Monthly Archives: November 2013

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It’s time to stop being afraid of socialism

afraid-of-socialismQuiet little Seattle made national news last week when a (very) longtime city councilman was defeated by an upstart and previously unknown candidate. The shocking part, though? She was a (gasp!) socialist!

Economics professor Kshama Sawant seemed to be far behind on election night, but in the days following the election vote-counts shifted strongly her way, eventually putting her win well outside the margin that would trigger an automatic recount. By last Friday councilor Richard Conlin conceded, ending 16 years on the city council.

Media outlets on the right and left immediately overreacted to the news.

Why is Seattle Socialist Kshama Sawant Allowed to Teach Economics?” whined a writer from Forbes after the election. Um, what??

Seattle’s election of Kshama Sawant shows socialism can play in America,” said the Guardian. Let’s not get carried away, Guardian!

The reason Sawant won, in case any of you outside of Seattle are wondering, is that she actually ran a tight, organized and well-messaged campaign. In contrast, her opponent, a very friendly (Democratic establishment-type), non-offensive guy (I’ve chatted with him several times) never viewed her campaign as a serious threat even as she was drawing crowds to her get out the vote rallies.

I’ll stay away from drawing too many broad conclusions about the meaning behind her victory. But there is one unarguable takeaway that I think is important: At the very least, the “socialist” label wasn’t something scary that would keep people from voting for her.

And I think that’s a good thing, because the hysterical fear of “socialism” is something that’s causing Americans a great deal of unnecessary misery and struggle.

Unfortunately for our country, the education system has been gutted to such a degree that I’d bet a majority of voters couldn’t give a proper definition of socialism. Because people aren’t generally educated in various economic systems, they are easy to manipulate with overwrought smears.

But when you label everything as socialism, suddenly socialism isn’t that scary anymore. One can almost imagine a voter thinking “Well, if Obamacare is socialism, then I must be a socialist.” (For the record, it’s not. I guess technically you’d have to say the Affordable Care Act, which requires buying a product from a private corporation, is part of our Corporatocracy — corporate interests running the government. Or I guess you could argue it’s Fascism, but let’s not get into that.)

It’s important that people begin to stop being afraid of socialism because socialistic programs are the strongest protections we have ensuring we enjoy a stable, safe place to live and they are some of your most important tools for leaving work at an early age.

Doesn’t this make us a bunch of freeloaders?

Pretired Baby struggling to survive under the ills of socialism at Ercolini Park

Pretired Baby struggling to survive under the ills of socialism at Ercolini Park

Let’s dispense with the trolls right away, shall we? The classic pushback against any form of socialist endeavor is that we’ll all become weak and reliant upon the expensive nanny state government. We will no longer strive to do better and we’ll have a country of deadbeats. Worse, since we’re talking about socialism in the context of pretirement, it’s easy to imagine the complaint that the government is forking over piles of money to a bunch of lazy people.

But even people in true socialist countries have no trouble working hard to make their lives better. They don’t, however, seem to have the same fear of the financial abyss as we do in America.

And it’s silly to accuse the pretired of not paying their fair share. Most of us worked very hard for several decades. Just because we would prefer to opt-out of the final few decades of pain doesn’t mean we didn’t make our full contribution.

But socialists are weirdos

We don’t need to join the Socialist Party, stop bathing and stand on the corner handing out manifestos to recognize the value in pragmatic social support systems. We’re stronger when we join together and help each other.

The two most recognizable socialist entities in America are Medicare (“free” health care for all citizens aged 65 and up) and Social Security (basically an “insurance” program providing a small pension for older citizens). Not coincidentally, these are among the two most popular government activities every time it’s polled.

But other examples of what are technically “socialism” are all around us although often the lack of socialistic programs are often more apparent.

Obvious examples include the electricity grid you’re using to read this right now (even though our lack of investment means the American power grid is in sorry shape), the roads you drive each day (falling apart under our tires), the public education system (also starved and under assault), mass transit systems (adorably out of date), police and fire departments and, of course, our military. Those public institutions are usually well-loved, even when they frustrate us. Interestingly, though, our most hated institutions are private: our outsourced renegade army (Blackwater), private health insurance companies and Wall Street, for example.

Why are we so afraid?

So why are Americans so afraid of socialism? My opinion is that it’s the aforementioned poor education combined with an easily exploited fear of authoritarianism. Mark my words: If we ever end up with a real dictator in the U.S., it’ll happen because we were falling all over ourselves out of a fear of a hypothetical dictator.

Authoritarianism is the belief among some that they are imbued with special powers and they are therefore superior to all others and we should all submit to their crazy will. Authoritarianism actually is quite dangerous and completely possible here. Note also that authoritarians are also the first to acquiesce to power. They either need to be in charge or subservient to a strong leader. (Check out Conservatives Without Conscience for more on this. Fascinating read!)

Many of the dictatorships that live most vividly in American memories arose from left-leaning perspectives (usually locations of U.S. military intervention, see histories of Russia, Cuba, Vietnam, and North Korea, etc. for example). I think the images of those regimes become conflated with the perspective they originated from, when in fact the economic or governmental theory is irrelevant to how much your life sucks under a dictatorship. No matter what the political theory is behind these guys, it always ends up being a tiny group of insiders bossing everyone else around and stealing all the money. Concentrated power is the real enemy, not some theory on the role of government. A Communist dictator is equally as bad as a Fascist one. Big Government, Big Business, Big Religion — I hate them all equally. And when they work in collusion, I hate them all even more.

As usual, it’s about your freedom

But this isn’t meant to be another Pretired Nick political rant, fun as that may be. We’re talking about maximizing the enjoyment of your life here. We want to get out of the rat race as soon as possible and spend our time with fulfilling activities.

We reach pretirement when our passive income is higher than our living expenses. Which is why a true socialist government could complicate matters for a pretired person living off investments. From a strictly income perspective, making your pretirement numbers work is easier under a system designed to benefit the wealthy. High taxes on investment income could negatively affect many who live off their investments. Indeed, the pretired are basically structuring their lives like the super rich — on a much smaller scale. However, the cost side can be much higher without a good dose of socialism.

Either way, I don’t see much chance of investment income becoming a target for high taxes anytime soon. Our system is essentially geared from the ground up for raw capitalism. We have a long way to go in simply excising corporate cash out of the government, let alone shifting the entire system to a worker-based economy.

Hopefully people will begin to see social programs as a way to support our fellow citizens and not as equivalent to dictatorship. We have a lot of needs in this country and it’s a shame we’re ignoring so many of them. But beyond government policy, those seeking pretirement would be wise to consider how social institutions can help them reach their goals. A community that has invested in itself is a better and cheaper place to live.

Living where there is an adequate mass transit system, for example, could save you thousands of dollars each year. A community that has invested in smart development, professional police force, good lighting and has a healthy economy, is safer. You won’t need to seek out an expensive “safe neighborhood” or gated community to keep your family safe. You won’t need a ridiculous alarm system. You may not need the house with the big yard if you have great parks nearby. You can spend less on books and movies if you have a good library.

You may even wish to consider moving to another city (or country?) that has better support systems than where you are today. Seattle, for example, has great libraries, but a crappy transit system. But it is very safe. If you’re saving for college, public university in Canada costs a fraction of what it does in America — plus sweet, sweet socialized health care!

Hopefully the U.S. is maturing out of its adolescence and is ready to put away the inflammatory language whenever government spending is discussed. Strong social supports don’t limit our freedom, they expand it.

What do you think? Is it time to start being afraid of socialism and push for pragmatic changes that can make our lives better? Would you move to take advantage of a better social support system? 

Forcing cashflow — when should you do it?

Image courtesy of renjith krishnan / FreeDigitalPhotos.net

Image courtesy of renjith krishnan / FreeDigitalPhotos.net

Ever heard the term “forcing cashflow” before?

If you’ve done any real estate investing at all, sooner or later you’ll run into the concept but it’s a topic with implications well beyond real estate. It’s a tricky subject and one that I still struggle with today.

I faced the classic “forcing cashflow” situation a few years after I purchased my infamous fourplex. Regular readers might recall I actually bought two fourplexes at the same time from the same seller. After a few years of thin cashflow and pouring too much free cash in to feed the mortgages, I dumped the more problematic of the two and walked away with some decent appreciation profit.

I examined my situation. My personal monthly bills (outside of mortgage) totaled about $1,500 at the time. I was pretty obsessed with cashflow in those days so the math was simple based on my objective — specifically raising the monthly income from the property up above the amount I’d need to cover my bills. I talked to my friendly neighborhood mortgage broker and asked how much cash I’d need to bring in if I wanted to bring my payment down to $1,000/month (including escrow). Rents in the four units were around $650. So on paper I’d have $2,600 in revenue and after paying the mortgage my cashflow would be a sweet $1,600 (not counting maintenance, vacancies, etc.).  Not bad, right? Who wouldn’t want a free $1,000+ coming in every month?

Well, there are a few ways to look at forcing cashflow that complicate the matter. First we have to break out of the mindset that forcing cashflow is either “good” or “bad.” Rather there are various types of forcing cashflow that may or may not make it a good idea for your particular situation.

Old school real estate investors usually talk about forcing cashflow in the context of something amateurs do to make their numbers “work,” while they, the savvy investors, boast about their “cap rate” and similar methodologies to evaluate their purchases. And they’re quite right to do so because strictly forcing cashflow ignores the opportunity cost of putting the extra money elsewhere. For example, in my case, I would have been MUCH better off investing the money in stocks. That is to say the return I got on the additional funds was less than I could have gotten elsewhere. Thus my overall income situation would have been better by paying more attention to return and less to cashflow.

However! While all of that is true, there are other important ways to think about this. Let’s reverse things to help see this clearly. Imagine for a moment, I pulled some cash out of my property instead of putting cash in, say via a simple home equity line of credit loan (forcing a negative cashflow, if you follow me). Suddenly instead of the $1,000/month coming in, perhaps I have to feed it by $500. This could put an investor in an untenable situation, unable to keep up with payments and vulnerable in a crisis. Or to put this another way, if you were buying a rental property, how much should you put down? How could you know what the right amount is?

Cap Rate (along with GRM and GSI for you real estate investing nerds) is cashflow neutral — it only helps you determine whether the purchase (or sale) price is fair (based on revenue). Cashflow is profit-neutral, it just tells you how you’re structured. For example, you could have a 10 percent Cap Rate building (unheard of around here, we’re usually around 6 percent if we’re lucky), but if you bought it with 20 percent down and had some vacancy issues and repairs, you may have gotten a good “deal”, but the building could still be draining you every month. If you decided to force the cashflow, though, and put 50 percent down, you got the same good deal on your property and are enjoying some tasty cashflow. However, you’d have to examine your overall investment posture because you might have come out ahead by putting that additional cash into other investments.

Real estate makes a good example, but we face decisions on forcing cashflow every day, often without realizing it. Every time we’re faced with a decision on whether to pay for something up-front in order to save more over the long haul we’re making this kind of decision. Older car beginning to cost more and more in repairs — would a newer car put you ahead or behind? Worn-out refrigerator burning way too much electricity? Better to keep limping along or upgrade?

So how does one know how much to force cashflow? I have three ways I evaluate this kind of situation:

  1. Payback time – Identifying the time until you reach break-even can be a smart way to look at things. All else being equal, it can be a good idea to achieve the shortest possible break-even time with all invested money. Say you’re considering dropping $5,000 on new windows in your home to replace the drafty single-pane pieces of glass in your house. And let’s say your heating and cooling bill is $200/month and you estimate it’ll drop in half with new windows. So, “savings” of $100/month. Worth it? At a savings of $100/month, it’d take just over four years to break even. So it obviously comes down to how long you’d be staying in the house. If it’s your forever home, the sooner you get started the better. If you’re planning to move in two years, tape plastic over your windows and tough it out.
  2. Yield – Another way to look at forcing cashflow is to compare the income (or ongoing cost reduction) to what you could do in the market. In the above example we were considering investing $5,000 on new windows. What if we took that same amount and invested it in stocks? Using my 5 percent rule, we’ll assume we can make an annual 5 percent if we put our money to work in the market. Let’s compare that to our energy savings with our windows. Our energy bills drop by $100 in this example, so $1,200 per year. Making that on $5,000 isn’t too shabby. And if this is our forever house, we make that (24 percent!) into perpetuity (after year four). (Which is why it makes so much sense to make your house as energy efficient as possible. Although keep in mind saving $100 a month may not be realistic for quite a few of you.) But you do effectively make zero for four years so it’s a long term investment and that’s the way you have to look at it (although you’ll be warmer in the meantime, which is nice). And, of course, you’ll want to count the money you’re NOT making for four years in your math.
  3. Bar lowering – Traditional investors will scoff at me (rightfully maybe) for this one, but since my goal is pretirement, there is another way I look at things. I call it bar lowering and the idea is that even if your potential investment doesn’t make sense under the first two items, it may still be worth doing if it brings your pretirement closer. The idea is that it may be easier and simpler (and more guaranteed) to spend some money lowering your expenses to bring your needed income amount down. The most common example of this is paying off a mortgage. If your interest rate is only 3 percent, it may not make sense mathematically to pay off your mortgage when you could probably make more in the stock market. Let the stock market gains pay for your mortgage and keep the difference, right? Depending on your overall situation, especially your age, it might actually make more sense to take the guaranteed win of paying off your mortgage, which also lowers the amount of passive income you need each month. In effect, this is what we’re doing when we buy the new windows above as well. By dropping our bill by $100 a month, that’s $24,000 we don’t need to earn and invest (again based on 5 percent — $24,000 * 5% = $1,200/year). The basic idea here is that it’s easier and less risky to cut costs than to build up an investment portfolio. So it’s just another way of cutting “spending” even though it’s not the mindless consumerism we talk about so often here on Pretired.org.

So to me it’s not as simple as just comparing everything against what I could do in the market, although that’s become my main approach. And there are other things that complicate these decisions further. How do you really figure out what the savings could be on something like new windows? Basically it comes down to a guess. And then there are factors like resale value and your personal comfort to be considered.

For example, I constantly struggle with whether it makes sense to add solar panels to my house — something I really want. We currently budget $100/month for electricity (yes we have some of the lowest-cost power here in Seattle). I estimate it’d take $15,000 to solarize our house. That means the payback would be over 12 years! That’s hopelessly long — especially considering that we may not stay here forever. I really want them, but it just makes no financial sense. The only thing that tempts me is the bar lowering. With one up-front payment, I’d never have to pay for electricity as long as we stayed here. My share of the minimum monthly bills requirement would drop to a tiny $700!

Yet, the equivalent amount invested would only yield maybe $62/month (applying 5% to $15,000 again). And because I wouldn’t be paying a bill of $100/month, it’d be worth it, right? I don’t know! See? Confusing!

We make these choices every day without realizing it. Some are simpler than others. For example, we finally got smart and bought our own cable modem instead of leasing one from the cable company. It took nearly a year to break even but now we have the lower bill and every month is gravy. Not a big deal, but just another little hole to plug in our budget. We switched the gas furnace a few years ago at considerable expense. That was probably a 3-4 year payback timeframe, but we’re warmer and the ongoing bill is lower (lower monthly overhead).

Do I regret forcing cashflow on my old fourplex? I wouldn’t do it again. In retrospect, I think I would have been better off improving the building and increasing the rents versus trying to lower the financing overhead. But if I’m honest, if I could go back in time I’d sell that building much earlier and dive into the stock market head first. I became so obsessed with cashflow, I forgot to keep an eye on the big picture. Fortunately what I learned about cashflow and the positives and negatives of forcing cashflow help me greatly today as I put together the final elements of my pretirement.

Why have the Japanese stopped having sex?

Japanese workers at a Tokyo subway station

Japanese workers at a Tokyo subway station

A recent story in the Guardian rocketed around the internet recently. It’s not surprising how quickly the story was picked up given the provocative headline: “Why have young people in Japan stopped having sex?”

Now, obviously, a whole country didn’t completely literally stop having sex, but birth rates have been dropping and interest in sex and relationships have been measured at record lows.

The number of single people has reached a record high. A survey in 2011 found that 61% of unmarried men and 49% of women aged 18-34 were not in any kind of romantic relationship, a rise of almost 10% from five years earlier. Another study found that a third of people under 30 had never dated at all. (There are no figures for same-sex relationships.) Although there has long been a pragmatic separation of love and sex in Japan – a country mostly free of religious morals – sex fares no better. A survey earlier this year by the Japan Family Planning Association (JFPA) found that 45% of women aged 16-24 “were not interested in or despised sexual contact”. More than a quarter of men felt the same way.

What is going on here?

The article lists all the usual excuses: too busy, too tired, technological substitutes, you know the story. But there are other reasons, too. Businesses feel women will quit their jobs once they have a baby. And they feel babies are likely after marriage. Thus women put off marriage to avoid triggering career suicide. But overall, those interviewed for the article make it sound like it’s just a big bother. There’s work to be done and the reward doesn’t match the effort.

One must be careful not to stereotype an entire culture when reading these type of stories. We also must avoid projecting our own biases onto these people. But perhaps we can learn something about ourselves by viewing this phenomenon from the safe perspective of our own culture.

To me, the interesting aspect is the disconnect from what is real and what is important in life. And this is where I see North Americans heading down the same road, although the exact manifestation looks different.

Capitalism is an awesome power. I love the power of money to motivate people. I love how it makes us push ourselves to do better. An unleashed marketplace is one of the most powerful forces on the planet. But it makes a better servant than a master.

The Japanese obsession with career mirrors our own in many ways.  But like many things exported from America, they’ve taken our ideas and made them more efficient. I was in Japan a few years ago and riding the subway during the evening was a stereotype come to life. The train cars are totally silent. Each and every person (except for we tourists) was glazed over and typing frantically on their cell phone. They were tired, you could tell. The kind of tired you only get from being in an office all day. Their bodies swayed gently as the train rolled along. They glanced up only occasionally to see if it was their stop. On the sidewalks, people rush quickly to and from their jobs, barely looking from side-to-side as they scurry (violent crime is almost unheard of so there is little need to glance around for personal protection the way we do here in the U.S.)

I think what Japan has created here is the perfect worker drone, or something close to it. Could this help explain the Japanese fascination with robots?

(Quick side note: I don’t mean to imply everyone we met everywhere has turned into a worker drone. It was also one of the most peaceful and calm places I’ve been. People largely were very happy, open and friendly. They believe in nature, beauty and well-designed cities. It’s just in the business districts and subways where you could really see the strain on the working class.) 

In modern times, the Japanese have an unwritten understanding of lifetime (or close to it) job security. In recent years, this is reportedly slipping with more contract workers and less security overall. However, incidences of losing one’s job involuntarily are still quite rare. This security comes with a price, however, in many unpaid hours and institutional and peer pressure to work many hours. On a societal level this obviously impacts relationships and family stability. On an individual level, the price is even higher as many lead empty, unfulfilling lives of drudgery and exhaustion. Who benefits? Well, the employers, of course, pocketing free labor and a stable workforce. What does it matter if people drop dead from overwork? Yes, it happens. It’s a phenomenon common enough there is actually a word for it: karoshi.

Are we heading this direction? Are we already there? We already have a massive labor theft problem here. We already have families falling apart under financial strain. We spend hours glazed over sitting in idling cars trying to get home where we glaze over a few hours more watching TV before stumbling to bed to do it all over again. Japan may have a low marriage rate, but we have an abysmal divorce rate. While it’s still expected that the mother stays home to raise the child in Japan, we ship our little ones off to be raised by others in large groups of other kids. Maybe we’re all just the same.

 

Naturopathic doctors often look at the skin to determine your overall health. Blemishes, rashes, pimples, etc. are all indicators of various medical issues, frequently related to diet. More fundamentally, however, clear, glowing skin indicates vibrant health. Just look up “health” in any stock image site to see what I mean.

A person’s sex life is the same way. It can be an indicator of overall health and life balance. While not as outwardly visible as your skin, it’s still acts as the same type of viewing window into your overall life — even if you’re the only one who can see it.

When something as fundamental as normal sexual interactions between people begins to break down, we know the problems run deep and have been building for years, possibly generations.

The Japanese are panicking because they are concerned about a shrinking economy (and their obsession with racial purity precludes them leaning on immigration the way other countries have done.) We don’t yet know what other problems these breakdowns in normal human interactions will have. We know pretending we can force ourselves into something beyond human causes major dysfunction — just ask any altar boy. We also well understand the strain modern life can take on us, most clearly seen when the vulnerable finally snap — all too often with weaponry in-hand.

Humans are animals as much as we like to we pretend we’re not. Allowing ourselves to be turned into machines for the sake of money is damaging to ourselves and society. Yes, we need food, clothing, shelter, rest, sex, love and emotional support to survive. And that’s just for survival. Is survival the goal? Or should the goal be to live as full and vibrant a life as possible? Society should be geared to harvest the maximum value from each individual, but that value shouldn’t be measured in money.

The important thing is that men should have a purpose in life. It should be something useful, something good.
-Dalai Lama

No one wants to give up the advancements of the modern world. In many important ways, things are better now than they have ever been. But we cannot lose who we are. Stories like this one out of Japan should be the canaries in the coal mine warning us we’re veering off-course. It’s not too late to change and individuals must lead the way by valuing their humanity more than money. Choose how much and when you’ll work. Buy your freedom as soon as possible and devote your life to what you think is important. Your society (and your spouse) will thank you.

What the Seattle Seahawks can teach you about getting out of debt

In a hole so deep you can’t imagine ever getting out of debt? It’s never hopeless

seahawksThere were only two minutes left in the half. Pretired Mama and I sat on the couch stunned as the previously unstoppable Seattle Seahawks found themselves down 21-0. We began eating leftover Halloween candy just so we could feel something. Anything.

Already worn out from a very busy week of normal life plus a sick Pretired Baby and forced to spend most of my free time wiping up snot and scraping off the resulting “crustache,” I was exhausted. This game was too much. I couldn’t take it. I briefly considered turning the game off to get something else done.

But then I noticed something. The Seahawks weren’t shaken up. They seemed confident. Determined even. It might not be exaggerating too much to say they looked confident they were going to win despite their current situation. Quarterback Russell Wilson, in fact, almost appeared to be grateful for the challenge. He clearly decided he was going to need to show his team how to win and so he did.

With the ball safely in his hands, Wilson stayed just out of reach of Tampa Bay defenders and ended scrambling for a nice 16 yard gain. A penalty gave them an extra 15 yards and suddenly the stadium knew the momentum had shifted.

“A lot of really cool things that happened,” Coach Pete Carroll said later. “To see that Russell finds a way to get us into position to win again, he’s just a terrific football player and a great leader. He never thought for a second that we weren’t going to win this football game. He made the plays he needed to make to put us in position to do it.”

The Seahawks crawled back little by little to dramatically take the win in overtime. “The biggest thing I’ve learned is, if there’s any time left on the clock there’s still a chance,” Wilson said.

If you’re in serious debt trouble today you probably got there the same way one of the best teams in the NFL found themselves down 21 against the worst team in the league. (Those of you with health care debt get a pass.) They didn’t take Tampa Bay seriously. The Seahawks shouldn’t have needed to even break a sweat beating the Buccaneers. It’s the same way debt creeps up on people. Lack of focus, not believing it could happen to you, and a combination of many small mistakes.

Most people when faced with seemingly hopeless adversity simply give up. Sure, they may keep going through the motions. They may keep “trying.” But deep in their hearts, they haven’t adopted a winning mentality. A championship mentality.

No matter where you are right now, you can get where you want to be. It may not be easy, but it’s always possible. You’ll need to create a strategy and stay focused. In sports, champions aren’t the teams who buy the best talent (although that helps).

You can identify the champions by watching teams struggle through difficult times. Are they lazy and entitled or do they take the responsibility upon themselves to make things happen?

It’s no different for any of us. Sure, there is hard work ahead and there’s no shortcut to paying down debt. But the shift begins when the mentality changes. The first step to getting out of debt, not matter how much you have, is to shift your mindset. Know it’s possible, make a plan and you’ll get there.

Just like the Seahawks. See you next Sunday.

You’re next, Falcons! 

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