Attempts at a Sustainable Lifestyle…

Today I read an NYT article that basically focused on one young man’s inability to launch a “dream career”, and how his family worried about him.    The article is titled “For a New Generation, an Elusive American Dream” and it notes that 23% of young adults aged from 18 to 29 are not searching for a job, and 14% are unemployed.  The story tries to paint a  bleak picture of my generation’s future, but I think the writer does not quite understand what the American Dream is for today’s young adults.

I feel like that the article focused too much on the American Dream being a well paying job that you do for 30 to 40 years.  I do not know anyone my age whose goal in life is to work for someone else  for their entire lives. On the contrary a lot of my friends dream of creating their own ventures, and some have started doing their own thing.  It would have been interesting if the NYT reported on how many of these unemployed young adults are trying to start their own businesses.  With today’s cheap technology it is quite easy for young adults to start a profitable business from home.  One phrase that I have heard a lot and I feel is worth repeating is “you don’t need a job, just a way to make a living”.  I have never heard of any of my friends say that they wanted to “climb the corporate ladder”, but many have said that they want to just run their own business.

Another problem with the NYT article is that it focuses on a young man who is still relying on the bank of mom and dad two years after he graduated from college.  I do know some people like him, and I really think that its the parents’ responsibility to stop letting these kids leech.  The guy featured in the article also turned down a job paying $40,000 a year without any reasonable backup plan. I just don’t see how this one privileged young man’s story indicates that the American Dream is elusive for all of us.  It just didn’t make too much sense because this guy’s struggles are so miniscule compared to many others in our generation who have real responsibilities.

One thing I do believe is true is that there is a lot less financial security for my generation.  Pensions are now extremely rare in private industry, and many young adults are finding that their expensive college degrees are a burden rather than a boon. Additionally, the U.S. government is still spending money like there is no tomorrow, so taxes will definitely go up while wages are not exactly keeping up with inflation. I think the current reality just means that we have to work hard and  create our own financial safety net.

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I wrote the “Goals” page almost three years ago and haven’t really updated it. I think now it is a good time to address what I have written and what has happened so far.

This is the old Goals page:

“My goals are quite simple — have at least one child and retire early. However, to do this I would need to save up a quite sizable retirement fund for myself and a fairly large college fund for my child. The pursuit to pass down my genes has a huge financial responsibility attached to it since once I have a child my pay may decrease quite significantly. I have seen many working mothers discriminated against in a silent but egregious manner, but if I get started on that topic I will have to fill up another page. So my short term goal is to save enough money to have a child without having to worry about paycuts or unemployment. I want to have my first child before I am 28, so that leaves me only three more years to save. If my husband and I don’t purchase an overpriced home and continue to rent, it’s possible to reach our goal of $500000 by 6/30/2010.”

So it is almost 6/30/2010, and no, we do not have $500,000. We might have made it if the stock market did not fall off a cliff, but the damage to our portfolios wasn’t extremely severe because we pulled out a good chunk of cash before the September/October 2008 crash to purchase the hubby’s parents’ house in Southern California.  Basically before the huge crash happened we had something like 40% of our portfolio in cash.   Our portfolios did go down, but it wasn’t as ugly as it could have been.

We plan to move there if the hubby gets a job nearby the house, but the recession sort of kept us where we are for the last couple years. The house is a bit too big for the two of us, but we did have a son last year and if we have one more child it would still be a very roomy house. Basically right now the hubby wants to just move one more time to that house and live in it until we retire.   The mortgage on the house is a couple hundred dollars more than our current rent and with the mortgage interest deduction it is less than our rent.  All in all, it was a good purchase and we don’t regret it.   Even if we had to sell it now we still have a good chunk of equity in it since we technically bought it at a low price along with the hubby’s parents’ gift of equity.

Being a working mom is very tough, but to be honest after having a child I really don’t care about paycuts and the possibility of unemployment anymore.  I have discovered that it is not really that hard to make money if I wanted to, and although my current job is pretty great, I am not afraid of losing it because a job is just a job and my life would not be over if I didn’t have a job.  As long as I have my family  and my wits about meI would be okay.

The ultimate goal is still to retire early, and now the hubby is on board with that goal and we have set the date of our financial independence to be our son’s 10th birthday.  We plan to pay off our home by then and have enough investments to generate around $3000 to $4000 per month.  So right now our son is 8 months old, and we have 9 years and 4 months left to achieve that goal.  I will probably update the Goals page in another three years.  Needless to say, a lot of things I didn’t expect to happen happened in the last few years, and I expect the future to be equally surprising.

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I have been gone from this blog for a while mostly due to my work and family, but there are so many things I want to write about and haven’t had the time for.  Today I read an article on the New York Times about a young  woman named Cortney Munna the same age as me who has nearly $100,000 of student loans.  The article basically tries to chronicle how the woman got so much debt, and whose fault it is that it got so big.  Here are some of my thoughts on this matter.

First of all, many commenters berated Ms. Munna and her mother for choosing an expensive school they could not afford, and then choosing a liberal arts major that has very little career prospect.  I think the major that she chose isn’t the problem, but the real issue that both she and her mother chose to pay for an expensive school they really knew they could not afford.   Even if she were an engineering major, she would be a lot better off if she went to a cheaper school because it would take less time to pay off the costs.

In the housing bubble, many people started to regard their dwellings as investments and disregarded the fundamentals of affordability. There is a parallel here since many people believe that a  prestigious degree is an “investment”. Speaking from experience, having a degree from a highly ranked  engineering school does get your resume to the top of the pile so in these times of economic distress it is worth it to have that extra credential.  However, once you are experienced enough and have proven that you can do a certain job competently, then where you got the degree does not matter as much.  Another aspect of the “investment” is that you build a network in college that could offer you opportunities in the future, but you could really do that at any college and later on at work.  Also, having a degree from a top school usually means a paycheck that is slightly above average, but the difference is not that great once years of experience are added.  Basically, there are definitely benefits in holding a degree from a prestigious school, but I doubt it is worth a lifetime of debt.

Another similarity I can see in these student loans stories and the foreclosure stories is that these people were paying for a “dream”.  Many people sought the “American dream” of home ownership at any cost, and similarly, many young students get accepted to their “dream schools” and try to attend at any cost.  Although dreams are worth pursuing, I think  borrows and lenders need to get in touch with reality.

One thing I do think is unfortunate is that most of those who rack up piles of student loans come from middle class families because they are not rich enough to pay for the costs and not poor enough to qualify for aid.  In many of these cases, they might have thought that going to a prestigious private school is the way to upward mobility, but find the opposite to be true after graduation.  The solution here is once again to pick a school that is affordable.

Personally, I never had student loans since my parents paid for UC Berkeley, but if I had to pay for it on my own I would have wiped out the entire four years’ cost in my first year of work.  I consider that to be a very affordable school.  Basically, I think that these students and parents really need  to sit down and think about things rationally before taking out huge loans.  Four years of education should not end up being a lifetime of indentured servitude.  I don’t believe that student loans are “good debt” at all, and I am glad that I never had to deal with them.  In 17 years my son will be choosing a college, and I will definitely explain the financial aspects of each college offer to him.  If he chooses a school that we as a family could not reasonably afford, then I would have failed as a parent.

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Today Goldman Sachs was handed a $450k fine for violating a short selling rule and there is an ongoing civil suit concerning their role in creating and selling a synthetic CDO product called Abacus.   Here is what I think of the whole debacle.

First, let me tell you a little story.  Yesterday my mom called me and told me of an investment property she and my dad were considering.  Apparently the current owners bought two duplexes at the height of the bubble for $500,000 and put $250,000 down, and now these two buildings are listed for $77000 each.  My mom’s comment was, “isn’t this sad?  The hard working folks lost all the money and Wall Street won!” I basically replied to her and asked her what Wall Street won from this particular case.  The lender to the couple will lose money in this deal, and it seems to me that this couple just made a bad investment.  However, the general sentiment now is that all the bankers are to blame for everything ill in this world whether it is true or not.

The folks who bought Goldman’s Abacus product also made a bad investment, and it seems silly for them to complain that Goldman “knew” that the investment will go sour.  Seriously, can you really blame Goldman Sachs for people who do not pay their mortgages?  Did Goldman hold a gun to these people’s heads and force them to sign their loan documents and default?  I think it’s ridiculous to say that Goldman or Wall Street in general knew that the housing crisis was going to happen when almost EVERYONE and their pets’ fleas were caught in the real estate mania and truly believed that real estate prices will never fall. The contention here is that the person who helped create Abacus felt that the underlying investments would go sour so he was on the other side of the bet, but obviously the buyers of Abacus felt that it was a good investment because they would not have bought it otherwise. They also trusted the ratings companies that rated these underlying securities to be awesome. So this case seems like the buyers of these investments are feeling gypped that their bet went wrong.  The fact is that they had access to the data of every underlying security, and it is their fault for not doing their due diligence.

Although I am not a fan of market makers like Goldman Sachs because I feel that they control too much, in this case I think it is ridiculous to try them for fraud.  If they committed fraud because they selected a consultant who believed that the securities would fall, then perhaps all the people that lost money in real estate in recent years should sue the real estate agents of the sellers that they bought their homes from.  Perhaps those real estate agents counseled their clients into selling their homes because they felt that the real estate market peaked, and they gained from the sales financially.  Have they all committed fraud, too?  Goldman is an easy target because there is all this hate against big financial institutions now, but when will people own up to their  mistakes?  All the investors from the Wall Street banks that bought these CDOs to the “Main Street” duplex owners who lost money in the real estate bubble are only here because of their own greed and I am not shedding a tear for any of them.

As to the SEC, it almost seems like they’re trying to show that they are doing something productive after the whole porn surfing scandal.  In this case I agree with Warren Buffet’s stance that Goldman did nothing wrong by selling Abacus.   I don’t know what kind of precedent this case would present to salivating lawyers.  What’s next?  Can anyone with a bearish opinion be sued when proven right?  Will investors start suing blogs like Calculated Risk and Doctor Housing Bubble for “creating” the real estate collapse by writing about their honest opinions about the real estate mania?  Lets be honest here, if the real estate bubble hasn’t popped yet then this lawsuit would not have been brought forth, and I really think that everyone should just accept their wins and losses in this whole madness and move on to better investment opportunities.

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Several people have said to me that if I were to retire early then I would lose out on a great deal of Social Security benefits.  The fact is that the earlier I retire the more return I would receive from Social Security.  Here is the reason why those who want to get more from Social Security should retire early.

First of all, I am still 40 years from what Social Security calls the “full retirement age”.  That is when I can collect 100% of the benefits I am entitled to.  In 40 years I have no idea whether or not this program would be around.  If it is not going to be around anymore then it seems to make sense to pay as little into it as possible.

Next there’s the issue of how your retirement benefits are calculated under Social Security.  Basically, the calculations work out so that those who pay more will get less of a return on what they paid.  Here is the detailed worksheet of how Social Security benefits are calculated this year.

Using that worksheet lets do a real example of two hypothetical people that both start working in 1991 and reach their full retirement age in 2010. (This is possible since some immigrants start working in America later in life.)  Suppose person A works for 10 years from 1991 to 2000, and person B works for 20 years from 1991 to 2009.  Also suppose that they both start off with a salary of $32,000 per year and get a raise of 2% per year. The final result is that person A has a monthly benefit of $866.49, and person B has a monthly benefit of $1180.58. So basically, person B paid more than twice the taxes as person A, but has a benefit of only 36% more.  Why isn’t it 100% more?   The reason is that the formula is meant to replace more income of a person with lower lifetime earnings.   It’s pretty easy to see that this is a system of diminishing returns, and it is better to retire early if you can because the rate of return you get on your taxes would be higher than if you retired later.

Finally I think a lot of people have a misconception of how Social Security works.  All the money we are paying now are going to current retirees.  None of the money is being saved into an account like a 401k.  So in the future the benefits we collect will come from younger folks.  It is supposed to be an insurance system since a lot of people die before ever collecting any benefits, but it is really another system that forcibly transfers income, and there is no point in paying for it more than you have to.

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