades, if your portfolio looks like a bridge party among pals who’ve known each other just a tad too long you’re in trouble.

Our team at Miller’s Money Forever hears stories all the time from friends and subscribers about “someone they know” (could have been themselves—we don’t pry) holding just one or two stocks and feeling dandy about it. I don’t want to seem overly dramatic, but these sorts of anecdotes keep me up at night. Why? Because even though investing isn’t the most difficult of all human endeavors (I’d argue that getting through a TSA line with a shred of dignity intact is much more difficult), there are rules of thumb that everyone should follow.

In real life, we all need one or two good friends and a soul mate. The market, however, is different. No one company can make you whole. Best friends do exist, but there is no such thing as a single, all-time best and safest stock. It’s better to have a hard-working team of stocks adding to your net worth each year.

How large and diverse should your team be? The easy answer is: it depends. It depends on your net worth and risk tolerance, the amount of time you can realistically spend monitoring your investments, buying, selling, and rebalancing your portfolio, taxes, and other nuances. Volumes have been written on proper diversification, and still there’s no one mutually agreed to viewpoint. Don’t fret! I won’t leave you hanging without a concrete answer.

The Right Number of Investments to Keep Your Portfolio Inline

Past research suggests that holding 15-30 investments at a time puts you in a safe and advantageous position. Fewer than 15 exposes you to too much nonsystematic, or company-specific, risk. Going in the other direction and buying 200 stocks is not the solution, either. It would be very demanding just to keep track of your holdings and rebalance your portfolio when needed, let alone follow the companies’ press releases and build models. This lack of control would make anyone uneasy, and you don’t want that.

In other words, holding too few stocks overexposes you to company-specific risk. There is actually some risk in holding too many stocks too. Having a dozen or so mutual funds invested in 30-40 stocks each is not a simple solution. Often times these funds are not as diversified as you might think, and all of their holdings tend to move in lockstep with one another in response to fluctuations in the market. While it may seem like the more stocks you have the safer you are, overburdening yourself with too many makes things difficult to manage and could actually reduce your yield.

It’s been proven that a portfolio of just 20 properly chosen stocks provides enough diversification for an individual investor. Going significantly over that number will result in diminishing benefits. Take a look at the chart below.

The green line shows total risk a stock has; the yellow line shows systematic risk only, the one that all stocks are susceptible to. You cannot diversify away systematic risk.

The area between the yellow line and the green line is the nonsystematic, or company-specific, risk. It decreases dramatically as the number of stocks in your portfolio increases from 1 to about 20. It continues decreasing toward the market risk as the number of stocks goes up but the rate of the decrease slows. This is what we mean by the diminishing benefits of over-diversification.

For retirement money, 15-30 investments is the sweet spot. Also, those investments should be a diverse bunch spread across many sectors. You want exposure to growth of the US economy and the economies of foreign nations, equity and debt (bonds and bond funds), and large-cap companies and upstarts (it’s less risky to do that by investing in an intermediary run by venture capital experts, such as a business development corporation). Your portfolio should also be exposed to the energy production sector and infrastructure companies, foreign currencies, and physical commodities.

If that sounds like a tall order, note that you don’t have to fill it alone. My colleagues at Miller’s Money Forever and I have designed the Bulletproof Portfolio to take out all the guesswork for you. By continually combing through contrarian investments and performing rigorous, independent research, we’ve built a portfolio that provides optimal diversification, robust income, and the protection conservative investors want and retirement investors need.

Gain immediate access to the Bulletproof Portfolio by signing up risk-free for a 3-month trial subscription to Miller’s Money Forever. If you decide we’re not for you, just call or write within the first 90 days, and we’ll return every cent you paid, no questions asked. We’ll even prorate your refund if you change your mind after 90 days. You don’t have to go it alone. Start your no-risk subscription to Millers’ Money Forever now.

Your Insurance Company Lands in Rehab—Will Your Annuity Survive?

By Dennis Miller

Your insurance company probably won’t go under; however, one might have said the same of AAA bonds in 2007. As many investors found out, sometimes the unlikely suddenly becomes your very own nightmare.

In 2012 the Financial Guaranty Insurance Company with $2.1 billion in assets failed. Also, in 2009 the Shenandoah Life Insurance Company with $1.7 billion in assets went under. In 2008, Standard Life Insurance Company of Indiana with $2 billion in assets collapsed as well. Although these failures weren’t all national front-page news like the AIG fiasco, anyone who owns an annuity or is thinking of buying one should take note.

In the last few years, about a dozen or so insurance companies have failed per year. These failures are mostly of smaller institutions, but sometimes bigger players get wrapped up as well. In these cases, a larger company typically absorbed the failing company. There is no guarantee, however, that that will happen in the future.

Insurance Companies Depend on State-Level Safety Nets

So what happens when your insurance company fails? Unlike a CD (which is insured by the FDIC) or your brokerage account (which is covered by the SIPC), annuities are not protected by any national program. They depend on state-level safety nets that typically cover $100,000 in annuity contracts. However, the limits and products covered differ from state to state. The National Organization of Life & Health Insurance Guaranty Associations (NOLHGA) provides an easy way to search the specifics for your state.

Regardless of your annuity type, check your state on the NOLHGA website to learn about its specific protections. And if you’re buying a variable annuity, pay especially close attention to your state laws; some states treat them differently.

Much like with FDIC insurance, you can split annuities across several different companies to maximize your total insurance coverage. If your state covers $100,000, you could protect $300,000 in annuities with three separate contracts for $100,000 each in three different companies.

But there’s a catch whereby state insurance programs vastly differ from FDIC insurance. When an insurance company is having a problem, the state puts it into rehabilitation to try to save the company from becoming insolvent. If the insurance company fails from there, the state government will take it over and liquidate its assets to fulfill its obligations to policyholders.

If more money is still needed after that, the state guaranty associations will attempt to amass more funds. How do they do this? Get ready for your jaw to drop! The other insurance companies in the state must cover the failed insurance company’s obligations in proportion to their business in the state.

That’s right. There’s really no FDIC or federal government waiting to print money to save the policyholders. Instead, you’re relying on other insurance companies for the bailout. In most cases, this shouldn’t be a huge problem.

If that doesn’t bother you already, here’s the really scary part. What happens when there’s a systemic shock to the insurance industry? For example, if a large company goes down and every other company is facing major losses as well, who is left to bailout your policy? Well, unfortunately, at that point, you’d have to hope and pray that the state or federal government comes to your aid. It might – and it might not.

Is this scenario likely? Probably not. Is it a possibility that you should seriously consider? Definitely.

High-Dollar Policyholders Are The Most At-Risk

Since 1983, state guaranty associations have protected 2.8 million policyholders and have contributed $5.3 billion to make sure that people get their benefits. However, high-dollar policyholders unaware of the state limitations have lost money. As a result, only around 90% of benefits have been fully recovered in the cases of company failures.

So far, everything has worked out all right for the most part, but that certainly doesn’t guarantee the same result in the future. Once you’re in an annuity contract, you’re in it for the long haul.

It’s hard to say what might happen in the next few decades, especially considering the US’s weakening fiscal situation. Don’t ignore the risks by putting a sizeable portion of your funds into annuities. At the very least, understand the limitations on coverage in your state.

Default isn’t the only serious risk to consider when purchasing an annuity. Even modest inflation can eat away at your annuity’s buying power and drastically cut into your lifestyle. Then there’s that pesky issue of liquidity. That said, the right annuity can have a place in a broader, highly-diversified retirement plan.

As financial educators, my team of analysts at Miller’s Money Forever and I want you to have the plain facts about annuities. That’s why we’ve just released a free special report, The TRUTH About Annuities. Download your complimentary copy today.

9 Need-to-Know Tips for Buying Annuities… And Knowing When They’re Not For You

By Dennis Miller

You’re probably something of an expert in your own field—and that field probably isn’t insurance or annuities. How, then, can you work through the minefield of clauses, guarantees, and pages of small print? Here are nine ways to start.

While you may feel uncomfortable doing this, you’re the one putting down thousands of dollars, and you have every right demand this. Remember: caveat emptor! It’s the buyer who must beware; you must protect yourself. Ultimately, the language in the annuity contract is what matters, but it doesn’t hurt to memorialize your verbal agreement with the agent in writing.

Hopefully your agent is totally honest and will help write the agreement, and both parties can sign and date it. If the agent starts to waffle, trust your instincts.

• Tip No. 1 – Buy an annuity only for the contractual guarantee. You’re only guaranteed what’s written into the contract. The language must be simple to understand. If you don’t understand it, don’t sign it.For example, one contract I’ve seen said: “If I paid them a $100,000 premium, the annuity would pay me $587.97 for the rest of my life. Furthermore, if I did not receive my $100,000 in payouts, my total payments would be subtracted from $100,000, and the difference would be paid to my beneficiaries.”

  The language was plain, simple, and easy to understand. There were no “if the investment does well” or “maybe” and “depending on” clauses in this deal.

• Tip No. 2 – Protect yourself against default by the insurer. At a minimum, the insurance company should be A rated or higher by all rating agencies. In addition, many states have a fund that insures annuities up to a certain point. If your state has a $100,000 per policy limit, and you wanted to spend $200,000 on annuities, you’re better off with two separate $100,000 policies. While annuities seem low risk, many people who had annuities written by AIG were quite concerned when the company went under.
• Tip No. 3 – Demand full disclosure of fees. Many variable annuities can have management fees as high as 3%, but the fees are often hidden. There is, however, a simple way to make them very clear. Insurance agents often have a program that can project the yield from the variable component of the annuity based on any number that they put in. Ask the agent to run the projection at 0%.In many cases you will find they have built fees into the system; they want to charge you to manage your money even if it’s held in cash. When the projection is set at 0%, you can see how much smaller your funds are getting as a result of the fees. If the agent will not or cannot run the numbers at zero, then you have good cause for concern.

  And remember, if you’re interested in investing, there are cheaper ways to go about it than paying a middleman at an insurance company.

• Tip No. 4 – Avoid a “captive” agent. Instead of buying directly from the insurance company (a captive agent) consider dealing with a general agent who represents several companies. The agent can shop prices and coverage and get the best package to suit your needs.If you are dealing with a captive agent, then you might consider talking with several agents and getting quotes from them. Make sure the comparisons are apples to apples, assessing like features of each company. Avoiding captive agents won’t guarantee you an agent with your best interests in mind, but it sure does improve the odds.
• Tip No. 5 – Consider taxes. While no one I know enjoys paying taxes, keep them in perspective. The right product with a safe company should be the first issue you deal with. However, the tax structure for each product is slightly different. The agent should be able to easily show you your liability per payment.
• Tip No. 6 – If it sounds too good to be true, it normally is. You may have heard of annuities offering great yields – well above what you could expect to earn in the current market. Much like credit cards offering big rebates, when you read the small print, you are likely to find it’s only for a short period of time or there’s some other limit on it. Don’t get caught up in the hype. The better it sounds, the more due diligence you should do.
• Tip No. 7 – Get the agent to sign on his promises. When both parties finally come to agreement, you (the party writing the check) should look at the other person and say something to the effect of: “To protect both of us, let’s agree upon what we agreed upon.” Write the date and the names of the parties, and then start numbering the points. For example:
  • Agent Mr. Smith says the fees are 0.5%, and there are no other hidden fees in the product.
  • While there is a variable component in this annuity, I am guaranteed a minimum of 5% yield on my investment.
  • The variable portion of this policy is indexed to the Consumer Price Index.
• Tip No. 8 – Demand a quote for a single premium immediate lifetime annuity with a death benefit, and compare it to the other options. The monthly income for the single premium life annuity should be your base number, as it’s one of the simplest annuities out there. As the agent starts to add “smoke and mirrors” to the equation with additional features, compare the payout to your original single premium immediate lifetime annuity.
• Tip No. 9 – Compare one annuity feature at a time. Don’t let the agent bamboozle you with multiple new features at once. If he wants to sell you an inflation rider, a death benefit, and a ramp-up period, don’t compare this annuity to the basic one.Instead, ask for a quote with just the inflation rider feature. Compare it to your basic single premium annuity. Then, tell him to give you a quote for an annuity with just the death benefit feature. Once again, compare it to your basic annuity and evaluate the difference. This way, you can tell how much each component costs. The agent won’t be able to bundle a bunch of features to confuse you.

The Miller’s Money Forever team and I want to un-complicate annuities. The topic is filled with exceptions and complications, and this short list can’t cover every piece of minutia in an annuity contract. However, anyone who owns an annuity and anyone who’s ever considered buying one should read our comprehensive special report, The Ultimate Annuity Guide. It’s one of the only resources out there written by financial educators who do NOT sell insurance or annuities, and it’s chalked full of vital information written in easy-to-understand language. Download your copy of The Ultimate Annuity Guide today.

Tap in to Your Inner Feminist-Real Estate Mogul Without Holding Real Property

By Dennis Miller

The new book titled #GIRLBOSS by Sophia Amoruso—reformed petty thief and CEO of a $100 million online clothing store—is the latest “live and work as I do if you want to succeed” book from a string of brand-building female executives. Facebook COO Sheryl Sandberg has women “leaning in,” while Arianna Huffington’s sleep crusade marches on in her latest book, Thrive. Now, I should confess that I haven’t actually read any of these books; one of my colleagues gave me the recap. However, I have had another female executive on my mind: Ms. C.

Ms. C heads up a certain real estate investment trust (REIT)—I’ll call it “Company V”—which Miller’s Money Forever chief analyst Andrey Dashkov and I featured in the latest edition of our monthly newsletter. So while she might not have a cult following or million-dollar book deal, she’s our gal—and for good reason:

• As Company V’s CEO for the last 15 years, Ms. C has boosted its market capitalization from $200 million to $19 billion.
• Under her leadership, Company V’s compound annual total shareholder return topped 28% for 14 years running, and it was named one of the top performing, publicly traded financial companies during the first decade of this century.
• As Andrey puts it, Ms. C has molded Company V into a “rock-solid business with an investment-grade credit rating, robust balance sheet, and reliable dividend history.”

On top of that, Ms. C has received countless accolades from the Wall Street Journal, the Financial Times, and a parade of other institutions. Plus, she practiced real estate, corporate and finance law, and sits on the Board of Trustees for the University of Chicago.

When asked about her professional achievements in an interview with the Chicago Tribune, Ms. C attributed her drive to her working-class Pittsburg upbringing. As the daughter of immigrant parents—a mailman and housewife—Ms. C said, “[T]here was always so much more for me to aspire to: in terms of education, in terms of seeing the world, in terms of working hard and achieving things. And so that drive comes from the kind of upbringing that I had.”

After announcing she wanted to be a lawyer, Ms. C’s father took her to watch a trial headed by one of the few lawyers he knew, a criminal defense lawyer whose son later became her husband. Ms. C praised her Italian father in the Chicago Tribune article, saying, “It was very unusual in that time, in that socioeconomic environment, very working-class and ethnic, that he would be what I would call a feminist. He would never call it that, but he was so supportive of my sister and me, and that was really rare.”

Sounds like my kind of dad.

OK, you get the point: this is an up-by-her-bootstraps, highly qualified CEO who puts shareholders first—a woman I imagine my wife and daughters would be happy to know.

Profiting from an Aging Population

People age 65 and over are expected to make up 19% of the US population by 2030—up from 12.4% in 2000. And it’s no secret that this demographic will demand more and more access to health care. Company V is tapping into this expanding need: It operates healthcare-related facilities, including hospitals, skilled nursing facilities, senior housing, and medical office buildings at over 1,500 properties in the US, Canada, and the United Kingdom.

Let me back up, though, and review REITs in general. Publicly traded REITs, which are traded just like any other stock, allow people like you and me to invest in large-scale, income-producing real estate without the headache of actually holding illiquid physical property. To be considered a REIT, 75% of a corporation’s income must come from real estate in some form or another.

Company V’s portfolio, for example, includes medical office building operations, senior living operations, and triple-net lease operations, whereby tenants cover taxes, insurance payments, maintenance, and repairs in addition to the rent. Ms. C has a proven track record of managing these holdings profitably over the last 15 years.

A word of caution is also in order here: not all REITs are investment worthy. Their profits depend on selecting and managing their properties well and keeping costs under control. Andrey and I culled a long list before landing on Company V. If you are considering buying in to a REIT, you should research it thoroughly as well.

The Rule of 90

One happy quirk of REITs is that they are required to distribute at least 90% of the taxable income to shareholders each year via dividends. On the flip side, they can also deduct these payouts from their corporate-level taxes.

We’re happy to report that Company V has a stellar dividend history: 9% compound annual dividend growth over the past 14 years. Andrey put together the chart below to show its dividend growth since 2Q11.

Now, you’re probably wondering why I don’t just come out with it. Who is Ms. C and what is Company V? And of course I’m chomping at the bit to tell you, but we value our relationship with the thousands of Money Forever subscribers too much to do that. So we have a seamless way for you to count yourself among them: Sign up for a 3-month, no-risk trial subscription and read Andrey’s in-depth write-up on Company V. You’ll gain immediate access to our complete portfolio curated for seniors and conservative investors alike, our full library of special reports, and all of our back issues.

Read through the material, and if our breed of high-yield-meets-low-risk investing isn’t for you, just call or write within 90 days, and we’ll return every penny you paid. Click here to subscribe to Money Forever now.

When All You Have Left Is the Cost of Breakfast at McDonald’s

By Dennis Miller

When I was 20 years old, I sat through my first day of a business law course at Northwestern University. The professor began by writing two words on the blackboard (in the prehistoric days of blackboards and chalk): Caveat emptor. He raised his voice and said, “Let the buyer beware!” I’m here to echo his warning, but this time it’s about annuities.

Annuities are at the top of the list of complicated products that often profit insurance companies without adequately compensating the buyer in return. Put plainly, sometimes you don’t get what you thought you paid for.

And, while annuities are often described as a “transfer of risk,” which is basically correct, owning an annuity will not transfer the risk of one of the greatest hazard’s to a retiree’s financial security: inflation. Inflation isn’t the only risk to worry about—lack of liquidity and insurance company default should also top your list of concerns—but it can be the most treacherous for someone with an annuity-heavy portfolio.

Will an annuity protect your lifestyle? In the short term, it might. If you believe the Federal Reserve when it says it will keep inflation at 2% or less, perhaps it will for a period of time. Even then, inflation will eat away at the buying power of your annuity payout fairly quickly. You are contractually guaranteed income; however, that does not guarantee your lifestyle.

To see the effect, my analysts and I charted the purchasing power of a single premium immediate lifetime annuity with installment refund, which pays $583.33 per month. We’ve compared several inflation scenarios: the currently tame 2% inflation rate; the long-run average of about 3%; and the possibility of things getting considerably worse at 7% inflation. We’re not even talking about hyperinflation—just reasonable estimates.

Even at the low 2% inflation rate, your $583.33 benefit would only have the purchasing power of $392.56 after 20 years. In the 7% inflation scenario, the purchasing power would be down to $150.74. Let’s put this into context.

The average US electricity bill is around $103.67. The average cellphone bill is $111. According to the USDA, an elderly household of two that’s being extremely thrifty could get its monthly grocery bill down to as low as $357.30 per month. In total, that’s $571.97 – leaving just enough for a McDonald’s breakfast.

Right off the bat, that isn’t so bad. The annuity takes care of the cellphones, the electricity, the groceries, and leaves a little extra. However, after 20 years at 2% inflation and a purchasing power of $392.56, the benefit would only be enough to pay for the thrifty grocery budget, leaving only $35.26 left over. Though your annuity benefits are the same, prices have risen, so now you have less purchasing power.

After 20 years of 3% inflation, it gets even worse. With $219.85 in purchasing power, you’ll have to weigh either purchasing 2/3 of your usual groceries against paying the electricity and phones. You won’t be able to do it all. By the third year, you will need to add funds to your annuity payment to cover those expenses.

And under the 7% scenario, you’ll only be able to pay for the electricity bill with less than $50 in purchasing power left over. That’s hardly the lifetime income most annuity buyers had in mind.

Furthermore, consider that our assumptions are a little optimistic. In all likelihood, your electricity and grocery bills will probably rise faster than the rate of inflation. If that’s the case, then you’d be in real trouble.

So, while annuities promise guaranteed income, they certainly do not guarantee what that income will afford you in the future.

Annuity policies can be structured with inflation protection, but those options are expensive in terms of the lower initial payments. With benefits starting so much lower, you would have to live an exceptionally long time to make them work out.

Depending on your circumstances, an annuity might play a useful role in your long-term financial plans. There is much to be said for transferring some risk to a quality insurance company. However, transfering one risk without planning for another could be catastrophic. Even something like a 5% inflation rider might not protect you if higher inflation rates become a reality. If a considerable portion of your portfolio is in annuities, then another portion needs to be balanced to fight inflation, with holdings such as precious metals.

While it’s impossible to make the risk of inflation go away, there are a few simple things you can do to minimize it:

• Never hold a very large portion of your portfolio in annuities. If high inflation picks up you could be entirely cleaned out.
• If you’re holding annuities, make sure that another part of your portfolio is geared to hedge against inflation.

Now, I’m not shouting caveat emptor just for the heck of it. As a retirement advocate and senior editor at Miller’s Money Forever my mandate is transparent financial education for seniors, conservative investors and anyone serious about building a rich retirement. That’s why my team of analysts and I have put together a free, comprehensive special report called Annuities De-Mystified—Three Simple Tools for Choosing the Right Annuity. Get the full truth on annuities by downloading your complimentary copy of Annuities De-Mystified today.

Kill Peter Pan: How to Make “Home” Unwelcoming In a World Where 26 Equals 18

By Dennis Miller

My youngest son, who is now in his 50s, asked me what it felt like when all the children left the nest. I thought for a moment and said:

For my entire adult life, I’d driven a boat down a clearly marked narrow channel. I had to stay between the markers in order to provide for my family. Then, when you and your siblings left, I came to a vast ocean with no markers and no land in sight. It was exciting and overwhelming; I had all these options, and I wasn’t sure what to do. But it sure was nice my money was finally freed up to make that last push toward retirement.

He told me that was exactly how he felt after graduating college—minus that bit about retirement: flat broke with no real job on the horizon.

He had the option of living with us in Florida or moving to Atlanta, where he’d gone to high school and most of his friends lived. He did not ask for, nor did we give him any financial support—and he opted for Atlanta. He lived with a high-school friend and worked in a restaurant until, several months later, he got his first and only “real job.” He’s been with the same employer for over 25 years and is doing just fine.

Nothing can screw up retirement plans like supporting adult children after you’ve shelled out tens of thousands of dollars in college tuition, shuttled them back and forth for Thanksgiving and Christmas breaks, and maybe purchased a new computer for all that research and writing they did (or maybe didn’t) do over four-plus years. And yet some 85% of parents plan to provide some sort of post-graduation financial assistance.

Emerging Adulthood

So, what has changed since my son graduated a few decades ago? Sure, new graduates are entering a much more difficult job market than he did, and even those who do secure jobs are unlikely to have the job stability he’s enjoyed. But a difficult job market is only part of the story. Social norms have shifted so that accepting help from Mom and Dad well into your 20s is “OK.”

Since the 1960s psychologists have used Erik Erikson’s eight stages of psychosocial development to chart personal growth from birth to death. In the paper How 18 Became 26: The Changing Concept of Adulthood, Eileen and Jon Gallo note that in the late 1980s, young people began transitioning from Erikson’s fifth stage, adolescence, to his sixth stage, young adulthood—where a person’s main job is to find intimacy, usually through marriage and friendship, and to become self-supporting—nearly a decade after they reached legal adult status. Psychologists call this trend “emerging adulthood.”

As Gallo and Gallo mention, for a certain socioeconomic set, growing up and moving out—permanently—means downgrading your lifestyle. The authors quote sociologists Allan Schnaiberg and Sheldon Goldenberg as stating:

The supportive environment of a middle-class professional family makes movement toward independent adulthood relatively less attractive than maintenance of the [extended adolescence] status quo. Many of the social gains of adult roles can be achieved with higher benefits and generally lower costs by sharing parental resources rather than by moving out on one’s own!

The War Factor and “Kennedy Fathers”

I came of age between the Korean and Vietnam Wars, when society’s message was crystal clear: when a young man graduates from high school, he either enrolls in college or joins the military. Any young man who didn’t go straight to college felt serious pressure to enlist because Uncle Sam would likely draft him anyway—better to just get it over with. However it happened, the bond between a young man and his childhood home was broken, swiftly and completely.

By the time my peers were 22 or so—graduating from college or leaving the military—they didn’t even consider returning “home” an option. And although it’s not something I’d encourage today, most women of my generation married and started families soon after high school or college.

Draft deferment was another reason to marry and have kids. Beginning in 1948, various executive orders altered the precise rules on Class III-A paternity deferments, and in 1963 President Kennedy broadened the scope of who could qualify, giving young men another incentive to have children pronto. Enter the “Kennedy father.”

By the time my son graduated from high school, a much larger percentage of his classmates went to college. Still, post college, society’s expectations remained clear: stand on your own and build your own life.

Making Sure Your Young Adult Emerges on Time

So, what can parents do today to make “home” a lot less welcoming and complete financial independence look like the brass ring it should be? Turns out, quite a bit.

#1—Be honest with yourself. Ask yourself: is my financial assistance helping or hindering my child’s emotional and financial growth? Well-meaning, soft-hearted parents can do a lot of harm without realizing it. Who wouldn’t enjoy having most all the privileges of adulthood without the responsibilities?

I get it, folks. Most parents don’t want their children to struggle like they may have as young adults. But balancing that pull with the understanding that those struggles—and successes—is critical if your child is to emerge an independent adult with a solid self-image.

#2—Set realistic expectations early. Clarifying what you expect of your children financially sooner rather than later helps you and your kids. They need to know when you’re cutting the cord so they can prepare (hopefully with your guidance) well in advance. Whether you expect them to handle their own finances step by step or all at once, at 18 or 22, after high school or after graduate school, spell it out.

Moreover, make sure those expectations jive with your retirement plans. If your youngest child won’t graduate from high school until you’re 63, be honest with everyone about how much you can contribute to higher education.

#3—Mom and Dad must be on the same page. One parent slipping the son or daughter money while the other fumes does little for a marriage or the emotional and financial well-being of the child.

Some years ago a friend of ours was really struggling with her 23-year-old son. After counseling, the soft-hearted parent realized the damage she was doing and sent her son packing. 25 years later, both parents and their son say it was a major milestone in their lives. He finally got a good job, became very responsible, and has raised two wonderful children. Now he’s actually thankful for the day both Mom and Dad said, “Enough is enough.”

Most parents understand what the right thing to do is; however, it can be difficult. That said, making the same accommodations for your child over and over will only produce the same result.

#4—Be a parent and a coach. Offer emotional support and financial mentoring. Saying “no” to financial assistance does not mean you can’t help with budgeting, résumé writing, professional networking, interview preparation—heck, whatever it takes! If you’re lucky enough to have a 20-something kid who will actually talk you about this stuff, jump on each and every opportunity to teach and listen.

The job market may be tough for new graduates, but forcing your child to navigate it anyway might just be the best way to help.

When Your Bedroom Isn’t Yours Anymore

Within months of my oldest daughter, Dawn, marrying and moving out of our house, one of my son’s high-school teammates, Mark, moved in for his senior year of high school. Mark’s parents had been transferred out of town, and he wanted to finish high school where he’d started. We offered to put him up for the year.

When Dawn came over and saw how we’d transformed her feminine bedroom into Mark’s room, she started to cry. That was her bedroom!

Her mother and I looked at each other, and Mom said, “Now it’s Mark’s room. Your bedroom is in your own home.” It was a very special moment. I found it quite amusing how quickly Dawn turned her own daughter’s bedroom into an office when she moved out.

Retiring rich is hard enough without paying for your child’s extended adolescence. Anyone in or planning for retirement today faces an unprecedented set of hurdles: from stubbornly low interest rates, to vulnerable pensions and an unstable Social Security system, to frightening and confusing changes in our healthcare system. That’s why every Thursday I share cutting-edge solutions to these challenges in my free weekly e-letter, Miller’s Money Weekly. Sign up here and start receiving your free copy of Miller’s Money Weekly now.

Rock Concerts, and How to Find On-Sale Stocks to Fuel a Rock-Star Retirement

By Dennis Miller

Have you ever wondered what really happens behind the scenes at a rock concert? My good friend Stew is a top audio engineer—you know, the guy who wears thousand-dollar headphones and stands below the stage manning dials at rock concerts the world over. I shadowed him backstage a handful of times, and the scene was not what I thought it would be. Sure, they all dressed the rocker part, but I was blown away by everyone’s professionalism.

Today Chris Wood and I are taking you backstage at a much more conservative venue—but one that could make your retirement a whole lot richer. Chris is the managing senior analyst at Casey Research; his responsibilities include recruiting and training new analysts in “The Casey Way,” and heading up research for the entire technology team. He also teams up with our chief analyst Andrey Dashkov and me to manage the Money Forever portfolio.

When I started Miller’s Money Forever, I already subscribed to Casey’s contrarian mantra: Look where nobody else is looking. The most successful investors take invaluable nuggets of information uncovered by world-class analysts and watch their investments grow long before the mainstream catches on. This is the game for my colleagues on the metals and mining, energy, and technology teams, as well as my own squad.

When we applied this philosophy to a highly diversified, high-yield portfolio designed to enrich retirees and conservative investors alike—all while guarding their nest eggs against catastrophic loss and the silent killer, inflation—I imagined our portfolio would hold many household names. Turns out, it does: 5 or 6, I’d say, out of our 20 current holdings. Whether we’re recommending a company whose products you likely have in your cupboard or an international, high-yield energy play, our approach stays the same.

The take-home message is that this approach works. At our most recent publication date, the stock portion of our portfolio, which is designed to make up 50% of a retirement portfolio under our Bulletproof Income Strategy, showed gains of 23.6%—without taking on more risk than befits a low-stress retirement.

On that note, let’s talk to Chris about how we’re making that happen and how our method can make your retirement a rich one.

Dennis Miller: Welcome. Thanks for taking the time to chat, Chris. Please tell our readers a bit about your background.

Chris Wood: My pleasure, Dennis. My background is really in valuation. I double majored in economics and finance in college, then spent several years as a commercial appraiser and valuation consultant where I appraised a huge variety of commercial properties and private businesses.

Then I returned to graduate school, and a few months after I received my MBA with a finance concentration, I started at Casey Research.

When I arrived at Casey, the learning curve was much steeper than I’d expected. I mean, I had an MBA and a lot of real-world experience valuing companies. What could I have to learn? Turns out a lot.

For most of my appraisal and business valuation jobs, I’d used discounted cash flow and sales comparison analyses to determine a business’ or property’s market value. There were subtleties I won’t get into here, but the basic idea was to calculate the most probable price at which the subject would trade in a competitive and open market at a given point in time.

Publicly traded equities are a different beast because that figure is already available. It’s the stock price, or in the case of a whole business it’s the market capitalization (i.e., the stock price multiplied by the number of shares outstanding).

So, the job of analysts at Casey Research boils down to determining if the prevailing market price of a stock is cheap, fair, or expensive.

Our goal is to find stocks that are “on sale.” Now, that can mean a couple of things. They might just be out of favor with Wall Street and have a stock price that doesn’t reflect their true value based on their current operation. It can also mean understanding and believing in their business plan and profiting as they add value to their bottom line.

In the world of publicly traded equities, investors should never pay fair value. You want to buy the stock at a discount and think about selling it when it reaches fair value.

Dennis: I want to make sure our readers caught that. You’re saying we never want to pay fair value for a stock; that’s when we want to sell it?

Chris: Exactly. Of course, you already knew that. Consider Hess, which you and your analyst team recommended back in August 2012.

The stock was out of favor with Wall Street, but Hess is operating in one of the world’s top oil areas—the Bakken Shale—and its valuation ratios were very attractive. It had also begun to realign its business focus in a way that made sense to us.

We made the call ahead of others, and as the market realized what we already knew, the stock price increased. We determined that the stock was trading at a discount—trading below fair value—and when the market caught on, the stock price came to meet us.

As a result, we realized a 78.3% gain on Hess, including stock appreciation, dividends, and income from the covered call options we wrote on the company.

Dennis: Subscribers ask me what it means to “look where no one else is looking.” When a new analyst asks you that question, how do you answer?

Chris: Well, it’s an underpinning of a contrarian approach to investing, but it translates into different specifics for our various teams. For the metals team, it’s quite literal. They trek all over the world visiting early-stage, under-the-radar miners on the verge of making a big strike. For the technology team, it often means digging into the science of an undiscovered small biotech outfit that could have a blockbuster cancer drug on its hands. At Money Forever, you and your analysts apply that same approach to a wide variety of sectors.

Dennis: Our publication focuses on retirement money, not speculating on the next hot technology trend or company trying to get the next miracle cure through the FDA. How do you teach our analysts to apply those principles to less-speculative investments?

Chris: Well, let’s look at what your goals are. You want a safe portfolio that beats inflation and throws off enough income so your subscribers can retire rich. Buying a bunch of utility stocks and holding a few mutual funds won’t cut it.

Your subscribers need income and appreciation. That means we look well past charts and dig into companies—much deeper than just reading the annual reports. Then we validate the data. We train our analysts to go beyond the 10-Ks and 10-Qs—to contact the company and ask tough questions; to independently verify as much as possible; and to take every answer from management with a grain of salt.

The average S&P 500 company is paying a 1.83% dividend. While a company might be performing well and increasing dividends, it could take a decade or more before dividend increases surpass inflation and allow you to take some money out to live on. That’s why we hunt for stock with real potential to appreciate on top of dividends.

Lots of companies are considered out of favor by Wall Street—many for good reason. We uncover why they’re out of favor and what they’re doing to turn things around. There are plenty of opportunities out there; we train our analysts where to look and what to look for.

Dennis: I imagine finding qualified analysts is challenging. Can you expand on the skills and qualities they need?

Chris: Of course. In addition to being strong analysts and writers, they have to be self-motivated, passionate about what we do, and able to come up with good investment ideas and defensible conclusions. All the spreadsheets and number-crunching in the world is of no value in this business if you can’t say, “I recommend XYZ because of this, this, and this” and defend your conclusion.

The recommendations we make affect our subscribers’ livelihoods, and we take that seriously. Our analysts would never recommend a company in which they wouldn’t invest their own money. And we do invest in many of the stocks we recommend—after our subscribers get their chance, of course.

Dennis: During a recent meeting, you said that part of the analyst’s job is to filter out the noise. Can you explain to our readers what you meant?

Chris: Nearly every public company has a marketing team with a hand in its press releases. Management wants the company and the stock presented in the best, most favorable light regardless of whether it’s delivering good, bad, or neutral news. Though technically accurate, what pundits say about a company on MSNBC in a quick sound bite or a press release is often an incomplete story and sometimes misleading. These snippets of information are not a sound basis for investing your money. We do our own due diligence—and a lot of it—to filter through the doublespeak and spin. No matter where we pull information from, we look for what’s left unsaid and why.

There’s noise about anything from tulips to technology, from Amazon to Zillow. We teach our analysts to drown out that hype and consider what’s left out: facts uncovered by our own independent research.

Dennis: Any final thoughts?

Chris: I want to tell your readers about your role in the process. Money Forever crosses all sectors, and since you’ve literally worked with hundreds of businesses and industries, you’ve really helped me train the analysts.

I’m going to tell a story about you if that’s OK.

Dennis: Sure, go ahead—as long as it has a happy ending.

Chris: Our team was discussing one of our current holdings, and one of our analysts mentioned new programs it was implementing to streamline its operation. We quickly learned you had worked with hundreds of different distributors all over the world. You immediately jumped on the new initiative, took the company’s profit and loss statement, and showed us what a significant impact it will have on its bottom line.

You helped us cross the bridge from raw information to understanding the financial impact on our portfolio candidates. That’s the final step in the process: understanding what the financial impact will be of a company’s current initiatives and then investing before the MSNBC sound bite comes out.

Dennis: Chris, thank you so much for taking the time to help our subscribers understand what takes place behind the curtain. I’m proud to be associated with such a group of dedicated and free-thinking professionals.

Chris: Thank you. My pleasure, Dennis; thank you for inviting me.

We’re proud that Casey’s contrarian investment philosophy is working just as well for our highly diversified retirement portfolio as it has for speculators across all sectors, and I’m gunning to share more financial know-how with you.

It just takes one easy step: sign up for Miller’s Money Weekly, our free weekly missive that educates seniors and savers about timely investment strategies. You’ll receive ahead-of-the-curve financial insight and commentary right in your inbox every Thursday. Start down your own path to a rich retirement by signing up today.

Why Seattle’s Minimum Wage Hike Matters to Seniors

By Dennis Miller

The US is gearing up for mid-term elections this November 4—so much so that Rolling Stone announced the relaunch of the “Rock the Vote” campaign last month (according to one of the younger members of my team). And just like clockwork, minimum wage is making headlines again too. It’s déjà vu all over again.

At a breakfast some 20 years ago, I sat next to a prominent, high-ranking US senator now long retired. He showed us data from the Bureau of Labor Statistics indicating that every time the minimum wage went up, more unemployment followed. Businesses were forced to ship jobs offshore—whether they wanted to or not—and started looking for ways to automate low- or unskilled jobs.

This senator and I talked one-on-one later in the day. Annoyed that politicians continued to do something that flat out doesn’t work, I asked him the rhetorical “Why?” He grinned and responded that politicians from all parties pander to the voters—and are more than willing to hurt Americans to get elected. Of course, I already knew that.

Swiss voters made the sane choice recently when they voted down a 22-franc (nearly $25) minimum wage. 76% voted to reject what would have been the world’s highest minimum wage. If only Seattle’s city council were as clearheaded as the Swiss! That city’s new $15 per hour minimum wage—the highest in the nation—will be phased in beginning next April.

The current federal minimum wage is $7.25 per hour. 22 states currently have higher minimum wage rates, and Washington’s wage floor (no surprise here) is the current high at $9.32 per hour. Not for long, though: Vermont just passed legislation that will raise its minimum wage to $10.50 per hour by 2018; Massachusetts is closing in on an $11 per hour rate. And earlier this year Connecticut, Hawaii, and Maryland passed $10.10 per hour minimum wage legislation.

More Jobs for Seniors That Still Don’t Pay That Much

Chances are you don’t live in any of those states. Maybe you even live in a place like Louisiana or South Carolina with no state minimum wage to speak of. Still, these increases affect us all by way of increased production costs and the like, which businesses ultimately pass on to consumers.

Minimum wage increases and the accompanying price hikes disproportionately affect seniors as a group. If you’re still working, your wages should increase with prices. But if you’re not, your income might not keep up, particularly if you depend on Social Security. Simply put, Social Security’s cost of living increases do not keep up with, well, the cost of living. Each time minimum wages go up, they push the buying power of a fixed income down.

Does raising the minimum wage force seniors out of jobs? No, actually. The percentage of seniors in the workforce is rapidly increasing as they look for post-retirement jobs, often in the only place they can find them: low on the totem pole.

The chart below shows the marked increase in the percentage of employed seniors compared to other age groups.

Walk into any Walmart, McDonald’s, Home Depot, or other big-box store and you’ll see a lot of seniors waiting on you with a smile… albeit sometimes forced. Businesses can move manufacturing jobs offshore, but they have to staff in-person retail jobs with live bodies right where their stores are.

Still, retailers have to cut back to cover minimum wage increases as best they can. My wife and I recently went into a fast-food restaurant and stood in line for 10 minutes. Talk about a redefinition of fast food: McDonald’s reported in April that their same-store sales rose 1.2%, and yet their lines and wait times have increased a lot more than that.

And it’s not just fast food. We just went to two different Home Depots to buy an inexpensive area rug and struggled to find a clerk in both. When we finally did, there were lines of antsy customers in front of us three people deep. We stood in line and waited our turn.

Of course, a senior earning minimum wage has a different perspective. Any 70-year-old in Seattle earning $10 per hour must be awfully excited about a 50% pay bump. As the saying goes, though, there is good news and bad news.

At one time, the minimum wage was meant to be “apprentice” pay for young people entering the work force. Young people, however, have the highest rate of unemployment: 15% for workers age 16-24. While this is an ongoing trend—before the 2008 recession, one in eight young workers was unemployed, according to a 2010 joint congressional report—higher minimum wages aren’t helping.

Ask any owner or manager of a retail store whom he or she would rather hire: a young person with no job experience or a senior? The senior wins out almost every time. Employers consider them to be more diligent, harder workers and more likely to show up consistently and on time. With fewer and fewer unskilled jobs out there and a larger labor force to choose from, seniors have a real advantage.

Higher Mandatory Wages Spur Automation

The other side of the coin is that higher minimum wages give retailers a greater incentive to automate unskilled tasks. How many of us now find the self-checkout at Home Depot or the grocery store faster and easier? One retail clerk can look over five to six customers checking out and assist them as needed.

Would you rather folks have jobs paying $10 per hour or this?

I have great empathy for a friend who, at 80 years old, went back to work in a retail store earning minimum wage. He had to in order to make ends meet. He worked 20-25 hours a week and came home exhausted. Certainly another $5 per hour would have helped; it might add $100-125 per week to his take-home pay. From his perspective, the push for a higher minimum wage is certainly understandable.

But consider this: He and his wife live in a small condo in a modest 55-plus community. Once a week, an army of workers descends on the condominium complex to mow the grass and perform the maintenance for the entire community. Those workers would also have to be paid more, and those costs would be passed on to my friend and his neighbors via their association dues.

No matter where they go to spend money—the grocery store, the occasional restaurant, or the gas pump—prices will reflect the minimum wages of others, and the cycle will continue. Soon, $15 per hour will mean the folks in Seattle are no better off than they were before. And what’s worse, young people who need job experience are not going to get it.

Sad to say, the few seniors I know who must work were never poor during their first careers. Many enjoyed excellent salaries, but they never learned to live within their means. Now that lifestyle has caught up with them.

Moreover, nearly every politician running during the upcoming mid-term elections (and every other election) seems to have a plan to “fix” Social Security. That’s a code for reducing benefits, making the minimum wage and subsequent price increases all the more relevant to seniors living on fixed incomes.

Meanwhile, the minimum wage will continue to rise. Some may benefit in the short term, but working seniors and retirees alike will all watch their cost of living rise. My team of Miller’s Money Forever analysts and I have a solution, though: a singular investing approach specifically curated for seniors and savers who want a higher monthly income stream without taking on post-retirement jobs or undue financial risks.

Click here to learn more about my favorite money-making strategy now and start down your path to a rich retirement today.

A Guy Leans on a Lamppost… and You Make a Buck

By Dennis Miller

To paraphrase Scottish novelist Andrew Lang, some people use statistics like a drunk uses lampposts—for support rather than illumination. Numbers can be twisted and abused to support false claims, and even correct data is sometimes misinterpreted.

For example, you may often see claims like “an expert opinion poll showed that inflation next year will be 2.65%.” Looks legitimate, right? We have experts and a precise number; what else do we need? Well, there are at least three potential biases at work in this short statement:

• Who are the experts? Are they economists and/or statisticians with robust methods and a good track record, or are they just the ones who had the time to reply to this survey? There is a potential selection bias here.
• How large was the sample? There is a rule of thumb in statistics that for an average to even start having any weight at least 30 experts (assuming their track records are solid) should have replied. If only 5 or 10 did the average tells us nothing.
• And what’s with the two digits after the decimal point? It sure looks precise, better than, say a range of 2-4%. However, such precision is often an illusion, or what’s called “over-precision bias.” Imagine a recipe that tells you to take two tablespoons of flour, half a cup of sugar and other things and then says the pie you’re baking will have 512 kcal. I’d bet that pie would never have exactly 512 kcal even if you follow the instructions to the tee. Same with inflation predictions: when working with complex systems such as the economy adding extra digits after the decimal point is a cheap shortcut to achieving the appearance of precision. In reality a (rough) ballpark figure is the best we can get.

With that in mind I want to clear the fog around two critical statistical measures, beta and correlation, and explain how they can help you invest smarter. There are many other statistical measures out there, but these two are critical for a well-diversified retirement portfolio.

Correlation-Based Diversification: When “Weak” Offers Better Protection

Let’s start with correlation.

Correlation tells us how closely related two datasets are. The correlation coefficient ranges from -1 to +1. A correlation coefficient of -1 means the two measures are perfectly negatively correlated. If one goes up, the other always goes down. Plus, they do so simultaneously. If the correlation coefficient is +1, they move together in the same direction 100% of the time.

The three most important points about correlation are:

• Correlation only shows how two variables move in relation to one another over time;
• Correlation changes over time; and
• Correlation tells us nothing about cause and effect.

The old adage “correlation doesn’t imply causation” is popular because it’s true. Even if the correlation between two sets of observations is strong, one still might not cause the other. Other statistical measures try to estimate causation, but correlation is not one of them. It only tells us that when “A” happens, “B” is likely to happen too.

Here’s a scholarly example.

Source: Dilbert

Correlation is important for diversification. The weaker the correlation between two assets in our portfolio, the better protected we are from negative movements in any one of them.

Bear in mind that correlation changes over time. The following chart shows the correlation of monthly returns between gold and the S&P 500. Each point on the line shows the correlation over the previous three years.

For example, the first number in the chart, -0.29, tells us that the correlation of monthly returns during the period of March 1975–March 1978 is -0.29. This tells us that for the preceding three years the relationship between gold and the S&P 500 was negative and quite weak. Thus, a portfolio of gold and the S&P 500 was well diversified before and at that date.

But as you see, this correlation fluctuated. It peaked at about 0.53 in 1983 and dropped to -0.43 in 1990.

The 1978 -0.30 correlation of a portfolio of gold and the S&P would not last. Gold’s returns followed the S&P much more closely in 1982, 1983, and 2006-2007. These relationships are not set in stone.

For retirement investors, the take-home wisdom about correlation is:

• Again, correlation changes over time. When you invest, try to pick assets with low (preferably negative) correlation to what you already hold;
• When you purchase an asset, consider how long you plan to hold it and how correlation may change during that time; and
• Most importantly, when the correlation does change, rebalance your portfolio to make sure it remains properly diversified.

For the Money Forever portfolio—a pioneer retirement portfolio built to safeguard your nest egg against its threat de jour, no matter what that is—we are using correlation to look for assets that are not strongly related to the US market right now. For example, the two latest additions to the Money Forever portfolio are: an international fund with an underlying index that includes companies located outside the United States whose income is denominated in foreign currencies; and, a high-yield dividend-paying energy play that is fantastic contrarian opportunity and a true global citizen—born in Norway, based in Bermuda and managed from London.

We are concerned about inflation, and holding these types of asset is one way to protect ourselves. For the international fund, we expect its value to rise if the value of the US dollar declines, and a correlation lower than that of another dividend-oriented fund we hold should protect us against a US market downturn even further.

Plus, the energy play I mentioned has income in a host of foreign currencies, providing an additional shield against the decline in the US dollar—and a 10% yield that’s well ahead in inflation to boot.

We also hold a certain household name whose products you likely have in your home right now. However, 70% of its business comes from outside North America. While it’s part of the S&P 500, its operating income denominated in foreign currencies should provide some inflation protection too.

“Is this a good hedge against inflation?” is part of the Five-Point Balancing Test we use to analyze investments. In effect, selecting holdings that should perform well when the US dollar loses value and that tend to move in opposite directions from the US market helps balance our portfolio.

Beta Measures Systematic Risk, Not Volatility

Now, let’s turn to beta. Chances are your online broker shows a beta number on the summary page of any stock you look at. What does it mean?

Beta measures an investment’s risk in relation to the market, or its “systematic” risk. Note that correlation measures the relationship between any two assets, but with beta one of them always represents “the market” or a benchmark. While correlation between the asset and the market shows us if they move in the same direction, beta also shows the magnitude of the relationship.

Historically, if a stock rose 2% when the market was up 1%, the correlation would be 1. They moved in the same direction all of the time, so the relationship is obvious.

Beta adds another dimension. If a stock gains 2% while the market gains only 1%, the beta will be 2. It not only shows the relationship (positive) but also its magnitude (x2). But there is a caveat.

A very common misconception about beta is that it measures volatility. This is inaccurate. Let me share a simplified beta formula to quickly illustrate this point.

The formula suggests that an asset with low correlation to the market and high volatility has the same beta as one with high correlation and low volatility. The bottom line is that high beta alone does not tell us how risky an asset is.

The key takeaways are:

• Beta is not an all-encompassing measure of a stock’s risk.
• Beta depends on what you consider “the market.” Usually broad market indices like the S&P 500 are used to measure asset betas, but they are not the only option. If another benchmark is used, the beta of a particular investment will change.
• Like correlation, beta changes over time.

Unlike the drunk who uses the proverbial lamppost for support, we use statistics to test our premises. They help guide our thinking, but we don’t let them dominate it. Used correctly, they enrich our understanding and guide us to better investment decisions.

You can access our portfolio online right now and find out just what those decisions are by giving our monthly newsletter, Miller’s Money Forever, a risk-free try. Sign up today, and if our brand of “high-yield meets ultra-safe retirement investing” isn’t for you, just call or drop us a note and we’ll give you a 100% refund of every penny you paid, no questions asked.

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5 Women Who Made Me Rich and What They Can Teach You

By Dennis Miller

My grandmother refused to share the heart-wrenching details until I was in the Marine Corps. I’d heard bits and pieces about my ne’er-do-well father but didn’t fully grasp the devastation he’d left behind until Grandmother spilled the story with tears in her eyes:

Your father never worked. After you were born he stole all the money in the house, vanished, and was never seen again. Fortunately your mother had gone back to work earning $8 per week.

However, one of the worst parts was: the store repossessed your baby carriage because your father stole the money your mother had saved to pay it off.

This was 1940, and Mom didn’t have the career options women have today. We lived with Grandmother and two unmarried aunts (both born before 1900), and together they raised me. Grandmother assumed the traditional mother role, while my mom and aunts worked so we could all survive.

While Mom eventually remarried, for 16 of the 18 years I lived at home, it was just four women and me. I wouldn’t bond with my stepfather—a true stand-up guy—until years later.

You’d think the importance of women’s financial independence would be a no-brainer for me. But, as my ex-wife and oldest daughter, Dawn, would say, “You meant well, but you were a slow learner.”

When Dawn was close to age 30, she was a vice president at a major bank and managed 200 employees. The women’s movement had blossomed by then, and more and more women were popping up in the sales training courses I taught at the time. When Dawn and I talked this over she made it clear that what I’d learned about women, work, and money from the formidable ladies who raised me was obsolete. She ended our conversation with, “Dad, you just don’t get it.”

Years later I asked Dawn if I finally “got it.” She grinned and said, “You’re doing better!” I never had the courage to ask again.

A Divorce Gone Right

Two of the most important people in my life are my wife Jo and my ex-wife, Sonja—two wonderful ladies. Sonja and I married as teenagers and stayed together for 26 years raising three children. Sad to say, we spent the last ten years of our marriage seeing counselors, trying our best to make it work. During a particularly difficult session, Sonja unloaded on me about all the things she was unhappy with. She came at me with both barrels.

Afterward I felt terrible that I’d unwittingly done so many things that hurt her and never knew it. Finally I asked, “My gosh, if you felt that way, why didn’t you just leave?”

She looked at me, astonished, like I had just asked the dumbest question on Earth. “I was married with three small children, hadn’t worked in almost ten years, and my parents and grandparents were dead. I was trapped. I had no place to go!” I was shocked, devastated, and speechless.

Ultimately, we designed our own divorce agreement, took it to an attorney, and said, “Make it legal.” In her late 40s then, Sonja immediately started college and forged her own path. She had volunteered at the library when our children were small and loved it. She earned her degree in library sciences and worked at the library until she retired. We are still friends and want the best for each other.

Equal Partnerships Equal Better Results

The counselors convinced me that the best marriages are between two independent adults. You stay together because you want the marriage to work, not because you have to. Jo and I are living proof: we’ve been married—in an equal partnership—for 26 happy years and counting. Our families blended; Sonja and Jo share common hobbies and are now good friends to boot!

When Jo and I were married, her father was in the last stages of Parkinson’s disease. He passed away less than three months later and suddenly her mother gave me—her new son-in-law—power of attorney over all of her finances. While I was the most qualified to handle the job, it was an emotional drain.

Jo and I cut a deal. I would take the job, but she would learn as much as she could so that when I passed away she would never have to rely on a son-in-law (no matter how loved) or anyone else. Jo kept her promise; she’ll never be financially vulnerable like her mother.

An Independent Life Lived Fully

Many of our friends are widows and widowers; some lost a spouse who handled most of the money. It’s hard enough to lose your long-term partner; compounding that pain with confusion about how to protect your nest egg creates a double devastation. Even those with well-intentioned adult children cannot always rely on those children’s questionable financial skills. Suffice it to say, I spend a lot of time bringing curious but inexperienced investors like these up to speed.

In that spirit, I’ll leave you with an important tool for your financial toolbox—a tool I wish my own mother and first wife had had.

To be truly financially independent, you need some of your own money. I’m not recommending spouses keep all of their finances separate. Truth be told, I’m more in the “go all in or don’t bother” marriage camp. Real life, however, is full of unknowns and preparing for those unknowns is a critical part of money management.

My mother had to fend for herself and an infant son without a college degree or much earning potential. She was a product of her time. Today, women are 33% more likely than men to have earned a college degree by age 27. When I talk to successful career women now they share a common story: their parents drummed the importance of higher education and financial independence into their heads. As a great-grandparent, I’ve been beating that drum for several generations.

What Does Financial Independence Look Like in Practical Terms?

Some pundits recommend women (and men) hold separate assets equal to at least 3-6 months’ living expenses, and I encourage new spouses to consider holding on to this sort of safety net. Be upfront with your spouse about it and encourage him or her to do the same.

In the best marriages, these emergency funds foster equality and respect for the other’s independence. In less ideal circumstances, they give each spouse a personal life vest should the unexpected occur. In short, it helps ensure that both spouses stay because they want to, not because they have to.

As life unfolds and spouses grow together, perhaps the most important thing women can do is to continue their financial educations. At 74, the widow’s club among my peers is growing much faster than the widower’s club, and older women with plenty of money are finding themselves vulnerable; they don’t have the skills and/or confidence to protect their hard-earned nest eggs, and that’s a damn shame.

One widowed friend told Jo how “the nice young man” at her brokerage firm found bonds paying almost 6% and she bought them. I looked them up, and they were very low-rated bonds with a reasonable chance of default. Now, buying junk bonds may be just fine—if they don’t default. If they do, you can lose a ton of money. A fund holding several well-diversified bonds would have been a better choice for our friend, but she didn’t know that. Ultimately the bonds did pay off, but she acted on terrible advice, particularly for a retiree.

Knowing enough so you don’t rely on bad advice from a “nice young man” or well-intentioned but clueless family or friends is important at every age. Sad to say, these poor decisions often come down to “I didn’t know what else to do.”

I commend you for taking a different road. There’s a mess of conflicting financial information on the Internet, in books, and on television, making it difficult to decipher the best ways to grow and protect your money. Miller’s Money Weekly is an education-driven, free weekly e-letter tailored for conservative investors. To receive unique financial news and insights every Thursday and to learn how to cut through the advice noise, click here to sign up today.

The US Economy Is Still in the High-Danger Zone

By Dennis Miller

I hate being the bearer of bad news.

I remember the one and only time in my life I agreed to umpire a Little League game behind the plate. My youngest son was on the mound, and his older brother came to bat. The count went to 3-2, and I realized I had a huge knot in my stomach.

I said to myself, “God, please let him swing and hit the ball!” And he did. I don’t even recall where it went; I was just thankful I didn’t have to make a call that would have meant bad news for one of them.

Calling it the way you see it may be a good way to live your life, but it isn’t always fun.

I have been harping on the Federal Reserve policy of artificially keeping down interest rates since it started over five years ago.

Nothing has changed; in fact, you could make the case that things have gotten worse. Although there are rumors that the Fed may end QE in September or October of this year, I am not holding my breath. Right now, they are still flooding the banking system with billions of dollars per month, and finally the baby boomers—10,000 of whom are turning 65 every day now, for the next 16 years—are starting to understand what we already know.

Low Interest Rates Are Killing Savers…

In a recent Bloomberg article, Bill Gross of PIMCO (the world’s biggest bond fund) calls the minimal returns that savers and income investors have seen from bank deposits and fixed-income securities a “financial repression.”

“I hate to be gloomy,” said 69-year-old billionaire Gross, “but, yes, for the next 10 years, the oldsters, and I’m in that camp, are going to be disappointed in terms of the policy rate.”

Former President of the Atlanta Fed William Ford chimed in, saying that current low US Treasury yields reduce conservative investors’ income by at least $280 billion annually.

“The costs of low interest rates are being ignored,” Ford said. “It is killing savers, elderly savers who are living on life savings that have been conservatively invested.”

Can it get any more depressing?

Yes: according to the Department of Labor, due to lack of yield from savings and investments, workers 65 and older are the only group of Americans who are increasingly employed or looking for jobs.

… and Keep the US Economy from Recovering

In a March 10 article in Gold-Eagle, author Ian Gordon joins the critical voices. “This is unprecedented,” he writes; “there has never been a time that the entire world has been subjected to such dishonest money that can be created at the whim of unelected bureaucrats acting on behalf of their private shareholders.”

And legendary investor Jeremy Grantham told the Sydney Morning Herald that the US Federal Reserve is killing the recovery of the world’s biggest economy:

“My view of the economy is not principle-based. Higher interest rates would have increased the wealth of savers. Instead, they have become collateral damage of Bernanke’s policies. […]

There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not. It’s anecdotal evidence, but we have never had such a limited recovery.”

As you can tell, I could keep going and going.

If it weren’t so sad, I would have been tempted to laugh when I read an RT article titled “’Too big to fail’ status gives US banks a ‘free pass’—Fed Study.”

According to the article (emphasis in original): “The new research shows ‘it is improper to ask the taxpayer to underwrite the non-commercial banking operations of a complex bank holding company,’ Dallas Fed President Richard Fisher told Reuters in an interview.”

Boy, are these folks slow on the uptake. I could have told them that even before the 2008 crash, and without spending millions of dollars on a high-falutin’ study.

The top 10 banks in America, says the article, now have combined assets of about $9.72 trillion (that’s compared to a total GDP of $15 trillion in 2012).

“The banks are still gambling with FDIC-insured money,” says Ted Kaufman, a former US Senator from Delaware. “The JPMorgan Chase ‘London Whale’ fiasco was just the latest proof that there has been no change in the casino speculation of Wall Street banks.”

“No one has gone to jail,” Kaufman predicted. “And no one will. There are many examples of criminal behavior during the meltdown, but not one megabank executive has been jailed. Without that deterrent, white-collar crime is not just profitable but inevitable.”

Enough Already!

We all get the point—the Federal Reserve is bailing out the banking system. And to do so, it’s keeping interest rates suppressed, forcing American savers and income investors to put more money at risk than we should have to.

And that’s not going to change with the new Fed Chair Janet Yellen, who flat-out tells us that “the Fed still thinks rates should remain low to stimulate borrowing, spending, and economic growth. I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely held by my fellow policymakers at the Fed.”

Of course there is no evidence that any of the policies have actually worked… so we’re on our own to maintain and/or enhance our standard of living.

High Danger of Wildfires

I am generally considered a pretty positive guy, but even I have been wondering if this artificial propping up of the economy and stock markets will ever stop.

Last month, my wife Jo and I were staying in Arizona. A couple of days after a heavy rainstorm, we drove through Tonto National Forest. There was a Smokey the Bear cutout next to a meter with color-coded markings outlining the danger level of a forest fire, and it was at light yellow.

I’ve never seen it light yellow before, very close to the green that signals “all clear.” Late last summer, when we last visited, it was way over in the red with a high-danger signal.

Unfortunately our economy is still in the high-danger zone. I hope to live long enough to tell everyone that I see the threat moved back to Smokey pointing at light yellow. I just don’t see it, despite what we read in the mainstream press. As I said, calling them the way I see them is not always fun—but there is a silver lining…

Here’s One Big Positive for All of Us

Good friend Chuck Butler of EverBank writes a terrific report each day called the Daily Pfennig. In a recent issue he wrote:

“I do believe that quite a few people in their 50s and 60s are about to find out that the money they’ve set aside for retirement is too meager to support the standard of living they’d hoped for, and then the forecast for a retirement system crisis will become reality, and then it will be too late!”

Chuck would be the first to agree that none of us has to be in that group—that is, the people who wear their rose-colored glasses until it is too late to change anything. His readers and our subscribers are some of the best-informed people on the planet. We simply refuse to fall in the category of helpless citizens that are termed “collateral damage.”

Intelligent investors who can see the truth are inherently problem solvers. Tell us the rules, and we will figure out a way to survive. We’ll do much better than the masses who may not be as well informed or, worse yet, may be listening to those who don’t have their best interests at heart.

Personally, I have never felt as confident as I do today, even though the economy is in terrible shape. We have a plan in place—a solid diversification strategy coupled with position limits and stop losses—and I’m proud of our track record of great yield as well as our safety measures to limit risk.

There’s one strategy in particular that I recommend for every conservative investor: I call it my “Paychecks” strategy because it’s like getting a steady paycheck—without having to work for it. If that sounds too good to be true, it’s not; the secret is a special way to invest in dividend-paying stocks. It’s all laid out in my special report Money Every Month, which also includes my favorite stocks that you can use to implement this simple strategy.  Click here to read Money Every Month now.

How to Die in Dignity Without Leaving Your Spouse to Starve

By Dennis Miller

We’d all been waiting for the big day, but the chapel the ceremony took place in was very small—just a room with Christian symbols and a few chairs. My wife Jo’s father was waiting for us in his hospital bed, grinning from ear to ear. Despite the feeding tube, he still managed to devour a few bites of our wedding cake. Parkinson’s is a powerful disease; it can take the sturdiest tree in the forest and wilt it like an aging rose.

Yes, Jo and I got married in a nursing home chapel. Little did we know that we would spend the better part of the first 18 years of our marriage dealing with nursing homes and assisted-living facilities for both sets of parents.

Constant care is expensive. Jo’s father didn’t have long-term care insurance, and in 1988 his care cost close to $3,000 per month. Fortunately, he and my mother-in-law had the money to pay for it.

It’s frightening to imagine a time when you can no longer bathe, dress, eat, transport yourself, or hold your bladder and bowels. In insurance-speak, those are called “activities of daily living” (ADLs). Mercifully, not everyone reaches that point. However, two out of three Americans over age 65 will need some form of long-term care during their lifetime. That might mean home health care or moving to an assisted-living facility or a nursing home. Regardless, it’s pricey.

Nationwide, the average cost of a single-occupancy room in a nursing home is $6,653 per month. Home care averages $3,432 per month; assisted living, $3,300; and adult day care (which sounds just awful), $1,322.

Years of paying those costs can spell financial ruin for an aging couple—the surviving spouse in particular. My aunt spent close to 10 years in a nursing home with Alzheimer’s disease before she passed away. Her long stint is not at all unusual. While most patients live an average of 4-8 years after an Alzheimer’s diagnosis, many live as long as 20.

Medicaid Is Not the Solution

While Medicaid will usually pick up the tab for lower-income people, the income and asset limits to qualify are quite stringent. While the rules vary from state to state, a helpful rule of thumb is that an individual must make less than 300% of the Supplemental Security Income limit, or $2,130 in 2013, and have less than $2,000 in countable assets to qualify. Although your home (up to a certain amount of equity) is not normally a countable asset, many if not most of our readers don’t fall in this camp.

After a recent chat on long-term care insurance with fellow financial authority David Holland on his radio show, David mentioned that anyone choosing to self-insure should have at least $2 million in liquid assets. I agree, but even then, it’s risky. One of my biggest fears is needing long-term care, having the ability to pay for it, depleting our assets, and leaving Jo flat broke.

So where does that leave people unlikely to qualify for Medicaid but unable or unwilling to self-insure? Long-term care insurance, of course.

Opt for the 180-Day Elimination Period

Buying any type of insurance means transferring some type of personal risk to an insurance carrier. Clearly defining the risk you want to transfer and then tailoring a policy to best accomplish that goal is critical to getting the best value.

David Holland generously shared some quotes to help illustrate this point. While there are countless long-term care options available today, we’re going to keep this example simple.

Mary Sample is age 65. She wants a policy paying $150 in daily coverage with some inflation protection.

 

Many advisors would recommend the first policy with the 30-day elimination period, because you might not require care for long periods of time. The 180-day elimination period means you pay for an additional 150 days out of pocket before the insurance company kicks in. The additional cost is $22,500 (150 days x $150/day), and many argue it’s a poor investment because the probability of needing care for three years or longer is small.

 

On the other hand, the 180-day elimination period (quotes #2 and #3) gives you a lot more coverage for the same premium. In effect, #2 and #3 cost $22,500 more out of pocket in exchange for $54,750 or $208,050 in additional coverage.

The only way to turn the policy premium and additional out-of-pocket costs into a good investment is to require expensive, long-term care. Most of us would prefer to never have to collect a dime. Families with a member requiring years of expensive care would tell you it was one of the best investments they ever made. But insurance is not an investment; it’s a transfer of risk.

The Risk of Leaving Your Spouse Penniless

If a couple has enough assets to be ineligible for Medicaid coverage, a week or two in a nursing home is not the risk they should be transferring. That’s a big nuisance, not a catastrophe. The risk they should transfer is financial ruin for the surviving spouse—in other words, 90 or 180-plus days of care.

Paying insurance premiums for short waiting periods is like buying a $100 deductible on your car instead of a $500 deductible. If you have an accident, you have to make up that gap out of pocket. Your insurance dollars are better spent insuring against the catastrophe, not avoiding the deductible.

Today, Jo and I would opt for door #3. I have two policies: one with a 90-day waiting period and the other, 180 days. I would not recommend anything less than 90 days.

My primary concern is leaving Jo with enough assets to live comfortably for the rest of her life, which could easily be 20-plus years. Paying for 90 days of care would not undo that.

Family Is Not Always the Answer

Why have long-term care insurance? To make sure you have enough money for the best care right until the end without depleting all of your assets. Whether your final days are at home, in an assisted-living facility, or in a nursing home is secondary. If you can pay for the most appropriate care, that decision will be based on your health and comfort, not your wallet. Many advocates of long-term care insurance actually call it “avoid nursing home insurance” because it helps pay for in-home care.

Jo’s parents never thought about nursing home insurance. They could tell you every detail about their fire insurance, auto insurance, or crop insurance, but long-term care insurance was not part of their world. Without realizing it, they were committed to self-insuring.

When Jo’s mom died, she was in an assisted-living facility and able to do some of her ADLs, but not all. Which reminds me—assisting with three of the ADLs requires caregivers to do heavy lifting. Don’t make the mistake of thinking a family member, particularly an aging spouse, will be able to do the job even if he or she is willing.

We have a dear friend whose husband is nearing the end. She asked Jo to look at nursing homes with her since soon she’ll be unable to care for her husband without around-the-clock help, which can be more expensive than a nursing home. They have some tough financial and emotional decisions ahead. No one wants to feel they’ve let their spouse down at the end, but logically she knows he’ll receive better care than they can afford at home.

No, I Do Not Sell Insurance

There is a reason they call it “long-term care insurance” and not “short-term.” The exorbitant cost of health care over the long haul can wipe out a nest egg and leave a family penniless.

After publishing a recent missive on annuities in my regular weekly column, several subscribers noted it was the first time they’d read anything on the topic not written by an annuity salesman—and I don’t sell long-term care insurance either. That’s because the mandate of Miller’s Money Weekly is education—education to help you retire rich and stay that way. We advocate for your financial health and equip conservative investors with cutting-edge tools for living a prosperous retirement. Sign up to receive Miller’s Money Weekly every Thursday at no cost by clicking here.

Be Afraid, Be Very Afraid: The “Nuclear Solution” to Underfunded Public Pensions

By Dennis Miller

With few exceptions, state and local pension funds are woefully underfunded. Five heavily populated states—California, Illinois, Ohio, New Jersey, and Texas—collectively lack $431.5 billion; money that won’t be paid out to hopeful pensioners. That’s according to those states’ own accounts published in a 2012 Harvard University study that was led by former Assistant Treasury Secretary Tom Healy.

And the real numbers may be even worse: Accounting for current low interest rates, Healy and his coauthors estimate that the true extent of underfunding is $1.26 trillion.

When your tab is floating in the nebulous zone between $431.5 billion and $1.26 trillion, does the exact number really matter? Either way, you can’t pay it. Even wrapping your mind around numbers that large is difficult—like trying to visualize distances described in light-years.

In an understandable move to protect their interests (read: limit future tax liability), corporate heavyweights including Dow Chemical, ExxonMobil, Google, and Walmart sponsored a three-day judicial conference on public pension reform at George Mason University School of Law last month. One headline from the conference agenda: “Bankruptcy: The Nuclear Option.”

If the “nuclear option” scares you, it should. Still, some cash-strapped state governments are pushing for it.

A Political Solution Is Unlikely

The upside of a republican form of government—like we have here in America—is that it’s difficult to get much done. That’s also its downside. There’s a lot of political maneuvering among pensioners, union representatives, taxpayers, corporations, and politicians themselves, but very little progress has been made to find a long-term solution to the pension problem.

The union position is simple. The public employees they represent upheld their end of the bargain, and now it’s up to the legislators to find the money to uphold theirs.

Where? In his report The Plot Against Pensions, liberal columnist David Sirota suggests redirecting the “$80 billion a year states and cities spend on corporate subsidies” toward the $46 billion annual public-pension shortfall.

Corporate leaders see things a bit differently, of course. They say reducing corporate subsidies or raising corporate taxes would hamper business development and lead to lower employment rates.

Like the unions, they blame state and local politicians for not properly funding their pension programs in the first place. Both have a fair point.

The Plot Against Pensions vs. the Plot Against Jobs

What Sirota didn’t mention in his report is that corporate subsidies attract and retain much-needed jobs. One Illinois school district nearly learned that the hard way. In 2011, District 300 rallied to end $14 million in annual tax benefits for Sears Holding Corp., the parent company of Sears, Kmart, Land’s End, and other brands.

Sears promptly countered by threatening to move its corporate headquarters out of Illinois if the state ended the tax advantages it had enjoyed for 23 years.

And it wasn’t an idle threat either. Office Max, which recently merged with Office Depot, started moving 1,600 jobs out of Illinois last month after the state refused millions in tax breaks the company had requested.

Smaller businesses are getting out of Dodge too. Deron Lichte moved his 100-job business—Food Warming Equipment Co.—to Tennessee to escape Illinois’ 2011 income tax increase and its hefty corporate income tax—the highest in the nation.

The Little Guys Are Walking Too

Speaking of taxes, individual taxpayers are no more inclined to pay for underfunded pension promises than corporations are. Just like Office Max, Illinois residents are voting with their feet. And why shouldn’t they?

Legislators can’t hike taxes indefinitely to cover underfunded pensions and other government debts, and then gasp in surprise when their constituents walk. In fact, my wife and I sold our Illinois home because we were fed up with the high taxes.

In the book How Money Walks, author Travis H. Brown writes that from 1992 to 2011, Illinois lost $31.27 billion in taxes per year because former residents like myself refused to put up with its predatory taxation.

The same goes for New Jersey, which according to wealth management firm RegentAtlantic Capital lost $5.5 billion in taxable income in 2010 alone because residents moved out of state, often fleeing the state’s “millionaire’s tax.”

Plus, US citizens from all 50 states (including one member of our team) are now heeding the call of Puerto Rico’s alluring new tax benefits.

States and cities can’t tax their way out of the public pension crisis. More and more people will simply get up and move. Would the last person out the door please turn out the lights?

A Radical Solution That Will Never Come to Pass

While campaigning, Illinois governor Pat Quinn pledged to cut government expenses instead of raising taxes. We’ve heard that many times before, of course, and true to form, shortly after taking office, Quinn gave raises averaging 11.4% to 35 staffers. The public howled, so Quinn back-pedaled, giving the staffers 24 days off without pay so their salaries would ultimately stay the same.

Apparently it never occurred to Quinn that if 35 staffers can do their jobs with an additional 24 days off, he might be overstaffed. If all politicos are this financially pragmatic, don’t expect a pension-funding solution anytime soon.

The Nuclear Option: State Bankruptcy

Federal law allows local governments to seek Chapter 9 bankruptcy protection so long as state law permits it where the municipality is located. Cities like Stockton, CA, San Bernardino, CA, and most famously Detroit have already taken this path.

On the other hand, federal law doesn’t offer states bankruptcy protection—and it probably wouldn’t be constitutionally sound if it did. State-level bankruptcy is a scary thought—but it isn’t all that far-fetched either. Mainline politicians like former House Speaker Newt Gingrich and former Florida Governor Jeb Bush have both supported it.

There are obstacles, though: Congress would first need to amend the bankruptcy code, individual states would need to authorize application of that hypothetical law, and the Supreme Court would have to rule on whether the contracts clause prohibits states from declaring bankruptcy even if Congress allows it.

I don’t expect this particular nuclear bomb in my lifetime. I can’t say the same for my grandsons, on the other hand.

Your Shelter from the Fallout

There are real-life people depending on these underfunded public pensions. While I’m still flabbergasted that anyone would rely on promises made by the government, these public employees will suffer from the fallout.

I would suggest that every public employee should immediately—as in yesterday—start charting a private path to retirement. If those pension checks are there when you retire, they’ll be a welcome bonus. But don’t rely on them.

For that matter, private- and public-sector employees alike should independently prepare for their retirement. The only person you can rely on is you—and all it takes to turn that self-reliance into a low-stress retirement is a working knowledge of investing and personal money matters.

It is possible to plan ahead and get a steady flow of income every month, even if your public pension checks never come in and whether or not you’re still working. My team of analysts has put together a special report called Money Every Month that details how you can get a regular “paycheck” by investing in certain stocks—which we name in the report—according to a certain schedule.

For a limited time, we’re making this in-depth report available for free. Click here to get your copy now.

Is It Time to Hide Your Money Under the Mattress?

By Dennis Miller

“I don’t know what to do,” said my good friend Rob after inviting my wife Jo and me to dinner for the third time in two weeks. “I know I should do something. Every time I think about it, it scares the hell out of me! Maybe I should just hide everything under the mattress.”

Rob is a sharp guy—he’s done well for himself and his family. He also recently settled the last details of his parents’ estate. Upon banking part of his inheritance, the branch manager magically appeared, introduced himself, and invited Rob into his office to discuss “some really good rates” the bank had to offer.

Not even the drive-through window has helped Rob fly under the radar. It still takes but a few seconds before the manager appears and starts his pitch. Rob has started to wonder if the drive-through tellers have a bright yellow “sic ‘em” button.

Rob is a veteran subscriber to Miller’s Money Forever. He reads our material faithfully and isn’t shy about asking questions. He knew for two years this large influx of cash was coming, and he’s made it a point to learn how to handle it.

Up to that point, Rob’s wealth consisted of home equity, retirement plans managed by others, and some collectibles. Now he has a sizable chunk of cash to invest, and he’s understandably scared.

So far, Rob has lots of book learning under his belt, but little real-life investing experience. Every option we discussed at that third dinner evoked a “Yes… but!” After much back and forth, I finally realized Rob’s Achilles heel wasn’t a lack of investment knowledge. Instead, it was his fear.

And Rob is not alone. The following morning, I received a timely message from subscriber and regular correspondent, Bee H. She shared a laundry list of places to put your money—banks, real estate, precious metals, annuities, a mattress—and all the horrible ends that money could meet in those places. Government seizure, market crashes, eminent domain, theft, inflation… the list went on.

Bee’s concerns are not unfounded. I even shared them with Rob under the heading: “See, you aren’t alone.”

Rob’s response: “Wow. She’s reading my mail! I’m stewing over this very same issue…”

Then it hit me hard: What are they afraid of? Not the market and investing, but rather the adverse consequences of government behavior. After nearly every “Yes, but,” Rob expressed fear about what the government might do: a haircut, bailout, bail-in, outright confiscation. Call it what you will.

These fears cross partisan lines. We all have some sense—even if we can’t quite put our finger on it—that our personal and economic liberties are threatened. Heck, every time I look in the sky now, I scan for NSA drones. If I see a tiny speck, I look at the television camera, wave my hand, and say, “Hi, Mom!”

Many of my friends—Independents, Libertarians, Republicans, Democrats, even a Green Party member or two—have told me, “For the first time in my life, I’m afraid of our government.”

Commonsense Alternatives to Your Mattress

If you’ve been reading my articles for any length of time, you know I worship at the altar of practical wisdom. So, my response to Rob and Bee came from that same place.

• Maintain perspective. You can’t get rid of these political risks entirely (although a little international diversification will help). Vote for the candidates you think are least likely to make things worse and move on.Learn the rules, pay your taxes, and fill out the proper forms. You don’t have to like it, but the punishments for noncompliance can be harsh. Behaving yourself is the best route.

  Plan and execute a retirement approach that will be successful despite foolhardy government action. This is more challenging than it was for our parents’ generation, but it is within your reach.

• Pay off debt. Rob told his accountant he was going to pay off his house with part of his inheritance. His accountant replied, “No! That’s a terrible plan. Invest the money! You can earn better returns than the interest rate on your mortgage.”Are you kidding me? Rob’s a rookie investor who’s scared to death, and his accountant is telling him to go into the market with borrowed money? Hell, that guy might as well have shown him how to buy on margin while he was at it! Rob held his ground, saying, “I plan to get out of debt and stay that way.”

• Keep saving. Once you’re out of debt, start making those debt service payments to yourself each month, first. Then live on the rest. Concerns about government confiscation or higher taxes should motivate you to save even more. If the worst comes, you want to have enough left over so you and your family survive.
• Get a financial checkup. Find a good financial planner, preferably one with a fiduciary responsibility to you (not all have that). Mark your goals, set a realistic plan, and check in annually.
• Never turn over all of your money to a money manager. Some money? Sure. But ultimately, the only way to protect your money is to learn how to invest it yourself.The first time you click your mouse to make a real trade, your heart will be racing. It’s an emotional experience, but each trade—good or bad—teaches you something and brings more confidence.

• Understand the motivations of brokerage firms, insurance agents, and banks. Rob experienced this in action. The branch manager offered him a “special rate” on a CD that wouldn’t even keep up with inflation.Brokers and captive houses will gladly do a free financial checkup and encourage you to put your money in their company-sponsored funds. The same is true of insurance companies. While there may be better options, they push for what compensates them the best. Caveat emptor!

  A money manager with a fiduciary responsibility must put your interests ahead of theirs. You want advice from people who are not stakeholders.

  Always ask, “Are there better options available?”

• Learn the lessons pundits cannot always teach. When you make an asset purchase, write down why. What is your stop loss, and what are your earnings targets? When you sell, investigate what made you successful or what happened that caused you to lose money.You’ll take some losses. Just don’t panic! They don’t have to be expensive learning experiences. As a wise old baseball coach once said, “Make your outs count!”
• Doing nothing is a choice. It’s an expensive one at that, as your cash loses its buying power to inflation. Invest to protect, invest for income, invest for growth.
• Take a giant leap of faith… in yourself. Trust your ability to learn, assess a situation, control your emotions, and exercise sound judgment. You’ve already honed those skills in other areas of life; now it’s time to apply them to investing.

Throughout history governments have taxed, spent other people’s money, and made stupid rules. People have succeeded anyway, and you can be among them. Our free weekly newsletter, Miller’s Money Weekly, can help guide you through the traps and pitfalls of personal finance and help you navigate toward a retirement on your own terms. Sign up now, for free.

How to Manage a Crisis… Before It Happens

By Dennis Miller

My wife Jo and I live in Central Florida, and having ridden out a few hurricanes in our lives, we’re as well prepared as we can be for emergencies. We have, among other things, a generator, food, batteries, candles, and a water purification kit.

My wife and I visited Punta Gorda, FL, after the town suffered severe hurricane damage in 2004. After driving one block to the grocery store, we raced out of there with burning eyes and handkerchiefs covering our noses and mouths. We immediately drove back to the motel, changed our clothes, and put what we were wearing in a plastic bag. We’d never seen anything like that before, and it left quite an impression.

Realistically, the chance of a hurricane doing that kind of damage to us is small—we’re over 50 miles inland from both coasts and 70 feet above sea level. However, in 2004, the eye of three hurricanes passed right over our little town for the first time in recorded history, so even if the probability is less than 1%, the fallout would be so bad that we prepare anyway.

What about a financial catastrophe? How well prepared do you need to be?

Folks near my age have lived through a few bubbles and the subsequent crashes and recoveries. Though we never experienced “the Big One” as our parents did in the 1930s, which was so bad that it shaped the attitudes and values of a couple of generations.

In a full-blown financial crisis, your material world collapses. It might come on the heels of medical problems and the resulting high bills and lost income, or it might come in tandem with runaway inflation or a political meltdown.

Financial Preparation

A full-blown financial crisis often develops so stealthily that only the most observant people will know what hit them, and it typically affects everyone. Those who prepared well are likely to fare much better and avoid the catastrophic consequences, which brings us to core holdings.

Core holdings are, quite literally, survival insurance. They are assets we sock away and hope we never have to sell. They should make up 10% of your overall net worth and be diversified in form and location.

In light of the warning signs that we see in the economy and the stock market, now is a good time to review your own core holdings.

What types of investments should be in that category depends on the type of risk you’re trying to protect against.

Protecting Against Inflation

Start with precious metals—gold and silver, in particular. I recommend starting with “junk silver,” which you should be able to buy locally. Then add gold, silver, and platinum bullion coins. One of the best ways to buy competitively is to go to a coin show. You will find several dealers displaying their wares and can quickly determine the market price.

You can also buy bullion from reputable dealers online, and as you increase your holdings, consider holding some metal internationally. (For the best ways to invest in gold, see the free special report, The 2014 Gold Investor’s Guide.

Don’t confuse these holdings with exchange-traded funds like GLD. Those are not core holdings. They are paper investments purchased with the intention of selling them for a profit at a later date. While they may (or may not) move consistently with metal prices, your paper is not redeemable for metal. You may want to own these in your portfolio just like any other asset you think will go up in value.

Your core holdings, however, need not be limited to metals. We hold foreign-currency-denominated CDs from EverBank that are FDIC-insured in ours. While their yield is currently low, we hold them as a hedge against inflation.

When the US dollar buys less, certain foreign currencies increase in value and will buy more. By way of example, I have held Swiss francs for years. They used to be worth $0.80 to the dollar; now they are worth more than $1.10.

Farmland is another great hedge against inflation. It’s a valuable asset and is in limited supply. There’s no new land growing in Kansas.

Protecting Against Confiscation

Historically, governments have resorted to extreme measures like confiscation when their debt load gets out of hand. Confiscation can take more than one form.

In 1933, President Roosevelt, by Executive Order 6102, made it illegal to own gold. It required everyone to deliver all of their gold coins, bullion, and certificates to the Federal Reserve, in exchange for $20.67 per ounce. Once people had surrendered their gold, the government raised its official price from $20.67 to $35 per ounce. Does that mean gold went up in value overnight? No, the value of the dollar went down.

A second form of confiscation is taxes, sometimes marketed as “emergency taxes.” A government that is spending more than it takes in will eventually have its day of reckoning. Fearing a collapse, they’ll resort to extreme measures. I wrote about the confiscation in Cyprus last year, and we are seeing similar things happening in Argentina. Who are the targets? Anyone with money.

While no one can predict for sure what our government will do, prudent investors diversify some of their investment capital offshore. The example of Cyprus has shown that those who moved some of their money offshore were spared. Once the government shut the currency window, however, it was too late for the others.

How Bad Could Things Get?

I have no idea. When I attended the 2011 Casey Fall Summit, three of the speakers described what it was like to live through hyperinflation. Argentina has already confiscated much of its citizens’ retirement plans, forcing them to invest in government debt.

The speaker from Yugoslavia shared the following slide showing the magnitude of hyperinflation in his country:

Of course we can’t say for sure that hyperinflation will or will not happen in the United States. But the Federal Reserve had been in business for 95 years and had $800 billion on its balance sheet as recently as 2007. Now it has $4 trillion, which is somewhere between a 400- and 500-year money supply. The minute the world loses confidence in the dollar or it loses its status as the world’s reserve currency, the decline in purchasing power could be horrendous.

Even if the probability of hyperinflation is tiny, remember that your biological clock is ticking. You may be close to leaving the workforce or already out. The adverse consequences of high inflation, hyperinflation (which are two different conditions), and/or outright government confiscation of wealth are so catastrophic that an unprepared investor may never be able to recover. That could mean bunking in your adult child’s guest room instead of doing the million fun things you’d planned for retirement.

It’s time to make sure your core holdings are where they need to be, just in case. Jo and I review our financial holdings each year at tax time. That reminds me… We store our emergency food and mark the expiration date on the cases. About a month before expiration, we load the cases in the van and take them to the local food bank, then head to Sam’s Club to reload.

Hurricane season will be here before you know it. It’s time to check your inventory.

There are countless ways to protect yourself from a financial crisis—and only a few are mentioned here. The Miller’s Money team is constantly on the lookout for the best ways to protect and grow your nest egg. Sign up for our free e-letter, Miller’s Money Weekly, today.