Tuesday, July 29, 2014

It is Hard to Find a Job Without Taking a Salary Cut

I recently discussed the job market with a few ex-colleagues and a consistent theme was that it was hard for them to find a new job that paid as well as their current job.  Generally, the job market in our area (Washington-DC based technology and telecom) is good, but it's hard to find that job that pays as well as you would like.  When they speak to the hiring company's HR department or hiring manager and salary is discussed, they hear something like "..we think you are perfect for the job..we cannot pay that much..we don't pay that much to our current employees.."

I offered some advice, which I will repeat here.

Taking a small pay cut (5-10%) to get into a good company, with a good manager, and a good job is fine.  A good company and manager will recognize your worth, give you chances to prove yourself and move up, and over time, the slight salary loss will not matter as you are being paid more, doing more valuable work, and getting more opportunities.

Also, there are plenty of good companies that pay well, but it is hard to get jobs in these companies.  Why?  Simple! They are good companies with good compensation so everybody wants to join them.  Some of the people they hire are the people who left the poor-paying jobs that you are finding.  So you have to work hard, be persistent, and be lucky to score the well paying job with the good company.  It is far easier to find the satisfactory or poor company with the low paying job, which is why you are faced with the predicament of finding jobs but not liking the pay.

So my advice is to not worry about a small pay cut for a good opportunity and to be persistent and work hard to find those good opportunities with good companies that pay well.  If all else fails, wait for marijuana to be legalized locally and be one of the first to open a weed-shop, you will surely get rich and be happy, but you may be hungry all the time and laugh a lot.

Tuesday, July 22, 2014

Trying out the Protective Put Option Strategy


Earlier in this blog, I noted that my asset allocation was no longer correct due to stock price increases and other factors, see this post.  I need to sell some small cap investments and buy more bond investments.

Well it turns out that selling my small cap ETF this year would incur large taxes.  If I sold next year, my tax would be much lower.  But I should rebalance now, not next year.  How can I reduce the risk of having an unbalanced asset allocation?

One idea that I am toying with is to purchase a "Protective Put" option against my small cap ETF.  You buy a Put option below the current ETF price that expires early next year.  If the ETF goes up, all is good as you get the capital gains and sell the ETF next year, but the option may be worthless.  If the ETF price goes down, your Put option gains in value at roughly the rate that the stock price falls, so you sell the Put and the stock next year and you do not lose as much.

The graph above shows a protective put for a position where you own a stock priced at $60, and a December Put option at $58.  The $6000 investment loss is capped at -$427 (the price of the Put option), but has upside potential.

What do you think of this approach?  Does it make sense given my circumstances?

Monday, July 21, 2014

Exporting Income Equality and Importing Income Inequality

Recent OECD statistics show that the USA and Canada are becoming more unequal in income distribution, i.e. there is a bigger gap between high earners and low earners.  This is of interest because the stability of a society seems to be correlated with some degree of income equality.

The Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

In 1983, according to the OECD, the USA had a Gini index of 33.6, in 2012 it was 38.9 (more unequal).  The trend in Canada is similar but less pronounced.  Why is society becoming more unequal in terms of income?  Here in the USA, this kind of question usually engenders a lot of crackpot theories from the left and right, with names like Ayn Rand, Marx, and Hedge Funds being thrown about.

My idea is that perhaps we have exported our income equality.  In the early to mid 20th century, Western countries manufactured most of the goods they consumed.  We have an old ironing board that is "Made in Canada".  Try to find an ironing board made anywhere but China today.  If you only had a high school education in the 1960's or 70's, you could usually get a job in manufacturing, transportation, or services.  The well-paying jobs that provided a better living were the manufacturing jobs, making cars, appliances, and electronics.  

Today, most low tech manufacturing is done offshore in China, Mexico, or other low cost countries - we exported those jobs to reduce labor costs.  The people who do these jobs offshore make a comparatively good middle class living in their countries - they can afford a small apartment, appliances, decent food and clothing.  So these countries, like Mexico and Brazil, are becoming more equal, although nowhere near as equal as the USA.  

Today, in western countries, the majority of low skill jobs are in service industries that cannot go offshore - food industry, retail, customer service..  These jobs pay less than the old manufacturing jobs of the 60's and 70's.  At the same time, our rate of high school graduation in the USA is unchanged at 70% from 1990 to 2009 - this means that 30% of people do not graduate from high school and must take unskilled jobs.

So my theory is that moving manufacturing offshore and not producing more skilled workers (high school graduates) means that the USA will inevitably have more income inequality.  The solution is to increase the skills of workers through training and education so you can retain as many high value-high paying skilled jobs as possible.

Saturday, July 19, 2014

Free Magazines

I don't know what is going on in the publishing business today.  I get solicitations by email every few days offering free magazine subscriptions.  Sometimes you have to fill in a pretty innocuous survey, sometimes you have to provide a little personal information.  It does not really bother me to do a 15 question survey on razor blades or coffee.  I never have to provide a credit card number, so it is not a scam to get me to renew next year for a big charge.

So far, I have free subscriptions to the following (I like magazines by the way):
- Wired
- Wall Street Journal
- Popular Science
- Popular Photography
- New York Magazine (electronic version)
- Cycle
- Motor Trend
- Travel and Leisure
- Forbes (love the articles targeted at plutocrats)
- Retired Nudists (not a real magazine, just checking to see how far you read)
- and some others I forget

They must be desperate for subscribers.

Friday, July 18, 2014

Big Brother is Watching Me


My insurance broker told me that I could save money on auto insurance by getting a little gizmo called "Drivewise" that plugs into your car and relays your driving quality to the insurance company (Allstate).  It plugs into the OBD (on board diagnostics) port in the car, and must have some kind of wireless link capability to send the info to the insurance company.

The gizmo seems to be most concerned about acceleration, braking, and time of day when you drive.  Depending on these factors, it gives you a grade from C- to A+.  You can see how it is monitoring you online, and how you compare to other drivers.  I pulled the graph above from their website, and it seems to show that most Allstate drivers are C-, which is not good.  It recorded two of my trips yesterday, but does not have today's drive information.

I am very interested to see how we score on driving and whether it has any effect on our insurance rates.  Big Brother is definitely watching me.

Wednesday, July 16, 2014

Where to Invest for Yield?

A lot of people ask where to invest today to get a decent yield.  Regular savings accounts pay 0.01%, money market funds have a similar rate, high interest savings accounts pay 0.75 to 0.90%, intermediate bond funds pay about 3%, stock funds have dividend yields of 1 to 3%.

Clearly, there is no easy place to find low risk high percentage payouts in today's markets. So what to do if you have excess cash?  My advice is twofold.

1. You should look for places where you can personally get a return.  The market may not offer an easy place to get yield, but your personal situation may provide some opportunities.  Pay down your credit card and auto debt if possible, these are probably costing you 5 to 15%.  Pay down your mortgage.  Even at 4% interest, this is a better return than a savings account.  Pay down student loan debt.  If you are debt-free, make sure you max out your RRSP/IRA/401K contributions, where the government will give you a large tax benefit which is somewhat equivalent to a return on investment.  If you do not own a home and live in a place where the housing market is still undervalued (most of the USA), you should consider buying a house.  Housing will generally appreciate at the inflation rate or higher and part of your monthly mortgage payment can be considered savings. However, buying a first home is a big decision so think carefully and do or get a personal financial plan to ensure this makes sense.

2. My second point is not to worry so much about low yield.  US inflation is running at about 1.5 to 2%.  You are not losing a lot of purchasing power if you put your money in a savings account at 0.90%.  If inflation tops 3 or 4% and risk-free yields stay this low, you should start to worry.

A last piece of advice.  If you have excess cash, are debt-free, maxed out all your retirement savings, you should consider using the money.  If the money is not going to earn you much, and you have always wanted to do or buy something, maybe now is the time?  If taking an exotic cruise or building a kit-car Shelby Cobra was always at the top of your bucket list, maybe now is the time to cross it off the list?  Just a thought...

Monday, July 14, 2014

Drones NOT Delivering Your Next Amazon Package

Flying Overhead in Your Neighborhood??
Getting away from my theme of a second career, let's explore the "Prime Air" idea promulgated by Amazon that drones will deliver packages for them.  As a lifelong model airplane and boat hobbyist, I would say that it is very unlikely in the next 5 to 10 years.  But why not?

While today's drones (multi-rotor devices) could deliver a 5 pound (2.3 kg) parcel over a distance of about 10 to 20 miles, it would be a recipe for disaster.  Such a drone would probably weigh 20 pounds by itself and would have multiple single points of failure and would encounter naturally occurring hazards.

Single points of failure in today's drones: battery, motor failure, blade failure, control system failure, sensor failures, body mechanical failure.  Natural hazards: excessive wind, trees/houses, flagpoles, inflatable gorillas on top of car dealerships, rednecks with shotguns, birds.  The probability of having a failure or encountering a natural hazard is probably around 10% today, and would cause a 25 pound object to fall around 100 feet onto an open area hopefully, but possibly a person, car, building, or road.  The outcome: death, injury, or major property damage.  This would be a godsend for all the law school graduates who are unemployed allowing them to become "drone-chasers", but I doubt insurance companies are going to let Amazon launch their fleet of flying package drones to overcome these obstacles.

Drones will revolutionize some industries quickly:

  • Surveying buildings, structures, and other objects with some form of human control in a controlled environment.  No more climbing towers, roofs, hanging from ropes, flying helicopters or planes.
  • Searching for people that are lost in remote areas using pre-programmed patterns and infrared detectors.
  • Triggering controlled avalanches in ski areas by dropping explosives before the thrill-seekers hit the back-country slopes at 11am after a hard night partying.
  • Flying surveying missions for mining companies and pipeline countries to find minerals or pipeline issues in remote areas.
  • Disaster recovery missions where helicopters are not available or it is too dangerous.
  • Defusing or detonating terrorist bombs under human control.
The main theme is that you want to stay away from populated areas and if not, have some form of human oversight and management of the situation.  So if you drive a truck and deliver packages today, you will not be hanging up your brown shorts and steel toe shoes anytime soon.

Sunday, July 13, 2014

Save Up to Fifteen (15) Times Your Salary for Retirement

An interesting article in the New York Times today covering a book by Professor R.C. Marston on how much you need to save for retirement. His conclusion?  Save up to 15 times your final salary, which is a lot - if you earn $100,000 a year, you need $1.5 million to retire.

It does make some sense.  If you save 15X your salary, and use the rule of thumb to withdraw 4% of your savings each year in retirement, you will get 60% of your salary, plus whatever you get from government pension plans (15 to 25% of your salary), for a total of 75 to 85% of your salary.  The rule of thumb for living expenses in retirement is 70%, although there is a good argument that you need more in your early years of retirement and perhaps less later.  See this previous blog entry.

I know, this sounds depressing, how am I going to save 15X my salary?

  • If you are a member of a good pension plan, you likely need less than 15X
  • You will accumulate most of your retirement savings during your late 40's and 50's when your kids are finished college, your mortgage is lower, and your earning power should be at its peak.
  • Follow the advice in this blog and max out your 401K, RRSP, IRA, stick to low cost index funds, and don't live above your income.
  • Or, you could do it the American way and work forever ;-)

Wednesday, July 9, 2014

Longevity Insurance and Delayed Annuities

I learned something new this week about the difference between a Delayed Annuity and Longevity Insurance. I originally thought they were the same thing.  This is not true.

They are a potential solution to a retirement problem - what happens if I outlive my savings?  Those with good pensions do not have this worry as most or all of your retirement income is guaranteed for life but for the large number of people who have to finance their own retirement, outliving your nestegg is a real worry.  If you were 65 and retiring today, your average lifespan would be 82.5 years for a male.  But this is an average, so there is a pretty high likelihood that you will live longer, particularly with medical advances. Consider the increase in life expectancy at 65 shown in the graph below from the US Social Security Administration.  How to make sure you still have enough money when you are 85?

Most people understand an annuity.  You pay a lump sum to get monthly income, which could be for life, or for a set number of years.  Inflation which is unknown, will decrease the value of the monthly income.  For example, a $100,000 payment today might buy me a regular life annuity with a $600 per month payout for life.  You could buy one of those rare annuities with an increasing monthly payout but then the payout will be much lower.  The solution could be a delayed annuity or Longevity Insurance.

1. A Delayed Annuity is an annuity where you pay a lump sum today, and you start getting your payments at some time in the future.  If you die before the payout starts, your estate gets the premium back.  If you die after the payouts start, your estate could get nothing (life annuity) or a lump sum.

If I purchased a $100,000 delayed annuity today, with payments starting when I am 83, I would get $3200 per month starting when I reach that age - 5X the payment of an immediate life annuity ($600).  I ran the numbers and I would get about the same amount if I invested the $100K at 5%, then bought an annuity when I was 82.  So this is not very exciting or useful, in my opinion.

2. Longevity Insurance is like an annuity with a reverse insurance policy that pays off if you are alive after a period of time.  Recall that life insurance pays off if you die.  You pay a lump sum today to a company and if you are alive at a period of time in the future, you start getting payments.  If you die in the meantime, you and your estate get nothing.

If I purchased a $100,000 Longevity Insurance contract today, with payments starting when I am 85, I would get $6700 per month for the rest of my life.  This is double the amount I would receive if I bought a delayed annuity or just kept $100K aside and bought an annuity at 85.  It is 10X the payment of an immediate life annuity ($600).

So you may want to think about the problem of outliving your nestegg savings and these two solutions and consult your financial advisor.  I will  be giving it careful thought.

Life Expectancy of a 65 year old American by Calendar Year - SSA Report

Tuesday, July 8, 2014

How Did I Retire or Start Second Career at 57?

I recently saw an interesting article on a blog asking the question: "How did you become a millionaire?".  Lots of people wrote in with their stories, many of which were interesting, some a little too interesting.  My post was more about how I got to the point where I could consider a second career:
  • Got a good practical degree in Engineering
  • Started saving 10% of income in my mid-20's
  • Saved 80% of my bonuses from employers, spent the other 20%
  • Took advantage of employers' retirement plans (401K, pension..)
  • Saved in tax advantaged accounts whenever possible
  • Bought affordable houses and paid off mortgages quickly
  • Bought affordable cars (this does not mean crappy cars, just affordable based on my income)
  • Never had a credit card balance
  • Always had a family budget that we followed
  • Bought index funds for investments through Vanguard.com, kept a diversified stock and bond portfolio
  • Had some luck
  • Retired at 57 and pursuing second career
Some of the more interesting answers:
  • blackjack
  • took half of my savings and invested it in low risk mutual funds and then took the other half over to my friend Asadulah who works in securities
  • money laundering and arms dealing
  • My uncle was a drug dealer for over 20+ years and he just got caught 2 years ago
  • I sent a check for 5k to this nigerian prince I met online
  • embezzled $1M from my company
  • Started out as a stripper a long time ago
  • Sold tin foil hats at the delzy family reunion
  • Started making prepacked food (2 items) at home (an apartment) for a niche community. Made some profits and bought a store to make food there and to make everything legal about 2 years later. About 1 year after that, introduced a third item, which made big profits. Bought a $600,000 in cash 3 years after that.
  • Crown Vic salesman
  • Publishers Clearing House
  • I met Howard Hughes back in the 70's at a 7-11 when he was buying some beef jerky

Friday, July 4, 2014

Market is Up, Time to Rebalance

The Dow is at a record high and it is the middle of the year, two great reasons to look at your investment asset allocation.  The market run-up has probably pushed your stock allocations over the targets.  Re-allocating your investments will maintain diversification in your portfolio and also has the benefit of "taking some of your winnings off the table".

My current allocation is as follows:

Asset ClassAllocation %Target %Difference
Domestic Bonds33.538-4.5
Large Stocks20200
Small Cap Stocks9.763.7
International Stocks20.1200.1
International Bonds3.54-0.5
Cash12.3120.3
Other0.900.9
TOTAL100100

This is a conservative allocation based on my age and family status, your allocation may be different.

So I need to sell some small cap stocks and buy some bonds, the other allocations are pretty close to target.  This means selling some of my small cap index ETF and buying some bond index mutual funds.  I will try to buy the bond funds within my IRA's or as municipal bonds as this is more tax efficient.

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Thursday, July 3, 2014

Entrepreneur or Part Time Employee?


Since we are staying put for another 9 months or so, I am thinking:

  1. Should I start a small business, maybe write a smartphone app, do some consulting, or ?
  2. Should I take a part time job?  This area has low unemployment and there are lots of stores and businesses advertising for part time help.
The small business has that all-American entrepreneur thing going for it, and it is supposed to be a good way to reduce taxes.  If I started doing photo-drone work, I could deduct the cost of all the replacement parts when I crash the drone.

The part time job has low stress and gets me out of the house - it is not nerve wracking to ask each customer "do you want a shopping cart?" or "move forward to the second window, do you also want a warm apple-flavored extruded burrito-thingy?".  I also look good in a uniform, at least I did 50 years ago in Boy Scouts.

What do you think?  Entrepreneur or minimum-wage service worker?

Tuesday, July 1, 2014

Support for Online Education for New Careers - and First Careers



The Economist Magazine's front page is devoted to the need for Universities to change due to their high cost, lack of success in some areas, and poor availability for certain students (like older folks studying for a second career). The primary theme is that MOOCs (Massively Open Online Courses) or online learning are needed to improve the situation.  The articles on this subject are well written and I agree with almost all of their ideas, such as:

  • MOOCs are a great way to offer education to people who are too poor or are located in remote areas.  It can also identify those students who are exceptional and need financial support to complete University degrees.
  • The combination of MOOCs and Universities for young students solves a lot of problems, such as cost, flexibility, and quality A University degree might be 
    • One year of online learning where you identify your interests and capabilities at low cost.  You could learn from some of the most interesting and best professors in the world, rather than being saddled with the dregs that usually teach first year courses at many Universities.  My EdX "Introduction to Computers" professor is brilliant, way way better than the professor who taught the same subject to me at McGill.
    • Two years of studying at a physical University where you get all the social interaction, lab time, academic interaction, and deep immersion in your subject.
    • One year of MOOCs while you work as a co-op or intern in your desired field, followed by a short stint at the University to do final exams, present papers, etc.
    • The textbooks, which are often a ripoff, can be put online and rented as needed by students, rather than bought at ridiculous prices and then re-sold.
  • MOOCs are a great way to train older workers in new areas for new careers.  These folks, like myself, have already experienced the social side of University (boat races at the pub), often have jobs and families, but do need a quality new education to prepare for a new career.
  • Using online education frees up professors at Universities for research and to work with graduate students on groundbreaking subjects, rather than giving the same old lecture in Psychology 101.
  • Standardized MOOC courses with proper tests to pass them are a better yardstick to judge a potential worker than looking at transcripts from a University with all the variations in teaching, grading, etc.
My CFP course is a great example of a way to re-train older workers at low cost.  The course is challenging, I am learning a lot, I can be flexible about when and where to learn, and the final proctored exam provides reasonable assurance that I really did learn what was required.

My EdX "Introduction to Computers" course is also exemplary.  The professor giving the video lectures is brilliant, the online setup is sophisticated and interesting, and it is accessible to anyone in the world who understands English and has Internet access.