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At Arm's Length: 05.04.05

The worry about inflation, something the F.O.M.C. suggests is well under control largely due to their actions and monetary policy, has been increased in the short term with the rising price of oil.

The full article.

Today's Commentary: 05.06.05
Then and Now - The Thirty Year Note

I was at odds considering what to name this article. Should it be called "Cost Effective vs. Cost Effective" or perhaps something more poetic, "Another Carrot, Dangling". Nonetheless, the possible reintroduction of the 30-year Treasury Note surprised traders on Wednesday as yields rose dramatically pushing prices down. For many, the most obvious question was: "Why did they do away with it in the first place?"

At the end of October 2001 the country was reeling. The terrorists had done something unprecedented and the Bush administration understood what the cost of engaging the enemy would do to the surplus. At the time of the attacks, this country still had a significant amount of capital inherited from the previous administration which was openly targeted by the GOP for their tax cutting plans. The war, however would need more than the surplus could offer. The 30-year note was seen as too expensive to be used to raise money through borrowing and was discontinued citing its lack of cost effectiveness. The 30-year note is offered at a generally higher yield than shorter term offerings, money the government did not want to pledge for the long term.

No one expected that surplus to turn into lingering deficits as quickly as it did. While many factors have added to the national debt, none was worse than the rampant spending that took place with the full knowledge that repayment was not possible in the near term. Now the Bush administration through the Treasury is seeing the cost of managing that debt as too expensive. What they want is a way to spread the cost of those deficits further out into the future. The 30-year Treasury is just what the administration needs to make current year books appear in better shape.

View it as admission of guilt. The deficit is not likely to go away and by offering this note they are admitting to having failed to estimate the cost of runaway spending and stimulative tax cuts.

This sudden change of heart, also billed as cost effective, would force the Treasury to offer much higher rates to attract investors, both foreign and domestic. Neither group of investors should purchase one of these notes with their eyes closed. This new issue is meant to enable the President to fund his ideological push for privatized accounts. This is another way to dig deeper into the world's savings accounts to finance what has become a bad experiment in economic growth.

Beside the President, there are basically two other groups that would benefit from the re-issuance of the note. Wall Street would love the idea. Historically more volatile, the note would provide bond traders the opportunity to make money. Although the Treasury doesn't plan on finalizing their decision until August, there is little chance it won't be issued.

Pensions would benefit as well. The need for locking in a secure maturity will solve many of the underfunding problems facing defined benefit plans. The S&P 500 has 350 companies with such plans with less than 20% of them able to meet the promises they have made to their employees. What the Treasury should do is offer a inflation protected note much the way Britain is doing with their 50 year offering. So far they have made no indication that they will add inflation protection.

If you are a fixed income investor, you can look for the new note to be issued in February of next year. If you are a pension manager, there will no longer need to speculate on the movement of short term bonds. If you are a Wall Street firm, you will be looking forward to the return of the days when money could be made with these types of offerings.

If you are Mr. Bush however, you can begin to make plans to offer a way to finance your changes in Social Security. The ability to shift the debt to the very generations that you are trying to convince need to be saved is a Godsend. It will give the costly attempt at overhauling the program seem smaller even as the economy slows, the twin deficits expands and inflation begins to rear its ugly head.

If you are a foreign bank however, you should be be wary of the move to bring the note back. It is, you will understand, an excellent way for Americans to avoid facing a real economic dilemma: continue to spend to keep the economy propped up or begin to save for the rainy days ahead.

Today's Commentary: 05.01.05
Note from the Editor: This week we will be focusing on women and finance. Although women have made great strides in not only earning better wages - although they still fall 24 cents an hour behind a man with a similar job - and have become considerably more financially savvy than just five years ago, many women are still facing an uncertain financial future. In honor of the upcoming Mother's Day holiday, we offer a look at the concerns and offer some ideas on how to fix what might soon become an enormous financial burden on the so-called growing American economy.

Partnerships
In the early days of the BlueCollarDollar.com, I focused on a unique approach to the handling of debt and ultimately, important financial decisions. The concept of using partners when making serious financial decisions was further mentioned in my book, "Building Wealth in a Paycheck-to-Paycheck World". But nowhere does it become more important than when those partners are about to make their friendship legal and tie the knot.

Getting married is not only about committing your love to someone for life, it is a financial union as well. Few of us however enter into the union with the wife's retirement as the primary concern. Doing so, despite the constant distractions that engaged and newlywed couples face, can create a much tighter bond. Even for those couples who are already married and whose courses seem on target are likely to have underplanned for the one half of the team that will live the longest.

The Odds
First, we need to consider the odds against women - which on the flip side reveals something interesting about men. Women are more likely live fifteen years longer than men. The majority of women would like to be married although more wait longer and stay married for a shorter time than they anticipate. In fact, almost half of all first marriages end in divorce and two thirds of those divorced remarry. According to the Center for Disease Control's Vital Statistics Report of 2002, 60% of those remarriages fail as well. Women are likely to be widows more times than not with an average age of those suddenly going it alone is 55 years old. The average time a woman is likely to spend as widow is fifteen years. It goes without saying that at that point in your life, after a marriage that has ended, whether by divorce or death, is not the time to begin wondering about the condition of your financial future.

The much maligned time spent out of the workforce also plays against women's financial survival. Few ever talk about this period of time. This conversation should be done before you stand before each other and say your vows.

There are any number of reasons why the woman is more likely to spend time away from the workforce. A young couple should begin their marriage with a plan in place that will include the chance that the wife will spend time raising kids, beginning her own businesses, or taking part in continued education. Whatever the reason, it usually lasts on average almost fifteen years. That time away spells lost opportunities for your wife at securing a more healthier financial future.

Michele M. Larson, publisher of the N.W. Women's Directory took the disturbing news of continued income inequality between men and women to task. Over the past 40 years, some gains have been made since laws were passed forbidding such pay discrimination. She was outraged at the glossed over attention the income gap received in the news recently and she had a valid point. Seventy-one percent of married mothers work full time, she wrote, up considerably from just two decades ago. The full scope of the problem and even more revealing numbers are available at the Census Bureau web site.

As I said earlier, the statistics on women often reveal concerns men should have as well. Half of you are likely to make your wife a widow. Half of you will divorce and almost two-thirds of you will remarry and divorce again. It might be you who takes off time to raise kids, start a business or continue with your education.

Consider the Benefits
I believe that men should take the lead to protect against those financial possibilities. With some simple precautions, a couple should build their plans now and together. Even if you have not yet married, here are some things to consider:

Make the focus of the retirement plan begin with the financial security of the wife. This is an excellent pre-nuptial discussion starter for both men and women. Entering into a marriage this way does have all of the aspects of a business deal but seldom are two negotiators in love.
Although that starry-eyed love can cloud your vision, discussing how you would handle finances as a couple can and should be addressed before you marry or soon after. If you are already married, this requires sitting down with your budget as a couple and changing course.
No good business deal, if I can use the analogy, would allow two separate companies to merge and keep assets outside of the deal. Everything gets married including all accounts. What this means is that for the marriage to succeed, all assets need to be commingled. This does two things. First, it effectively levels the financial playing field in the marriage. Sometimes it also involves bringing all debts and obligations to the table as well. This effectively changes the possessive as well. No longer is "your college loans" or "your boat". It becomes, instead, "our college obligation" and "our boat payment".
And secondly, although it does nothing to solve the inequality of pay your wife experiences in the workplace, incomes should become part of the whole as well. This can help your wife to survive better from within the boundaries of the couple. It is far easier to understand how to fully direct the family's finances if all sources of income are fully contributed. Sure, it takes some of the mystery out of cost of Christmas for each other - no more cars with big bows under the trees, guys - but the real beneficiary is the creation of a solid family budget and your wife's financial future.

Perhaps as a side benefit, knowing where the money is hardly allows either one of you to pursue an outside affair, an often costly undertaking that is usually funded outside the family budget. Not only are these events a torpedo for a marriage but also for the family finances. In fact, five of the top ten reasons for divorce (listed below) are eliminated with the tighter control commingling provides when your finances are combined as a couple.

Women, because of those ongoing pay issues will ultimately receive 25% less of the retirement benefits she could have earned. If her company has a retirement plan in place, she be taking advantage of it. If there is not one, her family should be fully funding one. When both incomes commingle in one budget, both parties have a clearer vision of where their money is going while allowing them to readjust their course or make attainable plans that do not require adding more debt. The idea of commingling can begin at any stage of the marriage. Like all investment ideas, it is best to start young. But don't discount the benefits of starting mid-marriage.

Women should be allowed to max-out their retirement plans before their husbands do. The fact that she will probably outlive you should be reason enough. There are chances that even with some spousal benefits, she will not have enough to stay comfortably above the poverty level without making some serious decisions now. Her retirement plan should be fully funded both outside and inside her job to prepare for her chances of living longer.

Good news though about how women fair as investors was released recently. It should give them hope for a good outcomes and healthy returns for all their retirement efforts.

Women, according to recent Merrill Lynch survey were found to have what it takes to be savvy investors. Possibly more so than men. The study revealed that men panic when it comes to downturns in the market and in their investments while women don't, remaining clear-headed and even somewhat detached emotionally. Men, the study revealed are more likely to hold a losing investment longer than a woman might.

Women it seems bring a more practical approach to investing. This works to their advantage when making long-term decisions. Because they tend to look at investing as something they need to do, helping them achieve it by using the combination of both incomes that is focused on her retirement needs, greatly increases her chances of being self-sufficient late in life.

Re-forecasting Your Plans
Once the monetary discussion begins, the first goal should be the elimination and control of debt. Then, the couple needs to identify the more financially savvy between the two of you, whether it be on the investment front or the ability to hunt down bargains. Good budgets will require both savings and spending and in that order.

Good businesses do regular forecasts of the upcoming business environment. Couples should do so as well and should do it at least once a month. Things change quickly as businesses know and you should be prepared build another twelve month plan together that outlines where you are headed and how you are going to get there. This allows you the opportunity to create a top ten list of priorities, with each of them ranked by importance (with your wife's retirement plan at the top).

When considering whether to take time off to have a family can you ask the budget the all-important question: Could the household pay the stay-at-home mom a salary? Not only does growing a family create a new financial pressure on the plan, but it is often the time when the plan to finance your wife's retirement falls by the wayside. While there is little likelihood you will be able to replace her paycheck, the budget should pay her a salary equal to the retirement savings lost. This should be part of the plan when you begin to talk about children. You will also need to consider the creation of a will, one should be a living will and the other for your estate.

For many women, taking time away from her career may create another problem. If time away has caused her job skills may lag behind her peers, the plan should include the cost of further education. Many women are bit by the entrepreneurial bug as well. Having a portion of the family budget directed towards her retirement will give her time to create a revenue stream to bolster the budget while not being penalized for her efforts when she is in her sixties.

Remarriage can be approached much the same way. If there are assets that need to be spent on other families outside your own, such as child support or alimony, budgets need to be constructed to reflect that. Those financial discussions often involve a good deal more than just the two of you and they need to be conducted with great tact.

To encourage you to save, I have included the information below. But the table below will tell two tales. One, if you begin early and stay consistent, your money will grow substantially. Two, these figures don't take into account the effect of inflation. Even if those numbers seem large, their purchasing power will not be as large in today's dollars.

Investment
p/mo/yr Age at Start Assumed
Rate of
Return Total
@ age 65

$50p/mo=$600 yr 25 9%    $235,822.00

$50p/mo 35 9%      $92,224.00

$250p/mo=$3000/yr 25 9% $1,179,108.00

$250p/mo 35 9%    $461,119.00

Ultimately, the marriage is about the union of two people who care for each other. There is no better way to do that than to make sure both parties have an equal chance at a fit financial future.