Thursday, September 25, 2014

Why Worry about the Latest Credit Card Security Breach?

In the last 9 months, my credit card information on my most used card was stolen three times and my credentials to log into websites were stolen likely three times as well.  Like a good sheep, I changed my passwords, signed up for the credit monitoring service, and monitored my transactions.  Should I worry a lot about this?

Heck no.  The Russians have my credit card three times over and have not used it yet, my credit card company regularly disallows valid purchases, and sends me tons of emails when I spend over a certain amount, when I use the card internationally, and when the card is not present for a transaction (as if that matters).  I am not responsible for invalid transactions and Home Depot will pay the $50 deductible if my credit card company tries to charge me.  It is inconvenient but the economic impact is to the credit card issuers and retailers.

The US credit card industry and US retailers are learning Game Theory.  Hackers had already broken through the security of magnetic stripe cards and simple PINs in Europe 10 years ago.  Europe and many other countries went to smart cards with PINs ("chip and pin").  The US thought it could not happen here for some odd reason.  The hackers, as game theory would tell you, simply switched to the most lucrative easy target: the USA.

Let's hope that the card companies and retailers get their act together and do two things:

  1. Deploy "chip and pin" cards and systems quickly.
  2. Harden the security of their enterprise data networks.  Based on the news reports, their networks are woefully insecure.
We also need the internet standards folks to come up with a standard way to authenticate a user.  A username and password were OK when the Bee Gees were "Stayin Alive", but 40 years later we need something better.

Wednesday, September 24, 2014

What is a Big Factor in Early Retirement?

One of the interesting things about retiring early or getting a second career, is that  when you create your plan, you immediately see what is most important.  In a previous blog post, I highlighted that you need either a large investment portfolio, or a generous pension - a rare thing nowadays.

This is certainly true, and let's focus on the most likely scenario of a couple retiring early without a large company pension, i.e. they self-finance their retirement.  Ignatz and Myrtle are my example, they want to retire at 56 years old.  They are in good health and want to live on $100,000 a year after they retire.  They expect to get government pensions (SS or CPP) of $22,000 a year.  They have a savings plan that will get them to $2M in savings by the time they are 56.  Their life expectancy is 87 years, but they want to plan for 92 to be conservative.

Let's assume inflation is 3%, is their goal of retiring at 56 feasible?

1. A simple planning estimate based on a rate of return of 5% says that yes, the plan works.  At 4% return, they will run out of money before they reach 92 at about age 86.  They need a rate of return of about 4.85%.  This is computed using a financial calculator annuity function with N=36, PV=$3M, I=1.85% (rate after inflation).

2. Running the Monte Carlo tool at Vanguard covered in a previous blog post gives a more realistic view of things.  With a $2M portfolio of 40% stock, 40% bonds, 10% cash, there is a 82% chance of success.  At 10% stock, 40% bonds, 50% cash, there is only a 49% chance of success.

What this is telling us is:

 Rate of Return is a key factor in a successful early retirement that is self-financed.  

The plan outcome (your life in retirement) is highly sensitive to the rate or return aka ROI.  So, when drawing up your plan or working with your financial advisor, carefully examine the rate of return that is used in the plan, whether it is a simple (case 1) or a more complex analysis (case 2).  If a high rate is used, like 7% or 10%, question how that return is going to be obtained and what is the proof that it is feasible.

Monday, September 22, 2014

Uber In Northern Virginia

On our last trip to Canada, we used Uber to get to and from the Airport in Washington.  Normally we use the taxi service affiliated with the airport called "Washington Flyer".  We live in a suburban development about 10 miles from the airport.

  • The app worked as advertised.  I requested a taxi about 15 mins before we needed it, I got an acknowledgement in about 15 secs, and the car showed up at our door.
  • The cars and drivers were fine - car was clean, the driver used the app to navigate but also asked if I wanted to go a particular way.
  • The cost was about 30% less than the standard fare to and from the airport.
  • I requested a car on our return when I got the bags off the airport baggage carousel.  The driver immediately phoned to find out where to pick us up and he arrived about 2 minutes after we reached the pickup point.
So Uber really does work in suburban Northern Virginia.

Wednesday, September 17, 2014

Employment is Picking Up in the USA

In spite of my lack of success in picking up lucrative consulting work (I cherish this fantasy), the employment situation seems to be picking up.

  • The unemployment rate has dropped to 6.1% from its high of 10% in 2009
  • Trucking comnpanies complain about lack of drivers
  • Airlines complain of a shortage of pilots
  • Lots of signs in restaurants, supermarkets, stores advertising for workers in our area
  • Liberty Tax is hiring - to do taxes, not to dress up as Lady Liberty and dance with a sign on the street corner
  • Loudoun County is holding a jobs fair this month for seasonal jobs for this holiday season
While none of this can be attributed to the dastardly duo of President Obama and the Federal Reserve, it is good news.  

Thursday, September 11, 2014

Rising Interest Rates


Lots of news these days about interest rates going up in the USA but today I saw concrete evidence. Ally Bank raised the interest rate on my savings account from 0.87% to 0.9%.   It is not much, only a 3.5% increase but it is the first increase in about 2 years for Ally, and I noticed that other online banks are offering even higher rates.

Most news reports say that the Federal Reserve will raise short term rates in 1Q15 or 2Q15.  On the other hand, the ECB is hinting at Quantitative Easing, which should reduce Euro interest rates.  The net, in my opinion, will be a moderate rise in real interest rates (loans, savings, bonds) in the USA over the next year or so.

Monday, September 8, 2014

Protective Put Strategy Status

Recall that I was going to use a "Protective Put" option strategy in the rebalancing of my portfolio.  The reason was that I had excess small cap stocks (ETF) in my portfolio and I did not want to sell until next year for tax reasons.  The Protective Put allowed me to protect against the downside that small cap stocks decline before I sell next year, effectively allowing me to sell this year without actually selling.

Here is the status of the strategy, which seems to be working.  The small cap ETF has gone up, the PUT has declined in value, but I also got the capital gain from the original ETF shares, so I am up, but not as much as I would be if I had not bought the PUT.

Protective PUT for Vanguard Small Cap ETF (VB)
Before Option PurchaseOption Purchase 8/15Now 9/6
200 shares VB$22,712.00$22,702.00$23,354.00
200 PUT options (Dec2014)$0.00$800.00$500.00

Note also that the loss on the PUT when I sell it is tax deductible.

Friday, September 5, 2014

Saving Money Running a Home File Server

PC Power Supply

I converted an old HP desktop PC into a home file server using the NAS4FREE free software a while ago.  The server works well and I have made some modifications to it over time.  The cost savings in electricity surprised me.

First, I replaced the motherboard with a low power mini-ITX motherboard.  The original motherboard had a power hungry old AMD processor and I did not need all that computing power.  This decreased the power consumption from 150 watts to 75 watts, for a monthly saving of $6.21 or $75 per year (local cost of a kilowatt hour is $0.115).  I also sold the old motherboard and memory on Ebay so my net cost was about $25, for a 3 month payback.

Second, I replaced the HP power supply with a modern energy efficiency Bronze-certified power supply (Corsair CX430).  This further dropped the power consumption to 35 watts, saving $3.31 a month or $39.75 a year.  The power supply was on sale for $29.99 so the payback is about 9 months.  For those geeks among us, it also corrected the power factor from around 1.3 to 1.

Two things I noted:

  1. You can save money by getting more energy efficient devices, like this server that is on 24 hours a day.  Clearly, home PC's as sold by the manufacturers are not very energy efficient.
  2. Even a small power draw like 35 watts (a couple of CFL bulbs) adds up over time if the device is always on - $40 a year.

Tuesday, September 2, 2014

Why is a Polish Person Wearing A Kilt?

Highland Games Kilts and Boots - Flickr
During our recent vacatin in Scotland, we happened on a restaurant in the Highlands with a nice young man in a Kilt working as the Maitre D.  When we asked for a table for 2, he replied in English with a strong Polish accent.  Why is a Polish person in a kilt working in a rural Scottish restaurant?

Well it turns out that a lof of Europeans including Poles have immigrated to the UK.  This should cause massive unemployment, but it has not, why?  A study by the Conference Board in the US concludes that western economies like the UK and the USA will soon have a labor shortage due to the retirement of the Baby Boom generation (like me) and not enough new people entering the work force.  We will rapidly go from high unemployment to a shortage of workers, as described in this Bloomberg audio interview.  The Great Recession delayed this shortage, but the graph below shows the boom in the late 50's, and the fall in birth rates afterwards.

US Birth Rate

Also, for those who think that the falling worker trend will be offset by automation, sorry.  The rate of productivity improvement in the US is well below the rate of decline of the working population.

So what does this mean for us?

  • The opportunities to work in retirement will be plentiful
  • We could get wage inflation in future
  • The US may want immigration in future, legal or not
  • Some countries with limited immigration, like Japan and Russia, will suffer this problem sooner and to a greater degree than countries that encourage immigration, like Canada.