Tuesday, June 30, 2015

6 Ways You Could Be Making Your Kids Money Averse

Well hello there!  It's stinkin' humid in San Diego county today, making writing this blog post that much more pleasurable.  No…I don't have air conditioning living in Oceanside only five miles from the beach.

Your Loss Aversion Is Costing You More Than Your FOMO

This post is all about family and in particular, how kids learn.

As an educator, I think I have some solid footing in this area.  You see, I know for a fact that kids learn best by doing and seeing.  Basically, if you want your kids to learn something new, get them to start doing it!  And if you show them how some things can be done, i.e., by modeling, well…they'll learn stuff even faster.

Another Einstein revelation for you: kids learn the most at home.  I know, crazy, huh?  This is why teachers struggle with some "gems" in their classrooms.  But you're a perfect parent, or at least, you try to be.  However, what if you could be doing some things that unbeknownst to you, are having the unintended effect of mind shaping your children to be averse to money?  Not money!  Yes, money.  Here are some adult behaviors that could be confusing your children about your true feelings with respect to the greenback:

1) You sit at the table with a stack of bills and your checkbook.  Sometime around the second bill you start to fuss and complain.  "What!…we spent $250 on the water bill!  Honey…you really gotta cut back on your shower time.  Really, do you need to be in there ten minutes?"  Of course, Junior, is seeing you get all bent out of shape while you pay these bills.  Your children also see you interacting with text negatively, which is bad for their sense of developing a love for reading.

2) You argue openly with your partner and the argument is constantly about money.  Sure, your child may be playing at the time…in the living room, which is a whole ten feet away from where the two of you are.  But guess what?  That child is listening!  "I don't want you buying things without consulting with me!  Bottom line, don't do it!"--money verbal bullets.

3) You don't explain to your kid(s) why they can't go home with a toy from the store.  Instead you yell at them: "Put it back…you're not getting that!"  Or you tell them: "No! We can't afford it."  Money becomes the object of their frustration.  What should you be doing?  You should be explaining to them that you have a shopping list.  Show them the list.  You should then tell them that the reason you have a shopping list is so that you don't buy items on impulse.  Explain to them that getting any random toy from the store is doing the opposite of what you came to the store to do.  And then tell them that in order to get a toy from the store, it needs to be budgeted and put on the list.  Tell them that when they get home, you and them can sit together and see how a toy could be earned prior to the next shopping trip.

4) You go to some common place…you know…like a school or other public place and you strut your wallet around like you own the place.  I'm referring to entitlement.  Do you scoff at people who you believe to be "lower" than you?  Do you challenge people and invoke your lawyer in argumentation?  Many children end-up with major entitlement problems at school come high school…and they didn't pick-up this bad money/power personality from their teachers, trust me.  Eventually, some caring person puts them back on planet earth and they realize how utterly grotesque they had been acting for many years, associating money with this "evil."

5)  You give your child spending money daily (for school) and that's that.  Then when they come to you broke on the weekend, asking you for more, you get mad.  "What'd you do with all the money I gave you for school?"--you ask them frustratingly.  Their response: "I spent it."  Your comeback: "On what!?"  And they give you the best possible answer suited for a money saving unconscious kid: "On stuff!"  What should you do?  You should challenge your child to keep up to half of what you give them.  Tell them to look out for the best deals during lunch, or if they can leave campus (older ages), for lunch specials.  This way they will actually check menus, and the boards at school, fast food spots, etc., making them conscious consumers!  

6) You make spending uncomfortable and upsetting.  You are one of those Mustachians at Mrmoneymustache.com's cult.  You scrutinize every expense and say negative commentary about buying almost anything.  You go around shopping at thrift stores and wear clothes that are two decades old just to save a penny.  Then when your child grows up, they have been trained by you to worry, and become uncomfortable every time money is needed.  In essence, you create a cheapskate out of your child that will have no chance in hell with the ladies or will be seen as weird by men.  There is a balance, whether Frugalists like to admit it or not.  Not worrying about money is okay, people.  Enjoy life too!

Well…I hope you've enjoyed this post.  Remember, kids are watching…all the time!  So make sure you lock your bedroom door and talk cool ish about money around your little tikes.  Must be the heat…I'm out of my mind! C-Los…out.  

Sunday, June 28, 2015

The Top 10 Reasons Why You Won't Get To An Early Retirement


I'm finishing off the last hours of my first week of vacation and so far...it has sucked!  I've had a sinus infection for like 8 straight days and am now just starting to feel human again.  I'm looking forward to next week when I'll be at full strength and my days will be more routine-like for vacation.  About the only thing I've done well so far is take naps...one long one per day.  They are so refreshing!  They give me a glimpse into the future of when I'll be retiring, able to nap at will without a care in the world.  For now, one of my greatest cares in the world is reaching early retirement.  Keepin' an eye on the prize can be a challenging thing for the best of us, and long vacations, come with the lure and complacency of "takin' it easy."

For you today, I have the top 10 things that can keep You from making it to an early retirement.  Here they are in no particular order:


1) You don't have a money group.  These are friends, who like you, desire reaching early retirement and find talking about money as normal and commonplace as talking about current events.  If you can't text a friend about a stock, or email a buddy about a business move you need an opinion on, then you are doing it all wrong!  You need to be able to talk shop with someone about money related endeavors without feeling awkward or intrusive.

2) You have not communicated your early retirement goal to your significant other.  You and your partner must be able to talk money matters just as, if not more so, easily as you can with members of your money group.  AND...you must be in support/agreement of this goal with one another, i.e., one person cannot be sabotaging the other with each passing day.

3) You don't review your finances often enough.  What's often enough?  For me, it's like once a month.  For many of you, it's maybe once a year.

4) You don't introspectively evaluate your (poor) money habits, and make necessary changes.  In fact, you may not even know you have poor money habits because you think buying crap you don't need all the time is what everyone does.

5) Your home is your prison.  When you come home from a hard's day work, you'd rather eat, watch television, and relax until it's bedtime instead of improving yourself by perhaps spending 1 or 2 hours making up for your lack of financial literacy.

6) You have no early retirement game plan.  How will you get to early retirement?  Have you done a backwards map, starting with what the end looks like?

7) You don't automate your savings.  You wait until the end of the month to see what's left and then put this measly amount into a savings account.  You should automate paying yourself first!  You don't even need a budget to do this.

8) You don't look for ways to supplement your income.  Your salary isn't going to take you to the promise land...I promise!

9) You take on bad debt.  You buy a car every 5.5 years.  You over rely on your credit card, and have more than a $7K balance.

10) You don't accept personal responsibility for your poor money choices.  Instead you blame the government, Wall Street, or the economy.  You, in essence, victimize yourself.  "Woe is me."

The biggest reason for not making strides toward an early retirement comes down to YOU.  You are your own worst enemy, as the saying goes.  But you don't have to be.  Print this list out and pin it somewhere.  Compare what you are doing or not doing now to it.  Can you tack on or tack off a few more things on this list?  If not, then HOW can you?  Never put a wall in front of yourself.  Ask a question that presents a thinking opportunity for you and brainstorm solutions.

With that...I'm off to continue my vacation from work.  Let me see what else I can get into these next few days.  Take care and don't forget to subscribe to CCM blog if you liked this post and want more like them in your inbox. 

Friday, June 26, 2015

Should a Former Student Buy His First Home in the S.F. Bay Area

Welcome to another segment of CCM blog!

In today's episode, I have a former HS student asking me for help.  In fact, he represents one of the first students I ever taught, having him in my science class as a first year teacher in 2001.  He emailed me the other day:


Thanks for sending me your email address.

As I said on my message, I want to be more involved in investing and saving. I have a good job, and my fiance will be a teacher soon. Both of us are financially responsible, but we have no clue how to even get started on investments and saving more. 

Our goal is to get a house, eventually, and have a future that is financially stable. 

I remember speaking to (name) once and him saying that you live a bit far from the Bay Area and that you are a busy individual. However, I was wondering if perhaps we can chat or sit down and talk about how you did it--being financially stable, that is.

Let me know what you think. I am all ears and willing to try what you suggest.


So as to keep his identity private I will only share minor details about him.  He's 28-years-old, i.e., a Millennial, and is an engineer renting near Palo Alto where he works.  As you can read from his email, his soon to be wife will be working as a teacher.  I also know that his company offers a 401(k) but they do not match.  Bummer.

Before getting to this young couple's shared dream of purchasing their first home, I'm gonna advise my former student (let's call him, Jose) to get to know his employer's pension plan.  Is he being placed in a high-cost group annuity plan, or given investment options with high expense ratios?  He's gonna have to do some reading and find out, because if that is the case, then I suggest he stop making contributions to his 401(k).  For most other people, I would tell them to continue to contribute to a high cost 401(k) plan with their employer IF they do not have the discipline to save on their own AND they rely on their company's payroll deduction to keep them saving toward retirement.  Jose was one of my most disciplined students so I know once he sets his mind to something, he'll have no problem executing.  Thus, Jose, only stay with your employer's pension if you discover that the plan options are, low-to-average cost, and well diversified.  Since he has "no clue..." I will most likely be reviewing and explaining his pension plan options at some point for him.  That's what teachers are for.  On to housing in the, Yay Area!

Heck to the No!  Don't Buy, Don't Buy!  That's really what I would tell everyone thinking of buying a home in top markets, just to get it out of my system and be able to later tell them: "I told ya so!"  Just take a look at this chart:


Jose is a happy worker bee as an engineer, and I've asked him take my money personality quiz just for fun even though I know he will score Spartan.  Meaning, Jose wants to be rich.  And besides, just read his email, it is the talk of a Spartan..."investing and saving."  Nothing wrong with this of course.  I just have to, as the responsible party giving him advice, make sure it is geared to the Spartan mindset and not the Roman one so as to ensure it hits home, so to speak.  If you are a Financial Advisor somewhere and are working with Millennials who do not know the difference between becoming wealthy and rich, by all means use my free money personality quiz.  Subscribe and I'll send you a link.

Even though Jose is a Spartan, I must educate him about assets and liabilities.  A rental property is an asset.  A personal residence, however, is a liability because every month it swallows your capital, and the monthly return in combined equity and appreciation is never on pace with the total monthly expenses (taxes, mortgages, insurance, incidentals, etc).  There are exceptions of course.  Remember the RE bubble that led to the crash of 2008?  In the Bay Area in particular, homes were appreciating so fast, people were in and out of them (getting subprime leveraging) in less than six months with positive cash gains!  That's not happening today in the U.S.  Go to Canada for that.  My friends, Andrew and Matt, over at ListenMoneyMatters.com have a great article for Jose, and others to read: Will Your Home Be A Good Investment?

Many renters make the mistake of simply comparing the rent they are shelling out each month to what they could be paying on a home mortgage.  For example, say Jose and his fiance will move in together and pay the average 2014 rent for an apartment in Santa Clara County, $2,197.  Seems like a lot.  It'd make many puff out their chest and say to their partner, "Look at all this money we're just throwing away by renting...an apartment!"  Sure, the rent is covering the landlords bills on the home, but don't expect to get a similar set-up unless you leave that RE market and go far East!  Like the desert.  In Santa Clara, County you'll have that (if you're lucky) be your first mortgage, followed by a second of say, $350-$600 on a 3 bedroom, 2 bath in East Side San Jose AFTER putting 20% down on a $600K fixer-upper.  That price tag may not cover your impounds!  Taxes and Insurance.  Then there are maintenance costs as undoubtedly something will break or need repair like every stinkin month!  In sum, being a homeowner is for the Rich, not the Wealthy.

But I must give Jose a best case scenario for one day owning a home in the Bay Area.  Even though he's a Millennial, it looks like he plans on staying in one place, as opposed to moving around every three or four years like the rest of his cohort does.  He's getting married soon, and will want to have a place to call home by the time his wife is pregnant.  Let's say this will be sometime around 2020.  This gives him 5 years time to save for his starter home and the baby...he'll name it, Carlos, of course, if it's a boy.  If it's a girl, Carla?  Sure, why not?

Okay, so the way to do this is:

1) Stop making 401(k) contributions now!  There is no employer match anyway, and building this fund with pre-tax dollars will mean a surefire tax penalty if he were to use the funds later for a home purchase.  This action will increase his current take home pay.
2) Whatever he was contributing monthly to his 401(k), do it now, but in a Roth IRA.  Now check this strategy out:

With a Roth you can take out $10K tax and penalty free for a home purchase if the account has been open at least 5 years.  So, Jose would create a simple spreadsheet keeping track of all of his monthly contribution amounts.  Say each month he put in $500.  After 1 year he'd have $6000.  After 1.5 years, he'd have $9000.  I'd want him to stop right there.  No more contributions.  Why stop?  Because now he could invest that $9,000 within his Roth IRA and have 3.5 years to make $1000, a very conservative and do-able endeavor for a rookie investor.  A sample suggestion for him would be to buy shares of Vanguard's Dividend Appreciation ETF (VIG).  VIG has a 0.10% expense ratio and invests in companies with a record of growing their dividend year-over-year.  This will dampen losses brought on by a major market correction.   

His wife would follow suit.  Adding everything together: $9K + $9K of actual saved money + $1K +$1K of investment returns within two individual Roth IRAs = $20K for a down payment in 5 years.  Not enough?  No...unfortunately, this would still not be nearly enough.  As first time homebuyers, with great credit, Jose and his wife could qualify for loan parameters of 10% down versus 20%.  Private Mortgage Insurance?  Yes, that may be part of the 10% deal.  So say his dream home in East San Jose costs $550K.  He'd need $55K plus be able to show he's got emergency cash in the bank.  Add another $10K to this.  Now we're looking at $65K.

$20K from the Roth IRAs.  Still needs $45K.

3) Open up a Brokerage account with a discount broker like Scottrade.  

I have Jose and his wife currently saving $500 a month for 1.5 years.  Now Jose saves $500 a month for 3.5 years in his Scottrade account, amounting to $21K.  His wife does the same, equaling another $21K for a total of $42K.  But, they're not just going to deposit cash every month.  They'll also be investing, buying quality businesses (stocks) that are potential turnarounds, meaning the stock is beat up, and the company is a couple of years from being back where it was.  Names like McDermott (MDR) and Actuant (ATU).  I'd ask him to start building positions in these two sample companies (and other's I'd recommend) from the get-go and look to sell them as they eventually appreciate in value over the next several years.  He could, this way, make another $5K easily over 3.5 years.  His wife would be up similarly.  Putting it together, they're at $52K + $20K from the Roth IRAs for a total of $72K.

Again, this is just a scenario using $500 cash savings per month for each individual.  As an engineer, he may be able to save more than this each month.  His wife, as a teacher, may not.  However, anything over $1000 a month combined would place him well above his target of $65K.  

Home Buying Strategy

I advise Jose that he find an excellent realtor that will get him the crappiest house in the best neighborhood for his budget, whatever it may be.  The neighborhood matters more than the turnkey-ness, so to speak, of the house.  If he buys a fixer upper anywhere outside of East San Jose, it would be an improvement over a decent ready home in that area.  I know, I'm from there.  And I love all my friends (and family) who live in East San Jo, but y'all got to get up out of there.  Why do you insist in livin' in the most expensive hood in the nation?

You know what else I don't get?  Why you're thinking of leaving this site without subscribing.  Don't do that.  You'll miss all of the fun here at CCM blog.  So make sure you do subscribe and I'll send you some links to my eBooks for your troubles.  Thanks!    

Wednesday, June 24, 2015

Should Married Couples Have Separate Checking Accounts?

How's it goin' all?

I got some deep marriage wisdom for you, from a man that has been once divorced, and is now happily married.  No...I don't have a marriage expert as a guest.  Yours truly will opine today on the greatest money debate of all time: Should married couples have separate checking accounts?

As always, I Googled this question and came across some excellent articles.  The Six Financial Mistakes Couples Make by Aleksandra Todorova, was by far the most comprehensive, focusing on all money related matters (debt, investing, emergencies, e.g.) during a marriage.  Bankrate.com's, Married with Separate Checking Accounts, has the top spot on the search page.  Though I find both of these articles useful, they both make a fundamental mistake: Placing the topic in the realm of what's practical and logical for each individual.  Well, duh, Carlos, that's how it should be!  Personal experience tells me that (placing the individual's needs first) should be secondary, not primary.

There are three ways couples, once married, use checking accounts.

A) One checking account for the couple.  All checks go into this one account.  Both individuals access the account.
B) Two checking accounts.  Each individual has their own bank/bank checking account where they deposit their money.  There may be some shared access, ex: Here's my debit card, go buy...my pin is...
C) Three checking accounts.  Each individual has their own, plus the couple creates a "joint" account where they each deposit part of their income for communal expenses.

Now, Bankrate.com's Heather Larson gives the following reasons as justification for keeping checking accounts separate:

  • Sense of autonomy as couples adjust to the interdependent lifestyle of marriage.
  • Prevents arguments over money and gives both spouses a feeling of fairness and independence.
  • Makes dividing expenses much easier when spouses contribute a percentage of income to joint expenses that matches the percentage of income they bring to the table.
  • Keeps your spending spouse's debt on their credit score card, not yours.
  • To keep one person's spending habits from affecting the other.
  • Brings meaning to gift-giving.
  • No one person dominates the marriage by dominating the joint money.  No one person will become the "parent," wielding the money power to make the other the "child."
  • Separate accounts facilitate the division of assets and the expenses of a divorce.    
It's absolutely comical seeing the last bullet of this article mentioning divorce as a justification for keeping separate checking accounts.  Why?  Because that's exactly where you and your spouse are heading if you follow this advice.  Bold statement?  Let me explain.

Marriage should be as simple as possible.  This article by Bankrate.com adds complexity to marriage, even though it attempts to keep money out of the marriage equation as much as possible.  I will tell you right now that it is impossible, and no practical or logical advice will ever prevail over a clearly emotional subject in an emotional set-up such as marriage.

My first marriage 

Respect.  That's what was missing in my first marriage.  I realize now that I had married the wrong person for me.  She had little to no debt.  Her income was slightly more than mine (we were both teachers).  And though we initially started our marriage with separate checking accounts, we even adjusted to opening one joint checking account as a last ditch effort to stop arguing over money.  Money should not have been a source of arguing per Bankrate.com's justifications.  But it was nonetheless.

When it came to our joint debt, like our 2nd mortgage on our townhouse in San Jose, we would argue about how much to pay, the minimum or more; if more, how much more.  When it came to date nights, we would argue about whose "turn" it was to pay the bill.  I kid you not!  So much for gift-giving.  Even with our separate checking accounts being used to buy things each of us desired, we would still scrutinize the expenses.  I have to admit, the latter was mostly me, worrying about our joint financial goals not being met with someone's "frivolous" purchases.

When you marry the wrong person, money will be first to let you know it.  Intimacy is a beast that hides in a cloud until the last days of your marriage.  When I look back at my first marriage, and wonder why I argued so much over money (and sex later) with my ex-wife, it comes down to one thing: lack of respect.  Yes, I "loved" my ex-wife, but I wasn't "in-love" with her.  What was worse, however, is that I never saw her as my equal.  I never submitted to the sanctimony of marriage with her being someone who is not only an individual, but a part and extension of me.

After my divorce I made this very important decision: If I was to marry again, this person would have to command all of my love and respect, AND dethrone money from the queen's chair I had put it on.  Where do you have money sitting currently?

High net worth people get prenuptial agreements.  Do us all a favor: Just don't marry if you "have to" get a prenuptial arrangement.  You are not okay with that person, who should be your soulmate for life, getting any of what you've earned over your lifetime.  There's nothing wrong with this.  Keep dating until you find the person you would be happy to give all of your money to in the event of your passing, or some of your money to, in the event of a divorce not having its origin be money.

If debt is a problem for you during dating, don't marry!  You cannot start a marriage mentally fit with a problem already on the table.  If the debt is small, wait for the person to pay it, or move on.  If you've found the "right" person, I can assure, they could have all the debt of the world and you would still marry them.  What comes after, of course, would be incredibly hard, but knowing the challenge, you'd still be first to take the leap forward into coupledom.

When I met Jessica, my true love, she had creditors calling her everyday, asking for payment on her various unpaid credit cards, owing nearly $10K from discretionary expenses on high fashion.  The funny thing was, I wasn't bothered by it.  It was surprisingly insignificant to me, and that's when I first knew I was on to something, so to speak.  She would later impress me by consolidating her debt, and getting rid of it prior to our engagement.  She had made a powerful discovery about herself and money, and I hadn't gotten in the way of her empowerment, mostly being a soundboard for her during this personal trial.  Little did she know I would have married her debt, and gladly taken on the potential for subsequent arguing, albeit as a unified body.  Soon as we got married, we joined our checking accounts.  Neither one of us objected.

Till death do us part.

Do we still argue about money?

Jessica and I argue about money all the time, like most married couples.  But here's the difference, we both know, money will NOT separate and divorce us ever.  We argue about money without fear that the other person is going to turn around and get divorce proceedings started.  I tell you, it is refreshing.  A typical argument goes like this:

Carlos on the phone or texting, seeing the online checking account debit: Jessica, what you buy now?
Jessica: I bought X.  It was only $.
Carlos: But you don't need X.  You have plenty of Y just like it.
Jessica:  Yes, I do.  Y isn't working anymore.
Carlos: But we can't afford it right now.  We have to do Z!
Jessica: Yes, we can!  Stop worrying about money.  Why are you constantly looking over the account?  
Carlos: I don't know...I'm anal like that, you know.
Jessica: Yes, honey, I do.

Over the years I've gotten a lot better about ending my silly back-and-forth arguing over money with Jessica.  Why?  Because I know there is no winning for either of us.  If she's wrong, she will be upset.  If I'm wrong and argue incessantly, she will be upset.  Pointing out when we are wrong is obviously necessary, but overdoing it is not, especially since it is not a "divorce" offense.

Marriage is an undeniably difficult commitment.  For there to be respect, each person needs to give 100% of themselves (their love, attention, etc.) to the other person at all times.  You won't avoid arguing over money, but perhaps you will a truer reason for divorce: infidelity.

I know I'm no expert, but this is my take and I'm sticking to it.  What say ye? 

Monday, June 22, 2015

Eliopoulos versus Ailman: Two Investment Philosophies with Enormous Implications for Californians

Hello!  Did you have a great Father's Day weekend?  I did.  Caught up on the entire last season of Game of Thrones with free HBO on Demand.  And I bet HBO thinks I'm gonna subscribe now, but guess what?--I won't!  Suckers!

Okay, enough messing around, I got a spotlight post for you today.  As Shakespeare wrote..."All the world's a stage, and all the men and women merely players."  But in our media era, some men and women are bigger players than others.  The two fellows I'm aiming my spotlight on today aren't widely known as say, Beyonce or Warren Buffett.  In fact, I would bet that even here in California, the state both of these gentlemen call home, I'd be hard pressed to find 2 in 10 random people who could identify them.  No matter.  I can: Ted Eliopolous and Chris J. Ailman.

Ted Eliopolous has $300 billion AUM (Assets Under Management) as the Chief Investment Officer at the largest public pension fund in America: CalPERS.

Chris J. Ailman has $193 billion AUM as the CIO at CalSTRS, the second largest public pension fund in America.

Mr. A

Although Mr. A & Mr. E both work in Sacramento and have similar roles and goals, they have very distinct investment philosophies.  Let me contrast them for you, starting with Mr. E:

Efficiency & Cost Savings: CalPERS

CalPERS took Wall Street by surprise last year when they made the decision to downsize from 212 "external" money managers to 100 over the next five years.  Which external money managers in this 300 billion dollar portfolio are being "trimmed" the most?  Private equity is being purged from around 100 hired guns to 30.  The second biggest slash is being felt by CalPERS' outside real estate managers from 51 down to about 15.

Why is Mr. E electing to do this?  We are in an alpha market now where stock picking prowess and activism is sure to lead the way into top returns.  This is when private equity shines the most.  Seemingly, it's a bad move.  But...

"The reduction in outside managers won’t fundamentally change Calpers’s investment strategy, or the percentage of assets managed in-house versus externally. The remaining 100 or so outside managers will simply get a bigger pool of funds varying from $350 million to more than $1 billion, Mr. Eliopoulos added."

Mr. E is acknowledging that there were just too many chefs in the kitchen.  In his mind, too much of our hard earned retirement money is being leeched by exorbitant fees paid to an excess cadre of outside money managers.  CalPERS is only 77% fully funded, despite a posted total return of 18.4% last year.  Another reason for "Slimming Down" is an inability to oversee all of the pieces on the board, so to speak:

"There are so many outside managers currently that Calpers doesn’t have the ability to make sure all those funds share the same objectives as the large California pension fund and are performing well, according to Calpers Chief Operating Investment Officer Wylie Tollette.
“We need to do a better job of keeping track of how those managers evolve, what strategies they’re good at, what they may not be good at to ensure they’re effectively earning their place at the table every year,” said Mr. Tollette, who currently gives Calpers a “B-minus” at doing those tasks."

The elephant in the room in this CalPERS decision is performance satisfaction.  Was Mr. E and his staff happy with the performance of his external money managers as an overall entity?  Or was it just a question of eliminating those firms/managers that charge the most?  The world will never know.

Mr. E and his staff have embraced the trend coming out of silicon valley and espouse the dogma of giants like Vanguard: simplify, reduce fees, and keep more.  Will the strategy work?  We shall see.  Nonetheless, I applaud Mr. E and his staff for being transparent.  This video interview of Mr. E by Maria Bartiromo is telling of a man who is quite comfortable and confident with his decision.    

All CalPERS members should be thankful to have a retirement fund team that is not only willing to look in the mirror and make tough decisions, but is also not afraid to share the game plan with everyone.

No Change & Hope No One Notices: CalSTRS

The CalPERS decision was monumental, and it undoubtedly gave other pension fund managers, including Mr. A, goosebumps.  How many public pension managers nationwide will follow CalPERS' lead feeling the pressure to do something significant during their time at the helm?  As of this year, Mr. A has done something significant to show his hand: He authorized a $100 million investment in Red Mountain Capital Partners, an activist hedge fund based in Santa Monica.  In case you don't know, activist investors (like Carl Icahn) or firms buy large equity stakes in companies then take a proactive stance with company management and boards to ensure the company stock appreciates in value.

I don't like it!  I'm sorry, Mr. A, but a decision like this makes me wonder what it is you could possibly be thinking.  A bet on small cap outperformance during the latter stages of a bull market is too much for me to swallow.  Everyone knows you place your small cap allocations heaviest right out of a recession, and that would have been in 2009, not now:

"But with that reward comes higher risk, experts say.
"One of the things to consider when figuring out your weighting (between small- and large-cap stocks) is where we are in the economic cycle," says Michael Sheldon, chief market strategist for RDM Financial Group in Westport, Conn.
"Typically, small cap takes the leadership coming out of a recession," Sheldon says. "They get beaten up more during a downturn, so it's not surprising that they outperform coming out."

I'm sure the people at RMCP are excellent at what they do, but even they will not be able to stem the tide of a market correction.  No one will, in fact.  However, I may not be giving Mr. A enough credit.  He may have read Barron's reporting on the historical outperformance of active versus passive strategies during rising interest rate environments.  If not Barron's piece from this year, maybe Mr. A read this Fidelity Worldwide Investment article in 2013: U.S. Small Caps: Outperformers during Rising Rate Environments.  It goes against conventional thinking so perhaps Mr. A isn't as "conventional" as one would be led to believe.

This $100 million deposit with RMCP was a celebratory moment for the hedge fund world.  And if you don't believe me, just look at this headline: Move over CalPERS, here comes CalSTRS!  The article is at HedgeCoVest, a company that seeks to mimic hedge fund trading strategies for individual investors within their own separately managed brokerage account.  What will they think of next, huh?

I had to dig deep to find this CalSTRS Investment Report from Dec 31, 2014.  If you skip past the risk reports to the pension's stock holdings in companies with exposure to Iran, Sudan, and Northern Ireland, you'll get to the Investments Branch Business Plans for fiscal year 2014-15.  From Mr. A's penned Intro:  

"The one constant drag on these goals is investment costs. To manage the costs, the CIO has built a ten-year financial plan, which is attached for the Committee’s review. The two key drivers of cost are assets under management, AUM, and the complexity of the portfolio. AUM is easy to measure and estimate over the next year within one standard deviation. Complexity, on the other hand, is much more difficult to measure. We track the number of custodian accounts and the number of investment managers, but neither encapsulates the overall variety and intricacy of the portfolio." 

So Mr. A acknowledges he is the captain of a very large and sophisticated ship with complexity that is "difficult to measure."  Mr. E didn't seem to have a hard time measuring the complexity at CalPERS and saw where his ship had holes right away.  He's plugging these as you read.

External Money Managers will cost CalSTRS over $200 million this year and between $200-$250 million every year for the next ten years!  See the graph on page 9.  Now see this interesting table I put together:

Portfolio Component
Internal Staff (Managing)
External Staff (Managing)
Global Equity ($104 billion)
10 ($38 billion)
48 ($66 billion)
Fixed Income ($28 billion), “Total Debt Portfolio”
16 (this is a proportional approximation as it is not actually given) ($23 billion)
4 (ditto) ($5 billion)
Fixed Income ($53 billion), “Other Portfolios”
Unknown ($42 billion)
11 ($14 billion)
Real Estate ($22.6 billion)
“Staff Count: 18+1 vacancy; 19 total Internal Management: $0 mil, (0%)”

I don’t get this! 19 people paid to do what?
78 ($22.6 billion)
Private Equity ($21.8 billion)
15 ($1.4 billion)
124 ($19.9 billion)
Corporate Governance ($4.6 billion)
9 ($253 million)
9 ($4.38 billion)
Infrastructure ($1.25 billion)
3 ($1.25 billion)
Innovation & Risk ($1.063 billion)
7 (0)
10 ($1.063 billion)

Both Real Estate and Private Equity make up just 11% of the overall portfolio individually, yet these two asset classes have the most external money managers assigned to them, 78 & 124, respectively.  Mr. Ailman, you sure you can't take a closer look at the various companies you've hired and see if there is any overlap somewhere?  In the case of private equity, you mean to tell me that there are 124 unique investment strategies present there?


That these two men, responsible for the retirement future prospects of millions of Californians, should be for the most part invisible, is something that has to change.  They should receive as much scrutiny as the local police chief, the city mayor, or any top office public employee.  Teachers, police officers, firefighters, nurses, county employees, we have to do better!  We can't be sheep, going about our daily lives oblivious to what is happening with our pension contributions.  Members need to demand transparency and speak up whenever they don't feel pension managers are doing their best with their fiduciary duty.

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Friday, June 19, 2015

How the Devil is on the Loose in State Teacher Pension Systems Nationwide

¡Santa Maria, Madre de Dios!  The “devil is on the loose” my people.  And I’m not just giving one of my favorite country music singers, Waylon Jennings, a post mortem shout-out.  Interesting story before I get going…when my family and I first arrived in California in 1983 from Mexico, we bought ourselves a color television and started tuning into prime-time television.  There were a few sitcoms we just loved to see, despite none of us having any idea what was being said on these shows.

There was Knight Rider, the show we lovingly called, “El carro que habla”—The car that speaks…sorry David Hasselhoff the show for us was about KITT.  There was the A-Team.  We referred to this show as, “Los que inventan”—The ones who invent.  And of course there were The Dukes of Hazard.  We dubbed this show, “El carro que vuela”—The car that flies.  I loved and continue to love the theme song, “Good Ol’ Boys,” by Waylon Jennings.

Rehani with my yard work Cowboy Hat on, about a year ago.

Alright now let’s get to some business.  I have some more critiquing to do and yes, it is similar to my previous post where I put CalSTRS on blast.  This time, however, I leave no stone unturned, scrutinizing every state teacher pension system in the nation.  If you’re a teacher, I highly recommend you read this post to its entirety and also share it with a peer.  If you’re not a teacher, please read this post and share it with a friend who may be a teacher.  By the way, unless otherwise noted, the source of this data was from a phenomenal read report.

41.  That’s how many states have unfunded teacher pensions.   

Now, not all teachers in the U.S. are members of a statewide pension system, but let there be no confusion that it ultimately doesn’t matter.  41 aren’t sufficiently funded (data is from 2012).

Here’s where the confusion begins for most teachers.  Most teachers couldn’t tell me how their pension benefit at retirement (full teaching career or not) is going to be calculated.  I don’t blame them.  Some like NY STRS is worse than a mortgage disclosure statement.  NY STRS needs handbooks, and interactive videos to educate active members about their Tier 1-6 benefits.  Sooo much complexity!  But wait, New York leads the nation in charging forward with Common Core State Testing.  Oh, and unions are too busy fighting Charters and their employers for kids and salary, respectively.  Who cares if the Devil is loose in the NY STRS pension system, right?

Another problem: many teachers do not know the difference between a defined benefit and defined contribution pension system.  Teachers in 38 states get no choice but to be in the default defined benefit plan.  Why as teachers are we okay with this?  California, Delaware, Iowa, Nebraska, Tennessee, etc., teachers, are you okay being given just one choice to fund your retirement?  How can we stand for most of us being pegged into one retirement funding option as professionals?

It’s “What’s Best” for Teachers

DB pension plans guarantee a monthly retirement benefit with parameters that exclude the public markets at the individual’s level.  This is why unions are in support of them.  You will see below that what you will “get” at retirement every month doesn’t depend on your investing performance or the public markets.  This is a great thing for (lifers) teachers, the security of knowing that the longer they work and promote, the more they stand to get each month once they leave teaching.  The only uncertainty teachers have in a DB pension plan is…not knowing if the system itself is viable or sustainable!  Even though teachers aren’t making investing calls with their retirement money, someone else is.  Whether it be you or the hired and expensive money managers of your DB pension plan, there is no escaping the impact of the stock market on your retirement money.  Like most professionals (85% of the private sector) with 401ks, I’d personally prefer to have investment options.  DB pension plans kick the can down the road, burden employer budgets now even more than ever (the highest expense in a school district’s budget is personnel) and new teachers entering the system having to contribute more to make sure retirees get their benefits.  In California, I have to be victim of Mr. Ailman and company’s investing decisions, even when I DON'T AGREE WITH THEM!  


Mr. Ailman, can you please explain to the teachers of CA why we need money managers who in ten years have barely matched their benchmark returns?

Without lawmakers passing “reform” laws every other year it seems, tax payers would be in serious jeopardy of having to pay additional state taxes to bail-out DB pension system shortfalls.  But there are more maladies that plague the DB pension system.

They are not portable

401ks are portable, meaning I could take what’s in my 401k anywhere in the country, and not be punished for switching jobs.  What would happen to my CalSTRS pension today if I moved to, say, Arizona?  My pension would freeze at 14 years of “service credit” (a total sham by the way)!  My service credit factor would be locked at 14, and my first year of teaching in another state with a TRS Defined Benefit pension plan would be considered year 1 of service credit there.  Why does that matter?  Because the more service credit, the higher the factor to improve my monthly benefit at retirement.

“The basic benefit formula for calculating teacher pensions—the amount of money teachers will receive each month after retirement—is the following:

A teacher’s
(1) Final average salary (FAS) X (2) Years of service X  (3) the multiplier = annual benefit (divided by 12 = monthly benefit)
Veteran teachers are most advantaged in plans that allow unreduced retirement based on years of service, plans that increase their multipliers based on years of service, and plans that change the final average salary calculation based on years of service. Being able to retire based on years of service without consideration of age allows a veteran teacher that started teaching at a younger age to collect more total years of benefits, on average, than a veteran teacher who started later or took time off during her career.”

Not fair!  Why do we agree to a retirement system that punishes us for mobility?  You mean I gotta weigh my family’s needs to move out of state for whatever reason with potential loss in my annual pension amount?  Then I arrive in this new state and get punished even more, being dumped into another defined benefit pension system that may have a “multiplier” that varies (perhaps be lower) from the multiplier from the system I left.  Rise up teachers in DB plans, rise up!  We can agree to a Common Core nationwide, but not a common and transferable DB plan system?  It can’t be done?  Well, considering that every state generates income differently, and each state pays teachers differently based on cost of living, a transferable DB pension for teachers is probably impossible.

What are the alternatives to DB Pension Systems for Teachers?

Alaska is seriously bold.  Even though the state is frontier land, with incredible temperature changes, and long hours of darkness several months a year, the state switched to a Defined Contribution pension system for all public employees, including teachers, starting in 2006.  It was very controversial folks, hampering teacher recruitment immediately.  Just look at this 2009 Juneau Empire.com online news article: State should let workers choose between defined benefit or 401(k )plan.  It’s been relatively quiet in Alaska since this.  I wonder why?  Could it be that any new teacher that entered the teaching profession in 2006, and is still working in Alaska today, is delighted by the returns of a stock market rally now almost a decade old?  But Carlos, let’s wait to make judgement until a major crash.  Like a stock market meltdown won’t impact Defined Benefit plan members indirectly!

Ask yourself this better question.  Why aren’t 41 statewide defined benefit teacher pension plans in the green after a stock market rally that not only made-up for all of its previous crash’s losses, and then some?  Because the fees the pension managers charge the state, and invariably us, add up!  Because they are full of corporate bureaucracy that has everyone getting paid handsomely from the bottom all the way up!

Kansas and Louisiana teachers can opt-into what’s known as "Cash-Balance" pension plans.  These too are controversial.  Basically, anything that is new and innovative and not a traditional DB plan is “controversial.”  It’s hard to let go of a beaten dead horse.  Cash-Balance pension plans are DB plans with DC plan components.  They give members a monthly benefit for life; however, one does not know what it will actually be because the monthly benefit will depend on investment performance and amount of contribution.  These still don’t give members the ability to manage their own holdings.  Like DB plans, Cash-Balance plans are professionally managed.

“Though the median annuitized benefit for a middle-income earner will be around $26,000 per year after 30 years (a replacement rate of around 65 percent based on a final average salary of $40,000), roughly one-fourth will have retirement incomes below $17,000, and one-fourth will have retirement incomes above $40,000.4” From: New Louisiana Retirement Plan is Bad for Workers and Taxpayers

Let’s talk a bit about the previous quote.  The author is highly critical of the Cash-Balance system and cites that a final (Louisiana) average salary of $40k per year will mean only a 65% salary replacement rate after 30 years of service, or $26K per year.  Well…that’s actually good! Look at what it is in New York:

A teacher retiring in New York after a career of between 20 and 35 years can expect an average of 54% Final Average Salary.  What about in the great state of Texas, with another Defined Benefit only pension system for teachers:

“TRS examined the value of its members’ benefits relative to the benefits provided by a variety of peer systems, including local plans and other statewide public employee and teacher systems.  A prototypical TRS career employee (one who retires at age 62 with 32 years of service credit) receives a lifetime benefit that equates to 52% of pre‐retirement income while the average benefit available to the same prototypical employee of the peer plans examined was 82% of pre‐retirement income.”-- Source

What a stinker!  Only 52% of pre-retirement salary replaced after 32 years of service.  Anomalies?  Well, let’s take a look at how CA teachers are doing after their careers in education.

CA Teachers, you stand to have on average a final compensation of $80K and an Unmodified Benefit of $48K after your 25 year career, or a replacement salary rate of 59%.

“Established a supplemental retirement savings account? It’s never too early to start saving for your future. The median CalSTRS retirement benefit replaces about 50 percent of a member’s salary. You’ll need to close any gap between your income and your retirement benefit with savings and investments, such as CalSTRS Pension2.”  Note: I purposely emboldened that sentence so it sticks in your head.

Okay, so here are my odds if I’m a teacher in Louisiana who opts in to the Cash-Balance pension:

25% chance of a replacement salary below of $17K i.e. 17K/40K FAS or 43% rate or lower.
25% chance of replacement salary above $40k (the average FAS) or a rate equal to or greater than 100%!
50% chance of matching the median of $26K of the average final salary of $40K for a 65% rate of salary replacement.
Roll the dices people because you know quite well that I would prefer the Louisiana Cash-Balance odds any day over the knowns of the New York, Texas, and CA DB pension plans.  And if I had a choice, like teachers in 6 states in our union do, I would select a full Defined Contribution pension plan any day of the week and twice on Sunday if I had to.
Having their retirement be in a Defined Benefit pension plan has kept many public employees financially illiterate.  There’s no need to know how to invest in securities when our pension system does it (poorly) for us. Teachers are no exception.  We’re the last to grab the bull by the horns.  The private sector started changing to DC plans years ago, and now after years of initial complaining and struggle, owners of 401ks have begun to embrace individual responsibility for their retirement.  They’ve taken to improving their financial savvy for their own sake, buying low-cost index funds, or turning to low-cost automated 401k service providers such as Blooom.com.  But not educators.  Oh no…we, with our unions will resist to the bitter end, until each state is broke and can pay nobody to retire!
What Can I do?
  1. Subscribe to my blog and get my eBook: Common Core Money: Financial Literacy for Educators & Other Professionals absolutely free.  Start reading!
  2. Don’t expect there to be anything in the DB pension plan of your state for YOU to retire on.  The least you expect of those bureaucrats the better.  Use as much of your salary to fund a Roth IRA and invest within the Roth IRA for the love of God.
  3. Buy my eBook: The Ultimate Teacher's Guide to Supplemental Income and start side-hustling to put even more into the Roth IRA you open.  Don’t waste time searching for things teachers can do to earn supplemental income.  Spend $4.99 and get a resource unlike none out there.
I’m out!