Advice For The Prosperous
By: A. B. Jacobs
Not long ago I was asked to give a financial address to a local Rotary Club. When I inquired what particular subject the group might like, I was told that many of the members are at or nearing comfortable retirement, but expressed concern for their children and grandchildren whose futures seem not so promising. With that as my guide, I selected three issues I hoped would fit the bill. You may decide, as I relate the information I passed on to them, whether I chose appropriate topics.
My first subject deals with schooling. Be aware that there is possibly no expense that can consume a family's assets more aggressively than that of sending offspring off to obtain higher education. It's not at all unlikely that thirty thousand dollars or more per year can be expended by a student at a prestigious university. Quite often the cost is borne by the parents, at the jeopardy to their own future, or through student loans that may not be paid until years after the diploma is earned. Although conventional wisdom seems to favor this scenario, I harbor a different attitude. My preference is for college on the cheap. The blueprint calls for the freshman and sophomore years at a community college, where tuition can be as modest as thirty dollars per unit. Following that, the junior and senior years will be completed at a local state university, commuting from home. Used textbooks can normally be purchased at a fraction of the cost of new ones, either from the school bookstore, or directly from a student just completing the course. This is not only economical, but also offers a serendipitous effect — used books often contain important portions underlined and helpful comments and notations included in the margins. In addition, it makes sense for the student to spend each summer at a job, so to earn at least a portion of the year's education costs. There is something about working that adds an important dimension to the learning experience. And finally, in response to the claim that a degree from an institution without an exalted reputation will forever stigmatize the graduate, let me pose a question: How many of you actually know from what school your dentist, attorney, and physician received their bachelors' degrees?
My second topic concerns retirement accounts. Many young persons are unaware of what to do with whatever excess money they earn, for the realistic handling of money is not a subject to which much attention is devoted. Whatever praise or criticism you may direct at the American public school system, one thing must be acknowledged. Whatever the average American knows about investing did not come from the classroom. This is understandable, of course, if only because the typical classroom teacher is equally mystified by the world of money. In any event, over the past several decades, thanks to a consorted effort by the investment community, the mutual fund has become America's investment by default. Tune in, if you will, to one of the many radio or television talk shows that feature a financial authority dispensing information to the unseen audience, and you'll find the advice to be uniformly consistent. Regardless of the retirement receptacle, be it an IRA account, a 401(k) Plan, or some other variety, all must contain a mixture of mutual funds, selected to meet one or more arbitrary criteria, with index funds enthusiastically recommended.
Let me offer a divergent view. However else a young man or woman chooses to invest, there is one vehicle that deserves first precedence. It is a Roth IRA, into which should go interest-bearing securities. As a tax-free device, rather than merely tax-deferred as with a traditional IRA or other retirement plans, the Roth is unique. It is available to all persons with earned income whose AGI is under $110,000 if single or $160,000 if married. The annual contribution limits are $4,000 for 2005 through 2007, to increase thereafter. Although this may not seem significant, a contribution of $4,000 yearly can, if invested properly over a working lifetime, grow to more than a million dollars. For an explanation of exactly how it's done, I invite you to visit my website, www.onthemoneytrail.com, click onto Newsletter Archives, and read December 2002: "Why Bonds Belong in a Retirement Account."
My final topic is one that currently separates the generations into two hostile camps: Social Security. Rather than become drawn into the controversy over the future solvency of the system or the wisdom of privatized accounts, let's view this matter from the perspective of its primary victims: those working men and women whose FICA taxes pay for it all. The simple fact is that money is collected today to pay sums to those who decades ago paid significantly less into the system. The program now operates as a device that robs youthful Peter to pay elderly Paul, and for most of those paying the bill there is no escape. However, the operative word is most. There is a small but select group of persons with the ability to opt out of the system, either partially or wholly. These are generally the self-employed, with a certain amount of investment or other non-earnings income. How this may be done is described in another article in my Newsletter Archives, February 2005: "Opting Out of Social Security: The Well-Kept Secret."
A concluding word: My address seemed well-received by the Rotary Club members. I hope you'll find the thoughts equally applicable.
Al Jacobs has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody's Fool: A Skeptic's Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting http://www.onthemoneytrail.com/.