Archive for the ‘Money’ Category

cat food eating

Cat food.  It’s what’s for dinner.

Back in the early 1980s I remember railing against Social Security to my mother who was on it. She’d grown up with the specter of little old ladies living on cat food.  That was a real possibility when she was a girl and the elderly were the poorest group in America.  I explained to her that if I and my two sisters were let off the SS hook we could not only give mom more than her monthly check, we’d have extra left to feather our own nests.  She wasn’t buying it.

And I wasn’t buying it, either. I never figured Social Security would be there for me.  All my financial planning has been based on the idea that if it wasn’t, no problem.  If it was, that would be a pleasant surprise.  Well, Surprise! Now I’m just a few short years from collecting and a surprisingly hefty amount at that.   Considering what we’ve paid in and assuming we live long enough, it turns out to be a pretty sweet deal. I hadn’t counted on the power of the AARP:  The most formidable lobby in history.

 retired couple

No cat food for these folks.

Us geezers are now the wealthiest group in America.

—A little bit of history.

Social Security was born in 1935 during the depths of the Great Depression.  Those hard times devastated everybody, but none more perhaps than the elderly who were no longer able to work even in the unlikely event work might be found.  Many were literally living on cat food, if that could be had.

Back in those days, life expectancies were considerably less. Now figuring this can be tricky as the biggest reducer of average life expectancy is deaths in childhood.  But if we look at the life expectancies of people who have survived to the age of 20, we get a more useful number. In 1935, for men the average was around 65, for women about 68. Since then, life expectancy in the USA has continued to expand. Here’s a cool tool for looking at this: http://mappinghistory.uoregon.edu/english/US/US39-01.html

From those numbers it’s easy to see that setting the age to collect Social Security at 65 was a pretty good bet for the system.  All workers would pay in, relatively few would live long enough to collect and then only for a few years. This worked so well, in fact, (with some fairly minor adjustments along the way) that it was only around 2011 that the money flowing in stopped being more than the money being paid out. So well the total surplus is currently around 2.7 trillion dollars.

—The times they are a changin’.

bob_dylan1

“We were all so much younger then…”

But now the wheel has turned. The huge baby boom generation that has been paying in these surpluses has begun to retire. In addition, they are living a whole lot longer. Going forward, if nothing changes, the system will be paying out a whole lot more than it takes in. It looks like this:

1935-2011:  Annual surpluses build and end up totaling about 2.7 trillion.

2012-2021: Annual payroll taxes fall short of the annual payouts.  But the ~4.4% interest on the 2.7T will cover the gap.

2021-2033:  The interest payments will no longer be enough to make up the payout difference and we’ll start drawing down on the 2.7T.

2033:  The 2.7T is gone.

After 2033:  The payroll taxes then collected will only be enough to cover 75% of the benefits then scheduled to be paid out.

—Where exactly is this 2.7T?  

The 2.7 trillion dollar surplus is commonly referred to as the Trust Fund and it is held in US Treasury Bonds.  This, by the way, is about 16% of the roughly 16 trillion-dollar US debt.  In a real sense we owe it to ourselves.  In fact, about 29% (4.63T) of our 16T debt is owed to ourselves in this fashion:  Social Security, Medicare and the balance in Military and Civil Service Retirement programs.  Only 1.1T/8.2% is owed to China, the creditor we hear most about.  We owe Japan about the same.  If you’re curious, here’s a breakout:  http://www.mygovcost.org/2012/09/16/who-owns-the-u-s-national-debt-summer-2012-edition/

—Does this 2.7T really even exist?

You’ve probably heard scary talk that this Trust Fund doesn’t really exist.  That the government has already spent the money.  Well, yes and no.

There is no “lock box” somewhere stuffed with these:

$1000 bill

$1000 bill

Or these:

$5000

$5000 bill

Or these:

$10,000_bill

$10,000 bill

Or even these:

$100000

$100,000 bill

It is in a whole bunch of these:

TreasuryBond

US Treasury Bond

*For bonus points, can you name the guys on those bills?  Without consulting your Uncle Internet?

To answer the question, “Is the money really there?” you need to understand a bit about what bonds are and how they work.

Anytime any entity sells a bond it is to raise money it intends to spend.  The bond and its interest are then paid back with future revenues.  This is how bonds work.  As it happens US Treasury Bonds, what the Trust Fund holds, are considered the safest investments in the world.  Backed, as the saying goes, by “the full faith and credit of the United States Government.”  Of course, that’s us, the US tax payers and the same folks owed most of the 2.7T.

So the US Treasury Bonds held by the Trust Fund are real things with real value.  Just like the US Treasury Bonds held by the Chinese, the Japanese, numerous bond and money market funds and countless numbers of individual investors.

—Yeah, well I’d still feel better if they hadn’t spent the money I contributed and if it really was cold hard cash in a lock box I could draw on.

Well, OK, but cash is a really lousy way to hold money long-term. Little by little it gets destroyed by inflation.

It is important to understand that any time you invest money, that money gets spent.  If you hold a savings account at your local bank, your money isn’t just sitting in a vault.  The bank has lent it out and is earning interest on it.  A portion of that is the interest they pay you.  Federal law does require that banks hold a portion of deposits as cash “in reserve” to be able to pay depositors upon demand.  If that demand exceeds what is commonly called “a run on the bank” occurs. Because most of it has been lent out and is not instantly available.

If that is an unacceptable risk, your alternative is to stuff your cash in your mattress or (much better) a safe deposit box.  Had the government done that, the Trust Fund would now be over-flowing with currency.  That is, pieces of paper money backed by, you guessed it, “the full faith and credit of the United States Government.”

At least the Treasury Bonds pay interest.

—When should I begin taking the money?

Once you reach age 62, you can begin receiving Social Security.  The catch is, the sooner you start, the smaller your checks.  The longer you delay (up until age 70), the bigger the check.  Of course, the longer you delay the fewer the years you’ll be collecting.

bomber

Catch 22.

Countless articles have been written about strategies attempting to answer the question as to when to begin receiving benefits.  All kinds of fancy, sometimes complex strategies, are described.  I’ve read a bunch and my view is in the end it’s really pretty simple:  Since the government actuarial tables are as good as they get, the payments are pretty much spot on with the odds.  Here’s what, in order, you have to ask yourself:

1.  When do I need the money?  If you genuinely need the money right now, nothing else matters. But if you can delay you might find some advantages.

2.  Do you think Social Security will collapse and stop paying? If you believe this, clearly you’ll want to collect while the collecting is good.  For what it’s worth, I happen to think you’re wrong and I’ll explain why further on.

3.  How long are you going to live?  The longer you live, the more advantageous delaying is.  The break even point between age 62 and 66 is around age 85.  If you think you’ll die before then, you might want to take the money sooner.

4.  Unless you are married and you were the higher earning spouse.  Then you also want to consider how long your spouse will live.  If your spouse is likely to outlive you, upon your passing he/she will be able to trade in their lower SS payments for your bigger checks.

For example, my wife and I are both in good health.  But looking at family histories, and because women outlive men, my best guess is that she’ll survive me. Maybe by as much as two decades. I figure I’m good to maybe 80-85.  Were I alone, I’d start drawing ASAP.  But she could easily see 95 or 100. When I die she’ll have the option of switching from her benefit to mine. Since mine will be larger, that’s what she’ll do. To maximize that check for her, I’ll delay taking my benefit until I’m 70.  She’ll start hers at 66.

Another thing worth considering: As we reach advanced age our mental acuity diminishes. Managing our investments becomes harder. We become more reliant on others. At that point, a monthly government check has more value than just the dollars.

Of course there’s no way to know what the future really holds.  The best we can do is play the odds.

—The odds look to me like Social Security is doomed.  I’m taking mine ASAP.

Armageddon_by_teddybearcholla

There are those who choose to take their benefits the moment they turn 62, even though the amount is reduced. Some simply need the money right now and have no choice. But others are acting out of fear. They believe Social Security will collapse in their lifetime and they want to get what they can while they can. I’m not worried. If you are 55 or older you’ll collect every dime. Here’s why:

1. Social Security is backed by the most powerful lobby in history: AARP.
2. Geezers are an increasing proportion of the population.
3. Geezers vote.
4. Politicians rarely try to take anything away from a large population that votes.
5. This is why all the possible solutions being suggested will affect only those age 55 and under.

—Well that’s all well and good, but I’m under age 55!  What about me?

For anyone 55 and over, Social Security has turned out to be a pretty great deal. But mine and the generations older than I are likely the last that will enjoy such lofty benefits. The system is in trouble and clearly changes will have to be made. For those under 55 today the deal is likely to be a lot less sweet. You can expect:

1. To get 100% of any promised benefits, but the promises will be smaller.

2. It will cost you more.  Income caps (the amount of your income subject to SS tax) will continue to be raised.  In 2003 the cap was $87,000.  For 2013 it is $113,700. That’s a trend that will continue.

3.  The “full retirement age” will continue to rise.  It used to be 65. For me it’s 66. For anybody born in 1960 or later it is 67.  Those ages will continue to rise.

4.  Benefits may become “means tested.”  That is, based on your need rather than what you paid in.

5.  Congress will continue to tinker and in the end Social Security will still be there.

—So, is Social Security a good deal?

Well, it kinda depends. For the fiscally responsible types who read this blog, probably not. If you took that 6.2% of your income you are compelled to contribute, along with the 6.2% your employer is compelled to kick in, and invested it over the decades using the strategies presented here, you’d likely be far, far ahead.  Plus your money would be in your hands and not subject to the whims of the government. But that’s just the few of us.

goofs

I’m realistic enough to know most people are goofs with their money. Without Social Security many would be back to living on cat food. Not only would the rest of us have to read about their sad plight, something much more draconian than Social Security might well be implemented to remedy the situation. So, yes, for most people it will turn out to be a good deal. And probably for society as a whole. But not for you. Or me.

—Recommendation

Plan your financial future assuming Social Security will NOT be there for you. Live below your means, invest the surplus, avoid debt and accumulate F-You Money. Be independent, financially and otherwise. If/when Social Security comes thru, enjoy.

—Want to know where you personally stand with Social Security right now?

Go here:  http://ssa.gov/myaccount/

*As for those guys on the currency:

$1000: Grover Cleveland

$5000: James Madison

$10,000: Salmon P. Chase**

$100,000: Woodrow Wilson

Oh, and that’s Teddy Roosevelt on the $1,000,000 Treasury Bond.

**Chase is one of three guys on US paper currency who was not President.  He was a Senator, OH State Governor, US Treasury Secretary for Abraham Lincoln (probably tough years to have that job) and Chief Justice of the US.  But never President.  The slacker.

VITA, income taxes and the IRS

Posted: January 11, 2013 in business, Life, Money

IRS

I wasn’t planning to do it again this year, but in the end I signed up.  If I had been planning better, the work for my re-certification would be mostly done by now.  But I’ve yet to begin.  Too much traveling and playing.  I knew this of course.  It is the reason I wasn’t planning to re-up.  But the new guy running our local program reached out, assured me there would still be time when I returned from Europe.  Assured me the need was critical.  He didn’t assure me that the IRS would be any less rigorous in its demands.  We both know better than that.  Still, this past Tuesday evening I showed up for the first orientation meeting and met everybody else.  They are all further along than I.

Assuming I catch up, once again I’ll be working with our regional VITA (Volunteer Income Tax Assistance) program preparing tax returns for our local poor and immigrant population.  It will be my third season.  It is gratifying work, even if the training ahead in the next couple of weeks is daunting.

 VITA_IncomeTaxAssistance_logo_w150

The work, and the training the IRS requires for certification, has given me an inside look. What virtually every volunteer agrees on is, the tax code is far too complex.

The tax code is complex precisely because it provides goodies for everyone.

The rich (and the thrifty but not so rich) get the favorable treatment of capital gains, dividends and tax-free municipal bonds. Not to mention the specific tax breaks for specific industries. This being the reason our corporate tax rate at 30% is one of the highest in the world but the effective corporate tax rate is only 12%, one of the very lowest.

The middle class get deductions for IRAs, 401ks, mortgage interest, real estate taxes, children and dependents.

The poor also get exemptions for children and dependents, along with the child tax credit and earned income tax credit. Tax credits are especially beneficial things.  Most deductions reduce your tax liability only to the extent you have a tax liability.  Then they become worthless.  Tax credits can provide refund dollars in excess of taxes withheld and beyond any tax liability.  That is, if you owe $500 in taxes and have a $1000 tax credit, not only is your tax liability wiped out, the government will give you the remaining $500.  The take away here is, even if you are sure you don’t owe any tax it can be worth it to file.

I use the term ‘goodies’ above in this sense:

The core reason for income taxes is to raise revenue to operate the government and it’s services.  But congress was quick to realize that once in place the federal income tax could also be used as a tool for social engineering. This is done by providing incentives in the form of deductions for certain behaviors.

    • You want more people to have kids? Child tax credits and exemptions.
    • You want more people to own homes and the social stability that provides? Deductible mortgage interest & RE taxes.
    • You want people to invest and grow the economy? Preferred rates on dividends and capital gains.
    • You want people to give to charity? Charitable deductions.

These incentives, what I call goodies, are not about keeping your own money. They are not about raising revenue. They are about doling it out to those who behave in a “proper” way.

In the world of VITA volunteers I hear little talk about the tax system being “unfair” but lots of conversation about it being far too complex. Indeed, as I prepare returns for folks I frequently ponder how insane it is to expect the average taxpayer to wade thru it.  I guess that’s why the IRS support VITA programs.

Most all volunteers (regardless of political leanings), myself included, favor some version of a simpler, flatter tax that sweeps away deductions in favor of lower rates. Don’t hold your breath, and even if it were to happen it won’t last. Congress would promptly begin creating new goodies to influence social behaviors, reward supporters and to garner influence.

Of course PAID tax preparers like our complex system just fine.  I feel about them much the same as I do about Financial Advisors.  Better to learn to do your own taxes or seek out the free help offered by your local VITA.  Volunteers are well-trained, each return is double checked and the work is respected by the IRS.  Oh, and it’s free.

It may surprise you, but I also give high marks to the IRS:

  • The training they provide is excellent.
  • The focus of this training is accuracy.
  • The IRS is not out to screw anybody, indeed a regular refrain is our obligation as preparers to seek out every deduction, credit and benefit to which the taxpayer has a legal right.
  • They have done an excellent job in taking a nightmare tax code and reducing it to a series of simple forms that actually make sense.   At least after some training.
  • They are very focused on weeding out tax cheats. Since cheats are taking money out of the pockets of all their fellow taxpayers, including me, this is as it should be.
  • and for those of us warped enough to enjoy playing with taxes, it’s fun!

vita uncle sam

If this kind of work appeals to you I’d encourage you to check into it.  As our site leader used to say, if nothing else it will give you some great insights and stories.  But be aware, sometimes there is not a lot in the way of appreciation from your clients. I’ve had people bitch at me throughout the entire process. That’s tough to take at any time.  But when you are providing a free service it is especially grating. I conclude that one of the reasons some, certainly not all but some, people are poor is a lack of basic social graces.  Dealing with it is good Zen practice.

That said, I’ve also had many very appreciative clients.  Knowing you’ve helped someone with what might have otherwise been an overwhelming task and spared them from the clutches of store-front paid tax preparers is a great feeling.

The work has also given me a greater insight into and sympathy with the working poor.  The sheer industriousness of some of our clients is inspirational.  Their stories, both spoken and as revealed in their taxes, are compelling. After a time, it’s not hard to tell who is on their way out of poverty and who will be spending their life mired in it.

Of course, the training also provides insights into my own taxes and possible strategies.  Since I’m now retired, I can enjoy what Mr. Money Mustache has called “the lovely low taxes of early retirement.”  Let’s take a look.

Over the years Mrs. jlcollinsnh and I have built up a nice stash in our retirement accounts.  As we all know, these accounts are not tax-free, they are tax deferred.  Big difference.  And the IRS requires that we begin withdrawals and paying taxes on them once we turn age 70.  We could just wait, but tax rates are low now.  We’d like to get these accounts shifted in to Roth IRAs at the lowest cost possible.  Roths earn tax-free, withdrawals are tax-free and they can be passed to heirs tax free.  A pretty good deal.

Since we’re married we file as “Married Filing Jointly,” the most attractive filing status.  (The government rewards marriage. See above.)  This means we can have income of up to $70,700 and still be in only the 15% tax bracket.  But it gets better:

  • $70,700 income
  • $11,900 standard deduction
  • $11,400 exemptions.  ($3800 x 3 for the two of us and our child.)
  • $94,000 total.

This means we can have up to 94k in income and still pay only a 15% marginal tax rate.  So here’s what we do:

Take my wife’s income (she still works) and add our taxable interest and dividends.  Subtract that total from 94k.  Shift that remaining amount from regular IRAs into our Roths.  Pay only 15%.  That’s a deal I can live with.  Plus I understand our government can use the money right now.

Serving with VITA helps my community and it helps me.  I’ll be challenged, learning and having fun doing this again this year.  Looking forward to it.  Just wish I had the re-certification behind me!

Addendum:

We like clear and simple around here. My pal femmefrugality just put up a post that gives the clearest and simplest explanation of the Earned Income Credit I’ve yet to read:  The Earned Income Credit: Why it’s not cool to hate on poor people

The EIC is one many of our VITA clients qualify for, as they are for the most part the working poor. It is designed to encourage people to take virtually any job they can rather than reverting to welfare. I’ve seen it make a huge percentage difference in the annual income of folks who need it most.

But, of course, people being people there are those who will try to game the system. A few years back our local VITA site uncovered this scam:

As FF points out in her post the EIC benefit increases based on the number of children claimed as dependents, but the maximum is three. A local minister gathered his flock together. Those people with more than three children “loaned” the extras to those with fewer children. Everybody got the maximum EIC. Very clever. Very illegal.

 

Back in the day Louis Rukeyser hosted a PBS program called Wall Street Week each Friday evening.  It was an end of the week ritual watching it for me.

Rukeyser

Louis Rukeyser

He’d open with a commentary on the follies and foibles of the previous market week and then turn to a rotating panel of three Wall Street gurus for their take.  Two of my favorites were Abby Joseph Cohen, a relentless Bull, and Marty Zweig, who was always relentlessly and deeply “worried about this market.”

Each guest was impeccably credentialled and Rukeyser made it a point to deftly schedule those who would each week present opposing views as to the market’s condition and direction.  Sometimes one would even prove right.

His commentaries, questions and comments were always delivered with a wink, a smile and with great good humor. Tragically, he passed away in 2006 and the current generation of investors is left without his insights and wisdom.

The key thing his program and its parade of guests taught me is that, at any given time, some expert is predicting any possible future that could conceivably happen.  Since all bases are covered, someone is bound to be right.  When they are, their good luck will be interpreted as wisdom and insight.  If their prediction happened to be dramatic enough, it could also lead to fame and fortune.

Every January Rukeyser would have each of his guests predict the market’s high, low and ending point for the year.  I forget his exact line, but after the predictions were in he’d say something like, “…with the understanding that even these experts could be wrong, there you have it.”  And he’d wink into the camera.

Come the following December he’d salute those who’d come closest and chide the goats.

In that spirit, here are my market predictions for the S&P (which incidentally closed 2012 up around 13% at 1426) in 2013:

High:  1825

Low:  1312

Dec 31, 2013 close: 1754

Clearly, I’m very bullish.  Here’s why:

Since the Spring of 2009 we have been on a slow, grinding climb back from the brink.  Corporations have cut expenses to the bone and accumulated formidable amounts of cash.  Balance sheets are exceptionally clean.  I expect the pace of recovery to begin to accelerate and as the market senses that stock price will continue to build on the 13%+ increase they posted in 2012.  But most importantly, the news, gurus and commentators are filled all with gloom.

Now, don’t take any of this too seriously.  My crystal ball is just as cloudy as everybody else’s. I’m certainly not changing my investment allocation and strategy based on this and you shouldn’t either.  As Mr. Rukeyser would gleefully point out, even I can be wrong.  As I’d point out, I most often am.  We’ll see come next New Year’s Eve.

If you want to join me in this silliness, post your high, low and close predictions in the comments below and come year end we’ll, in the best Rukeyser fashion, honor those closest and jeer those most far off.

Even if I turn out to be spot on, it won’t get me interviewed on MSNBC.  Not dramatic enough.  But then, that’s not my ambition.  If it is yours, however, here’s how:

Step 1: Make a prediction for a huge short-term swing. Up or down doesn’t matter.  But down is easier and might get you more play if you’re right.
Step 2: Document the time and date you made it.
Step 3: When it doesn’t happen wait a bit.
Step 4: Repeat Steps 1-3 until one day you’re right.
Step 5: Issue Press Release: Market Plunges!!!, just as (insert your name here) recently predicted.
Step 6: Clear your schedule for media interviews.
Step 7: Send me my 15% agent’s fee of your new-found wealth.

Be sure not to issue your press release until events prove you right.

Oh, and keep in mind that once your Guru status is established you’ll be expected to be able to repeat it.  For months, maybe years, everything you say will be noted.  Each misstep will be gleefully documented until you slip from view humiliated and discredited.  But also rich if you’ve played your moment in the sun well.

Here are 14 Spectacularly wrong predictions that should serve to keep us all humble.

2013 new year

May this New Year bring you Health, Wealth and Happiness!

That’s both a Wish and a Prediction I truly hope I got right!

Addendum:  Per Smedley’s suggestion in his comment below, we now have a prize for winning the Rukeyser Memorial Market Prediction Contest 2013.  The chance to have a guest post right here telling us how and why you’re so smart!

Remember you need to predict the S&P: High, Low and Close for the year in you’re comment below.  Then somebody is going to have to remind me about this in December.  :)

fiscal cliff

You can’t turn on the TV or radio or pick up a newspaper these days without being confronted with scary talk about the Fiscal Cliff and the doom that awaits us should we hurdle over it into the abyss.

This is (mostly) a financial blog.  I intentionally avoid politics, primarily because that subject turns so ugly so quickly.  So I thought long and hard about whether to broach this subject.  It treads dangerously close to the political line where I simply do not want to be.  Yet, this Cliff business does have financial ramifications.  So, here goes….

Are we really going to go over this Fiscal Cliff?

Yep.

Will going over the Fiscal Cliff be the disaster we’ve been lead to believe?

Depends on how you view our nation’s (the USA for my international readers) debt and deficit.  The greater these problems are in your mind, the better going over the Cliff will be.

How can going over the Fiscal Cliff be a good thing?

Well, you need to understand the two things that will happen.  One, the Bush-era tax cuts will be allowed to expire.  That means a tax increase for everybody and more revenue for the government.  Two, dramatic across the board spending cuts will automatically take effect.  This will lower government spending.  Both these things will happen on a scale unlikely to be accepted by either party thru negotiation.  This great scale of increased taxes and reduced spending will have the greatest possible impact on reducing our debt/deficit.

Gee, that sounds great!  What’s the problem?

That depends on who you are.  If you benefit from a program that gets cut, you probably won’t like it.  When you have to pay more taxes, you won’t like that either.  Oh, and some economists think the combination of reduced spending and increased taxes could trigger a recession.

But our politicians will reach an agreement and save the day, right?

Could happen.  But my bet is we’re going over.

But why?

Because to reach an agreement would mean both sides will have to take something, tax cuts or spending programs, away from their constituents.  That’s something no politician likes to do and few have the stomach for it.  Plus, both sides win by letting us go over.

Both sides win?  How’s that?

These are smart people.  Both sides know that we need to cut spending and increase taxes.  Both happen when we go over the Cliff.  When we do both sides can blame the other for not coming to an agreement to avoid it.  Plus, then they can get back to doing what they really like to do.

Doing what they like to do?  What’s that?

Why giving stuff to their constituents, of course.

Ah, OK.  How’s that work?

Think of it this way:  Going over the Fiscal Cliff is essentially hitting the big Reset Button.  Taxes spike up and spending programs across the board get slashed.  Both happen more dramatically than anyone really wants or needs.  So now the politicians can get to work restoring the favored tax cuts and spending programs that have the broadest support.  In the process, they get to look like heros.

Now I get it…

Right.  Instead having to explain why they raised your taxes or cut a program that provided jobs in your city, they can tout how they cut taxes and increased spending on those critical programs we all love.

Wait!  Doesn’t that get us right back where we started?

Not immediately and not if they’re smart about it.  This will be a great opportunity to leave those tax increases and program cuts everybody really wanted in the dust without having to take any responsibility for them.

Wow.  These guys really got lucky the way this is going to work out.

Lucky? Maybe not so much.  Remember, these are the same folks who designed and created the Fiscal Cliff in the first place.

Warning:  As always I encourage and welcome your comments.  But anything remotely touching on partisan politics, either side, will be deleted.  This is not the place.

ecuador map

If you’ve been reading the last few posts focused on my recent trip to Ecuador, you know one of my objectives was to take a look at property for sale both in Cuenca and in and around Bahia on the coast.  I like looking at property, it is an excellent way to get a feel for a place and we are seriously considering relocating in a couple of years.  All good reasons, and the fact that it gives me material for this post is just icing.

Back in February of this year I presented my way of running the numbers in the rent v. own analysis:  https://jlcollinsnh.wordpress.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/  I like this approach better than others because it is simpler and it focuses on evaluating the choice you are actually making rather than some academic exercise designed to prove a point.

If you haven’t already, you might take a moment to give it a read as it lays out the thinking behind the analysis of a couple of Ecuadorian properties to follow.  Go ahead.  I’ll wait…

OK.  If I’ve learned anything from putting up that post it is that people have very strong emotions wrapped around their personal decision to rent or buy.  In it I was candid about my own inclinations.  I have a bias towards renting.  As soon as I can unload the house I own, I’ll happily go back to the carefree and blissful renter’s life.

But I’ve also owned at various times in my life, so I’m not unsympathetic to the appeals of having a place you can call your own.  While we were raising our daughter the school system, lifestyle and neighborhood we wanted were all most easily accessed by owning.  Now those days are past and my wandering spirit is getting antsy.   I’m not a putting down roots kinda guy so the flexibly of renting has an outsized appeal.  For others putting down roots is vitally important and so owning has, for them, its own outsized appeal.

Regardless of where your personal inclinations lie, I think it is vitally important to run the numbers.  At least if achieving wealth is important to you.  If you are going to own a house, or not, it behooves you to know what the financial implications are.

For instance, in my case, running the numbers tells me that owning my house costs a $5-8000 annual premium to renting the apartment I have my eye on.  That’s steep by any measure.  Given that the apartment is the far more appealing living arrangement to me, my path is clear.  But so far, the market has kept me trapped.  This, too, is an important lesson:  It is almost always far easier to buy than to sell.  Houses, cars, appliances….just about anything. Something to keep in mind when the buying siren’s song is calling.

While renting holds more appeal for me than owning, and my guess is that once this house is sold I’ll never buy again, never say never.  I am first and foremost a financial guy.  If running the numbers in some future situation points to a fiscal owning advantage, I may yet again pull the trigger.  Living in Ecuador may present just such a scenario.  For the purposes of the analysis below I’ve used the asking price for both sales and rental.  Negotiations would lower both, but we can assume in proportion.  Let’s take a look.

Property #1.  Cuenca Condo: 2-bedrooms, 2.5 baths.  Veranda.  ~1500 square feet.  $162,000 to buy/$800 per month to rent.

tomebamba river

Tomebamba River View

This is a beautiful property in a solid brick building about two years old.  Finishes are top quality and it comes furnished, also to a top quality level.  Needs nothing, as they say.  It is on the second floor and the veranda provides a lovely view across the street to the river and the park that runs along side it.  Using the formula from my February post:

— $5670 opportunity cost. This is the 3.5% dividend our 162k could be earning in VGSLX.  Opportunity cost is frequently overlooked and is often the largest cost of all.  If you really want to know what the numbers have to tell you, its inclusion is critical.  What it is and why I use VGSLX as my proxy are both explained the February post.

— $1252 in annual cash expenses comes from these:

  • Heat and AC costs: 0.  Buildings in Ecuador don’t have heat or AC.  Neither are needed.
  • $1128 HOA (home owner’s association) fees @ $94 per month.
  • $124 real estate taxes per year.  No, I didn’t omit any zeros.

–$6922 total annual cost of owning and operating the condo.

v. $9600 annual rent @ $800 per month =

— $2678 annual premium to rent.  Advantage:  Owning.

Bahia

Property #2 is in one of those tall white buildings above

Property #2.  Bahia Condo: 3-bedrooms, 3 baths.  Veranda.  ~1600 square feet.  $145,000 to buy + $10,000 to renovate/$800 per month to rent.

This condo is on the 4th floor of a solid brick building about 16 years old but the finishes are poor quality and showing their age. It comes serviceably furnished, but I’d want to upgrade were I to live in it.  As a rental you could get by, but upgrades would bring more rent and the rental figure I use below assumes the upgrades.  It faces the Pacific Ocean and the view from the veranda is pretty spectacular.

— $5425 opportunity cost. This is the 3.5% dividend our 145k purchase price and 10k estimated renovation cost could be earning in VGSLX.

— $1825 in annual cash expenses comes from these:

  • Heat and AC costs: 0.  Buildings in Ecuador don’t have heat or AC.  Neither are needed.  Temperatures in Cuenca range from about 60-80F and on the coast from 70-90F.
  • $1200 HOA (home owner’s association) fees @ $100 per month.
  • $500 special assessment for painting the building.  As this is a 16-year-old building my guess is these ‘special’ assessments will become a regular thing.  In Ecuador HOAs tend not to build contingency funds from the monthly dues.  Special expenses are a handled with special assessments.
  • $125 real estate taxes per year.

–$6750 total annual cost of owning and operating the condo.

v. $9600 annual rent @ $800 per month =

— $2350 annual premium to rent.  Advantage:  Owning.

Two things immediately leap out to me:  The lack of HVAC costs and the super low real estate taxes.  Looking at the numbers we ran last time on my house v. renting, these alone go a long way toward tipping the rent v. own balance. My real estate taxes in NH are over $8000 annually and heating oil runs over $2500 a year.

So clearly the first thing you should do upon arrival in Ecuador is buy yourself a home, right?  Well, lots of gringos do exactly that, but your pal jlcollinsnh is going to suggest you carefully consider a few things first.

1.  The “gringo tax.”  Like many overseas retirement havens, the gringo tax in Ecuador is a very real, if unofficial, thing.  Now, if we are talking a $2 taxi ride and the driver is asking for 50 cents more than he’d charge a local, my advice is don’t sweat it.  Pay the man and feel good he has a bit more to bring home to his family.  If we are talking about a 150k house, I get a bit more hard-nosed.

2.  There is no MLS (Multiple Listing Service) in Ecuador.  You’ll get no listing sheet with the price clearly shown. The price is whatever the realtor or owner tells you it is and that number may be, in fact very likely is, different than what they told the last person or will tell the next.  In my short time looking I’ve had one realtor tell me an apartment cost 145k and another 90k for the same place.  With a couple of new American friends I looked at a rental for $750 per month.  It had been offered to friends of theirs two weeks earlier for $950.  One gringo owner told our realtor he was only interested in selling at “the gringo price, not the local price.”   Purchase price or rent, it is very difficult to determine the actual market value and very easy to overpay.  Of course, a mistake made renting is lots easier and cheaper to correct.

Cuenca apartment

Nicely furnished Cuenca Apartment.  $750 a month for us, $950 for the people who saw it before us.

3.  There is no set way or commission percent realtors get paid.  It depends on the deal they strike with their seller and/or buyer.  Maybe the seller pays the commission.  Maybe the buyer.  Maybe both.  In some cases the seller will set the price and the realtor’s commission is whatever more she can sell the place for.  If the seller wants 100k and you can find a gringo just off the boat to pay 170k, 70k is your commission.  By the way, don’t think for a moment dealing with gringo sellers and gringo real estate people will avoid these situations.

4.  You shouldn’t be buying property in any market you don’t first understand.  Because there is no MLS, any given realtor will only be aware of the few properties available to which they are personally connected.   No one person can or will show you everything available at a given time.  To really understand this market takes much more time and effort than here in the USA.

5.  Ecuador is a 3rd world country.  As such dramatic political changes can come swiftly.  If push ever comes to shove, no politician will favor the needs and interests of expat property owners.  As one expat told me, “While things are great now, we are only ever one election away from a presidential order expelling all foreigners.”  From what I can tell, in Ecuador that’s highly unlikely.  But I’ve known enough people over the years, my wife included, who have fled revolutions with only the clothes on their back that I don’t  take it lightly either.

6.  Even the most adamant proponents of homeownership concede to have a chance of making it work financially you need to live in the place at least five years.   Ecuador is no different.  Yet I heard several stories of gringos who arrived, bought and three months later were back in the USA having decided the reality didn’t match their dream.  And stuck trying to sell.

7.  This is, for all practical purposes, a cash market.  Mortgages are tough to come by for locals and near impossible for expats.  Rates, assuming you have excellent credit, start at 15%.  If you have the cash, you are in a strong position.  Most American expats are renters.  Some because of point #5 but many others because they are living on Social Security month-to-month.  Something you can quite comfortably do here, BTW.  The other buyers are wealthy Ecuadorianos who also have cash.  But remember, this is still a poor country and those folks are few.

8.  You should never buy property without a clear understanding of how and to whom you’ll be selling.  It is well to remember that as attractively priced as stuff looks here, when the time comes those expats and locals with the cash to buy from you may be few and scarce.  In Ecuador, as in the USA, cash buyers are rare.  The difference is, in Ecuador they are virtually the only buyers.

That all sounds pretty grim, but the truth is the place calls to me.  If in a few years we make the move, here’s my approach:

1.  I’ll put our best and most treasured stuff in local storage here in NH; sell and dump the rest.

2.  We’ll move to Ecuador, probably Cuenca to start, with a couple of suitcases and set up month-to-month housekeeping in an apartment/hotel like Apartmentos Otorongo where I stayed for part of this past trip.

3.  From this base I’ll focus on finding a furnished rental like Condo #1 above.  This I’d rent for a year.

4.  During that year I’ll look at lots more property, both to rent and to buy.  I’ll talk to lots of expats about what they own/rent and how they found it.  By the end of this time I should have a very clear idea of what true market values look like.

5.  I’d also travel extensively in Ecuador this first year.  It’s a spectacular place and I want to see it all.  At each step I’d be evaluating where in the country to settle.  Cuenca and/or the coast look like the right places now, but who knows?

6.  At the end of this year+, I’ll also have a much clearer idea as to whether Ecuador itself is just a couple of year fling or the place I use as my traveling base for the rest of my days.

7. Based largely on the answer to #6, I’d make the rent/buy decision.

8.  Assuming we decide to stay for the long-term, the last decision is whether to pay to have our stuff shipped or to buy new furnishings locally.  Since I have little emotional attachment to the stuff I own, and since beautiful local art can be found and absolutely gorgeous wood furniture custom made for less than shipping costs, that looks like the path I’d take.

Despite all my cautionary points above, I love what I’ve seen of Ecuador.  I wouldn’t be so seriously considering relocating there otherwise.  I think the country’s future is very bright and they are on a strongly positive path.  My biggest dilemma really is where to settle.  I’m a city guy and I love Cuenca.  It’s small enough to be comfortable and large enough to have the amenities that make cities a joy.  Plus it is wonderfully walkable.

san-clemente beach

On the other hand, there are several beach towns up and down the coast with a very appealing laid back vibe.  Beautiful sandy shores that seem to stretch forever dotted with little beach shack restaurants serving seafood and local beer.  Not a bad way to while away some time.  One coastal expat described his town as what Cabo San Lucas used to be twenty years ago before it got overrun with yachts and multi-million dollar homes.  He hopes it doesn’t happen to the Ecuadorian coast but if it does he figures he’ll just cash out and find the next unspoiled place.  Not bad figuring seems to me.  Hmmm…..

Maybe I’ll rent in Cuenca and buy a little beach shack on the coast….

$3636.35

That title question was posed by a blog reader and, since I obsessively track expenses anyway and my guess is if you’re a reader of jlcollinsnh you’d be curious, it suggested a fun and easy post topic.  Since I was actually there only 27 days, that’s $134.83 per day.  But you could do it a lot less expensively and below I’ll point out how.  Of course, you could spend much, much more too.  But you don’t need my help for that.

But before we get into the specifies, I want to share this cool story with you.

If you’ve seen the movie “Romancing the Stone” you might remember this scene:

Kathleen Turner (Joan Wilder) and Michael Douglas (Jack) find themselves in a small Columbian village and at the door of the local drug lord seeking transportation.  It’s looking grim as the drug lord sticks a huge pistol in their faces and his armed and sinister looking compadres are closing in.

Jack:  “OK, Joan Wilder, write us out of this one.”

Drug lord:  “Joan Wilder?  The Joan Wilder?!  I read your books!  I read all your books!!”

I’ve never personally met one of my blog readers.  Of course I know those friends and family who read it.  And I’ve had coffee with two other bloggers who read mine as I read theirs.  But I’d never met a person who’d independently found the blog and started reading it with no prior connection to me.

After a long day of bus rides and planes I landed at the Quito, Ecuador International Airport around 9 pm.  Since this ain’t my first rodeo and I knew I’d be dragging, I had arranged for someone from The Travellers Inn where I was staying to meet me.

The Travellers Inn

Sure enough there was a young man waiting for me as I emerged from Customs holding up a sign with my name on it.  Shamefully, especially since he didn’t stick a pistol in my face, I have forgotten his name.  But, as I said, I was dog tired at the time.

He put up graciously with my bad and broken Spanish on the walk to the car before switching to his own perfect English.

“I read your blog,” he said.  “I read all your posts!”

Airfares:  $1046

American Airlines flew me Boston – Miami – Quito and back for $812.

Lan Airlines flew me from Quito to Cuenca for $80.

Aero Gal from Cuenca back thru Quito and onto the coast at Manta, then Manta to Quito for the flight home, $154.

Lan and Aero Gal are both Ecuadorian airlines and are absolutely first rate.  The planes were new and, unlike American airline companies, they haven’t jammed every possible seat into the cabins.  I actually had comfortable leg room and was served a tasty empanada snack and drink (even though all of these in country flights were less than an hour) by flight attendants who were bright, friendly and gracious.  Not because it’s in their job description but just because they are bright, friendly and gracious people.  It was like what flying in the USA used to be like in the 1960s.

Hotels:  $1137.65

Not much you can do about the airfares we didn’t already do, but if you wanted to take this trip for less than I spent, cheaper hotels and hostals would be a place to start.  The hotels I stayed at were mid-range or better.  You could easily shave $5-600 off here.  Of course, you could also spend lots and lots more.

My night at the Travellers was $47 and included an excellent breakfast.  The room was clean, simple and in an old converted house.  Private bathroom and a good shower with plenty of hot water, which is not always the case in South America.

Cheryl’s farm house

The next several nights were spent with Cheryl at her farm.  By way of thanks for her hospitality, I took her and her boyfriend Rich out to eat a couple of times for a total cost of $27.50 (accounted for in the restaurant category) which made this the bargain of the trip.

Her EcuaTruck.

Been rolled once by the farmhand’s son and so now has serious character ground in.  Fortunately with no one in the bed.  It is the local custom to stop when you see someone on the side of the road and offer a ride.  They hop up and tap on the roof when they want to be left off.

Her place is about 2.5 hours out of Quito near the tiny town of Santa Elena, far up a very rough rock and dirt road. We had a great time and laid out plans for the Retreat.  I can report now that this will almost certainly happen. Date: September 7-14, 2013.  In addition to Cheryl and myself, two additional presenters will be on board.  Both are seriously interesting guys I look forward to hanging out with and I bet you will, too.  We’re still massaging the details and when the time comes I share them with you in a post right here.

I stayed here.  Join us for the Retreat and you will too.

As part of my relentless dedication to you, my readers, I then spent two nights at the El Encanto Resort.  We plan to hold the Retreat here and I wanted to be sure the rooms, service and food were up to par.  Work, work, work.  They were.  One example:  The resort is built into the side of a ridge and it is about a 45 minute hike down to the river and waterfall.  It is a bit steep and a somewhat tough climb back out.  When I made my way back to the top, Veronica the resort chef was waiting for me at the trail head with big smile and a glass of fresh lemonade.

Two nights and three meals a day: $124.

From there I made my way back to Quito and flew on down to Cuenca for a couple of weeks.  This was the longest stop of my trip and for good reason.  Check it out:

Cuenca

Photo by:  Dario Endara

Home in Cuenca for 16 days was Apartmentos Otorongo at a cost of $500.  I had a small apartment with a kitchen so I had a place to stock and prepare food for the rare occasions I felt like staying in.

Otorongo

My apartment was the door on the far left in the back of the photo, second floor.

There is a lesson here:  The longer you settle in to a place the less expensive per day the accommodations become. Otorongo is run by Xavier y Samara Montezuma, their family and staff.  Just wonderful people and within a day or two it felt like home.  Sara and Angelica took especially good care of me and they put up with my broken Spanish.  

Bahia

The last five nights were spent on the coast in the town of Bahia.  Patricio Tamariz was my host at his Hotel Casa Grande, which is exactly like it sounds like:  A grand home converted into a hotel.  It is located near the tip of the peninsula shown in the photo above.  Easily the most luxurious place of my trip it was also the priciest at $466.65 or $93.33 per night.  But as is frequently the case, you get what you pay for.  This is a first class place.

Each morning began with a unique and tasty breakfast served poolside by the genuinely friendly, caring staff. Ecuadorians are remarkably hospitable.  I am impressed enough that it is high on my list as a destination for Retreat II.

Oh, and if you go try to spend some time over coffee with Patricio.  Fascinating guy who, among other things, served as the Executive Director, Ecuador Tourist Authority.  He’s traveled all over the world presenting the charms of his country.  He has endless great stories well told he’ll share in flawless Spanish or English, your choice.

Inside Casa Grande

Patricio also owns and operates Chiriji (Chee-Ree-Hay), an ecolodge/archeological site with bungalows on a pristine Pacific Coast beach.  I’ve not been to it, but I’ve met people who have.  Those conversations have convinced me I need to go.  These pictures, too:

Food and water:  $44.   

This covers the bottles of water bought during the trip and the groceries with which I stocked my Cuenca apartment. Milk, cereal, cheese, sausage, yogurt and such.  Also, stunningly good freshly baked croissants for a dime each.

Restaurants:  $479.

I took most of my meals in restaurants.  The most expensive meal was in a first class Cuenca restaurant with two other expats I’d met.  We all had filet mignon and downed a couple of bottles of pretty good wine.  Shared a dessert, too. My share was $30, fully $10 more than the next most expensive meal.

The least expensive meals were “platos del dia” in local Ecuadorian joints.  Juice, soup, meat (or chicken or fish), rice, vegetables and most often a dessert.  A banana or scoop of ice cream is typical.  $2.50.  If you focused on these places you could cut my restaurant tab by 2/3rds or better.

Tours:  $515.

As regular readers know, I am not a fan of tours.  But I took two on this journey and only one was a mistake.  The $500 one.

Visting Refugio Paz de las Aves was definitely not a mistake.  This bird reserve is run by Cheryl’s pal Angel Paz and his family.  His story and that of the reserve is seriously cool and well worth checking out by clicking the link.  For $15 you get to show up at dawn and hike down the trail to various viewing stations where you’ll get to see cool birds like these:

Cock of the Rock

Photo by Crijnfotin

I don’t know what this one is, but I saw it.

We also saw several others, including about a dozen different types of hummingbirds.  In addition to the birds, we sighted four French birders armed with cameras and three foot lens.  These, it seems, are also common in the Reserve.

Back at the house, a great breakfast is included.  We had strong coffee and Bolons, balls of mashed plantains with meat and cheese in the center.  Yum!  Since I was a friend of Cheryl’s it took more than a little effort to get the Paz family to accept my $15.

The remaining $500 was the price for a three day real estate tour I signed up for.  From the moment I found it I had serious misgivings.  It was offered in an e-newsletter on Ecuador I subscribe to.  This thing is filled with relentless self promotion and sales pitches by the author, normally a red flag.  When I emailed for more information, getting my questions answered was like pulling teeth.  Even then, the answers were frequently vague and unclear.  More red flags.

I stepped away from it for several weeks, but ultimately pulled the trigger.  Since I had only a few days on the coast and wanted to see some property while I was there, the concept perfectly fit my needs.  The email stating the hotel would be discounted to $65 per night sealed the deal.  Of course, that turned out not to be true.  I remain unsure if the promoter was simply clueless or just lied outright.

I landed at Manta airport figuring there was a maybe 50% chance that someone would be there to meet me and working on my plan “B”.  Over the next three days I heard even more bitter complaints from the other people on the tour.  None of us knew precisely what our $500 covered.  Some thought hotels.  Some thought meals.  Nope.  Not even, for instance and as it happened, the return trip to Manta airport after it was done.

For all these reasons, I’ll not be naming this tour operator here.

The irony is, the tour itself turned out great.  This is due to Xavier Gutierrez Salazar, the Bahia local who actually took us around.  Xavier is an extremely knowledgeable guy, especially concerning the ecology of Ecuador, his main passion.  In addition to running the occasional tour, he is a real estate broker, operates a shrimp farm, is an environmental activist and launched Green Global Solutions to promote environmentally friendly and sustainable projects.  Oh, and he is developing just such a beach house community on the shore a bit north of Bahia.

When I stepped out of the Manta airport, Xavier called my name.  I guess picking out a big ugly solo gringo isn’t that tough.  He was there with his cousin Jorge and his drop-dead gorgeous wife, and mother of his four beautiful little girls, Maria.

We had great fun together running up and down the coast all day and eating lunch at little beach side shacks with beer and seafood.  Each evening he took us to small, friendly, inexpensive and tasty local places for dinner.  He’s one of those guys who knows everybody, local and gringo alike.  Often we’d stop to meet and chat with them.  One night after dinner we approached a small house.  Music and singing could be heard a block away.  Knocking on the locked door, Xavier called out whatever needed to be called out.  Inside was a small group — Ecuadorians, Americans, a Nicaraguan and an Australian — singing, playing music, talking in English, Spanish and the odd mix of both.   We had dessert.  Someone brought out a bottle of the local liquor.  Clear as water and clearly with the kick of a mule.  Never has my Spanish been better.

My advice, should you go:  Skip the irritating $500 middlemen.  Contact Xavier directly:  nxcoastal@gmail.com  Tell him I sent you.

Ground Transportation:  $255

The big expenses here were the $45 taxi each way for the 2.5 hour trip from Quito to the farm, $30 taxi from Bahia back to the Manta airport, $18 bus from New Hampshire to Logan Airport going out and $100 for a car to take me from Logan back home on my return.  I splurged on this last because I knew by the time I landed I would have been up for 36 hours and flying all night.  The balance was taxi fares around Cuenca which are mostly $2 a ride.  I also tried the city bus but that was only a quarter.

Odds and Ends:

Chocolate.  Ecuador produces what is likely the finest, purest chocolate in the world.  But it ain’t cheap.  The two bars I brought home cost $18.

ATM fees:  $4.50.  For one withdrawal. Yikes!  But cash is king in Ecuador.  Credit cards are only accepted in the more expensive places and then with a premium of 3-4% to cover what the cards charge the merchant.  Makes better sense than, as the USA merchants do, building the fee into the price and charging it whether you use a card or not.

By the way, Ecuador uses the US Dollar as their official currency.  If you’ve ever wondered what happened to all these coins…

Sacagawea Dollar

..they’re in wide and popular circulation in Ecuador and you’ll hardly ever see a dollar bill down there.  So unpopular are they in the USA, that last year when I tried to spend the leftovers I brought back the sales clerks didn’t know what they were.  Took some convincing that they really are US money.

Laundry:  $7.20.  Dropped off and picked up.  Done twice.

Book:  $10.  Madrigal’s Magic Key to Spanish by Margarita Madrigal.  This book came highly recommended by an expat I met in Cuenca and now I highly recommend it to you.  If you are interested in picking up Spanish.

Tips:  $20.  

Charity:  $100.  Cheryl has the habit of helping her frequently very poor neighbors.  Since there is no charitable organization pulling expense money off the top, every cent goes to helping.  Plus, these are people she knows and she can see the impact up close.  While I believe in more formal giving, I prefer this up close and personal approach when it presents itself.  BTW, we’ll also be giving at least 10% of any retreat profits in this fashion.

Want to do it for less?

Were I traveling as I did in my 20s, I’d go the hostel route and shave about $600 off the hotel bills.  The restaurant costs could easily be cut in half, saving $240 and with more use of buses ground transportation would drop by $130. Skipping the real estate tour, chocolate and book saves another $528.  Total saved $1498, cutting the trip cost to about $2138 and you’re still tipping and giving away some money to help others.

The Podcast: You can hear me now.

Posted: October 5, 2012 in Life, Money

A few weeks back a guy calling himself The Mad Fientist showed up in the comments section here on jlcollinsnh.  He started by linking back to my post.  As if the name alone wasn’t enough, that got me poking around, and enjoying, his site.

One of the cool things he does is podcast conversations with other financial bloggers, starting with one of my favorites, Mr. Money Mustache.  So when he invited me to be his second interview ever, well what could I say but:

Yes!

I hope you have as much fun listening to it as I did doing it.  Here’s the link:

http://www.madfientist.com/jlcollinsnh-interview/

Oh, and when your done you might want to check out his site, if only to learn what a Mad Fientist is.  For now all I can tell you is I’ve got my Halloween costume all planned out.