## So What Are You Doing by Raising the Minimum Wage?

It really seems simple.  People need more money, so you just require that they get paid more.  You say that it costs about a \$15 per hour job to live in the city, so you raise the minimum wage to \$15 per hour.  Of course why stop at \$15 per hour?  Why not just raise the minimum wage up to \$100 per hour so that they could live in style and pay lots in taxes?

Obviously people know that you can’t just raise wages to \$100 per hour.  The business would need to raise prices dramatically to pay those high wages.  But even raising wages from \$7.50 to \$15 per hour has a similar effect, although more subtle.  You can’t just arbitrarily raise wages because the person who is making \$7.50 per hour isn’t producing enough to earn more.

You see, everyone who is earning a salary is actually engaged in a bartering transaction with everyone else in the economy.  They perform some task or make some product and then trade the value they create for something else they want. Maybe a McDonald’s worker in NYC enters orders into the cash register for ten minutes and trades that service to a farmer in Nebraska that grows an ear of corn he eats that night.

Of course he doesn’t actually meet with the farmer in Nebraska.  The farmer in Nebraska takes his corn to market somewhere in Nebraska and trades the corn for cash.  The McDonald’s worker goes to his boss at the end of the pay-period and collects a check.  There are several transactions that take place between people to connect the McDonald’s worker who wants an ear of corn with the farmer who grows it.  Cash just makes it easier to trade since the McDonald’s worker doesn’t need to make several trades himself to finally get the ear of corn he wants.

Now let’s say that you just raise the wages of the McDonald’s worker to \$15 per hour since that’s what he needs to pay for things.  Now the farmer needs to trade two ears of corn for the same ten minute period of order taking.  He needs to do twice the work to get the same thing in return.

Now the price of an ear of corn compared to the amount of time spent pushing buttons on the cash register isn’t arrived at arbitrarily.  It is based on how much the farmer must earn after he has paid for all of his expenses to motivate him to go through all of the trouble to grow the corn in the first place.  If he is not paid enough, he may decide to stay in bed a few more hours.  He may decide to plant 50 acres instead of 100.  He may decide to trade his corn overseas where he can receive more per ear.  He may decide to do something else rather than grow corn. Or he may decide to just grow crops for his family and stop trading.  When any of these things happen, the amount of corn available declines, so now even though the McDonald’s worker earns enough to buy two ears of corn each time that he works for 10 minutes, he may go to the grocery store and find there is no corn to buy.

Note that Venezuelans a few years ago decided to vote in a government that went out to the farmers and demand they charge less for their crops.  In fact, they even went so far as to chase the farmers off of their land and give the land to squatters who were supposed to use the land to grow crops and feed themselves.  Because the squatters didn’t know how to farm, plus they probably lacked the drive and work ethic that the farmers had, the country went from one that was an exporter of food, meaning that they grew more than they needed to feed their people, into one where the people are starving.

And it extends beyond food into toilet paper, medical supplies, gasoline, and even electrical power.  There is a shortage of everything.  Today it was announced that state workers would only work for two days a week to save power and women are advised to not blow dry their hair.  Of course, the capital, where the ruling class live, has first dibs on electric power and they aren’t experiencing the same kind of blackouts that they are seeing other parts of the country.  The rulers in Socialist societies always take care of themselves first.

Now there is another possibility and that is that the farmer will simply raise his prices and require more money in exchange for each ear of corn.  In that case you soon end up with the McDonald’s worker making \$15 per hour but needing \$30 per hour to have enough to live on.  He may earn more per hour numerically but he still gets the same amount of value per hour of work because that is what the service he provides is worth.

The only way to improve the life of the McDonald’s worker is for him to learn new skills that will allow him to produce more per hour.  He can then get a higher salary without forcing someone else to pay him more than he is worth.  Millions of people do this during their lifetimes, starting from a minimum wage job but using that job to learn and develop skills and experience so that they can get that next job and that next one.  Maybe they even start a company and generate even more money, eventually becoming a wealthy person.  The trouble is that some people want to stay in that same job, doing a minimal amount, taking on the minimal level of responsibilities, and using a minimum amount of skills but get paid enough to support a family.  That is just not a sustainable plan.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Contact me at vtsioriginal@yahoo.com

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

## Make Your Money Last in Retirement

In this series we’ve talked about how to handle your money in retirement.  As stated in the first post,  there are three competing concerns when managing money in retirement.  These are:

1. To generate enough income for expenses.
2. To have the amount of money you possess grow over time so that you’ll be able to keep up with inflation.
3. To make your money last for the rest of your life.

We’ve discussed income assets and how to use them to generate the cash you’ll need when you’re retired, plus we’ve discussed assets that will allow your portfolio to grow over time.  Today we’ll talk about using both of these tools, combined with proper money management, to make your money last and provide the income you need through retirement.

The only way to be assured that your money will last through retirement is to spend less than you make each year plus have your portfolio grow to keep up with inflation and so that the income you receive will grow each year as well.    A downside of this is that you’ll end up with a lot of money left over when you die, which is good fortune for your heirs but seems like kind of a waste.  It is sort of like buying the fuel option on a rental car where you bring back the tank empty – you normally end up leaving a lot of gas in the tank because you don’t want to run out on the way to the airport.  The other option is to plan to spend a little of the principle each year based on how long you expect to live, but of course you take the risk of running out of money that way if you live longer than you expect.  A third option is to buy a deferred annuity that kicks in and provides income when you reach some really old age, like 85.  This is like buying an insurance policy in case you outlive your money.

A normal plan is to invest part of your money in income securities and part in growth securities.  The income securities provide money for living expenses and stability to the portfolio while the growth assets allow the value of the portfolio to grow and keep up with inflation.  Doing this, a portion of the portfolio is withdrawn each year – normally 3-4% – while the rest is reinvested.

For example, a 65 year-old might have a \$1 M portfolio that is 50% income securities and 50% stocks.  If the income portfolio has an average return of 6%, that would produce \$500,000 x 6% = \$30,000 in income each year.  The retiree might withdraw that \$30,000 and use it for expenses.  That, combined with Social Security, might provide \$50,000 in income per year.

The 50% stock portion of the portfolio would increase and decrease in value.  Over long periods of time, like 10-15 years, it should produce a return of between 10-15%.  This means it would double about every 5-7 years, so the retiree might have \$2 M in growth stocks by the time he reaches 75 or 80 if he left the stock portfolio untouched.  Of course, he would be selling some of his growth portfolio each year and adding to his income portfolio so that he could keep his income level up with inflation.  He might therefore actually only have \$1 M in stocks and \$1 M in bonds by the time he reached 80 with an income of about \$80,000 per year.  This would continue, with money being shifted into income from growth, until he was perhaps 90 and had 90% income assets.  At that point he would probably not have too much longer to live so he needn’t worry about inflation very much.

One issue with this strategy is that it assumes fairly benign stock market activity.  The greatest danger is that the market takes a severe tumble like 2008 right when our retiree starts his retirement.  That might cause him to panic and sell all of his stocks, locking in the losses and guaranteeing him a lower level of income throughout his retirement. Another issue is that interest rates may be really low when the retiree starts retirement, forcing him to take chances to generate the income needed, perhaps resulting in defaults and losses in his income portfolio.

A second strategy is to forego the income portfolio entirely and use a large stock pile of cash combined with a portfolio of stocks, including both growth and income stocks with the dividends reinvested, and then to sell off stocks to replenish the cash as needed.  The idea is to keep enough cash on hand to weather downturns int he markets, but not so much cash as to see it erased by inflation.  For example, one might start with five years’ worth of cash on hand, sell stocks to add to the cash during good market years, and then hold onto stocks and wait for them to recover during down years.  This strategy would make sense particularly during times when interest rates are very low and therefore it is difficult to find income assets that both pay a good rate of return and are safe.

Probably the best thing to do is to save about twice what you think you will need for income in retirement.  This would allow you to treat a portion of your portfolio in one of the standard ways, then invest the rest in growth securities.  You would get a much better rate of return over long periods of time but also be able to wait out downturns since you still have the basic portfolio to generate needed income.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

## Managing Your Money in Retirement. Part 2: Growth Assets

As stated in the previous post,  there are three competing concerns when managing money in retirement.  These are:

1. To generate enough income for expenses.
2. To have the amount of money you possess grow over time so that you’ll be able to keep up with inflation.
3. To make your money last for the rest of your life.

In the last post we discussed income assets and how to use them to generate the cash you’ll need when you’re retired.  Today we’ll talk about the second element – making your portfolio grow so that you’ll be able to keep up with inflation.

Unfortunately, even if you stick all of your money in a safe deposit box or bury it in the ground, if your money is in the form of cash a little bit of it will be stolen from you every month.  This is because the government is always printing a little more money than collected in taxes, causing inflation.  Even if you deposit it in the bank or buy CDs you’ll be losing a little bit each month in terms of buying power because the interest paid by these assets is less than the rate of inflation.  While inflation is typically less than 3% per year, over the course of a 30-year retirement inflation can easily consume half of your savings, meaning that you’ll only be able to buy half of the things each year after 30 years that you were able to buy when you started retirement if you withdraw the same numerical income each year from your portfolio.    Inflation for things like food, energy, and healthcare can be even worse during some periods.  For these reasons you need to place a portion of your money – money that you won’t need for a while – into investments that will keep pace with inflation, allowing you to grow your income with time.

One place that many people use is their home.  If you are willing to sell your home at some point late in life, you can use the proceeds to pay for expenses.  Because the value of the land under your home remains relatively fixed, or even grows as more people desire to live in an area, plus the cost of the materials required to build your home remain relatively fixed, your home should go up in price at about the rate of inflation or more.  There are exceptions of course, such as living in an area that for some reason sees home prices decline due to a plant closing, natural disaster, or other event.

Your home is far from a perfect inflation hedge, however.  One reason is that you’ll always need somewhere to live, so you’ll almost never be able to use the entire value of your home.  The exception will be if you move in with relatives or if you trade your home to a nursing home in exchange for care there.  A second reason is that homes always need maintenance, so the value of the materials in the home are always declining.  People often think that they make a lot of money when they sell a home after owning it for many years, but they forget all of the money they spent on paint, shingles, upgrades, maintenance, and lawn care.  A final reason that a home is not a perfect inflation hedge is property taxes.  Really in many ways a home is most useful in at least getting people to save up some money that they can use later, but even then many people spend the money as quickly as they get it by taking out loans on their homes.

A second asset that keeps pace with inflation is land and investment real-estate.  Again, owning land will require the payment of property taxes, but they will be far less than those owed for land with a structure most of the time.  You might also be able to enjoy the land, such as having it as a private retreat for hunting, camping, hiking, or just sitting on a nice day.  Investment real-estate, such as apartments or commercial buildings  that are rented out, are good inflation hedges because the rental income pays for the taxes and the maintenance, allowing the owner to realize the full value of the appreciation on the price of the asset.  You may also be able to generate a small income for daily expenses with a rental, depending on the market.  One downside is the need to be on call to fix things or the need to pay a property manager, which will eliminate much of your profit.

The third type of assets that make a good inflation hedge is hard commodities such as gold and silver.  These will definitely keep pace with inflation over long periods of time.  In fact, if you wanted to give money to your great, great-grandchildren without needing anyone to watch over it, one of the best ways would be to buy some gold and have your family pass it from generation to generation, maybe buried in the back yard.  The downside of gold is that it does have a premium attached at times when people get nervous about inflation or economic stability, such as in the late 1970’s or in the period around 2004-2008.  If you buy at one of these times you risk seeing a decline and may need to wait decades for another speculative boom to push the price back up.  It is therefore important to only buy when no one else is interested in gold or silver.  There are also costs involved, such as renting a safe deposit box or paying for storage of your commodities.

The final, and probably the best hedge against inflation is to buy common stock in companies that are still growing.  Because these companies will be able to charge more when the value of money declines, and because the value of their assets and capability to generate profits will increase with inflation, most of your portfolio that is used for growth should be in common stocks.  When you are young and have an income from a job, you can allocate a fairly large portion of money to stocks that are growing very rapidly with little or no dividend.  When you are in retirement, you need to mainly hold stock in large companies that still grow but are more stable because they have many product lines and the financial resources to weather economic downturns.  These are the household names like Clorox and McDonald’s that create a steady profit stream.  Buying into a fund that invests in large cap stocks is another way to invest in these companies.

Probably the best situation to be in is where you have enough money to invest about half of your money in income assets and half in growth assets where the income assets generate enough income to pay for expanses.  You then slowly sell off some of the growth stocks and buy income assets as needed to keep your income up with inflation.  In cases where the income assets don’t generate enough growth to pay for examples, you may need to sell stocks periodically to raise cash.  Another possibility is to forego the income assets entirely and just keep enough cash on hand to pay for expenses for five years or so, allowing the rest of your money to grow in stocks.

In general, a balanced approach where you have different types of growth investments is best.  Perhaps hold some land, a rental property or two, and a portfolio of common stocks.  That way you will almost always have something performing well even when other assets aren’t do so well.  Diversification is the secret to stability and reducing risk, which are important in retirement.