When All You Have Left Is the Cost of Breakfast at McDonald’s

By Dennis Miller

When I was 20 years old, I sat through my first day of a business law course at Northwestern University. The professor began by writing two words on the blackboard (in the prehistoric days of blackboards and chalk): Caveat emptor. He raised his voice and said, “Let the buyer beware!” I’m here to echo his warning, but this time it’s about annuities.


Annuities are at the top of the list of complicated products that often profit insurance companies without adequately compensating the buyer in return. Put plainly, sometimes you don’t get what you thought you paid for.

And, while annuities are often described as a “transfer of risk,” which is basically correct, owning an annuity will not transfer the risk of one of the greatest hazard’s to a retiree’s financial security: inflation. Inflation isn’t the only risk to worry about—lack of liquidity and insurance company default should also top your list of concerns—but it can be the most treacherous for someone with an annuity heavy portfolio.

Will an annuity protect your lifestyle? In the short term, it might. If you believe the Federal Reserve when it says it will keep inflation at 2% or less, perhaps it will for a period of time. Even then, inflation will eat away at the buying power of your annuity payout fairly quickly. You are contractually guaranteed income; however, that does not guarantee your lifestyle.

To see the effect, my analysts and I charted the purchasing power of a single premium immediate lifetime annuity with installment refund, which pays $583.33 per month. We’ve compared several inflation scenarios: the currently tame 2% inflation rate; the long run average of about 3%; and the possibility of things getting considerably worse at 7% inflation. We’re not even talking about hyperinflation—just reasonable estimates.

Even at the low 2% inflation rate, your $583.33 benefit would only have the purchasing power of $392.56 after 20 years. In the 7% inflation scenario, the purchasing power would be down to $150.74. Let’s put this into context.

The average U.S. electricity bill is around $103.67. The average cellphone bill is $111. According to the USDA, an elderly household of two that’s being extremely thrifty could get its monthly grocery bill down to as low as $357.30 per month. In total, that’s $571.97 – leaving just enough for a McDonald’s breakfast.

Right off the bat, that isn’t so bad. The annuity takes care of the cellphones, the electricity, the groceries, and leaves a little extra. However, after 20 years at 2% inflation and a purchasing power of $392.56, the benefit would only be enough to pay for the thrifty grocery budget, leaving only $35.26 left over. Though your annuity benefits are the same, prices have risen, so now you have less purchasing power.

After 20 years of 3% inflation, it gets even worse. With $219.85 in purchasing power, you’ll have to weigh either purchasing 2/3 of your usual groceries against paying the electricity and phones. You won’t be able to do it all. By the third year, you will need to add funds to your annuity payment to cover those expenses.

And under the 7% scenario, you’ll only be able to pay for the electricity bill with less than $50 in purchasing power left over. That’s hardly the lifetime income most annuity buyers had in mind.

Furthermore, consider that our assumptions are a little optimistic. In all likelihood, your electricity and grocery bills will probably rise faster than the rate of inflation. If that’s the case, then you’d be in real trouble.
So, while annuities promise guaranteed income, they certainly do not guarantee what that income will afford you in the future.

Annuity policies can be structured with inflation protection, but those options are expensive in terms of the lower initial payments. With benefits starting so much lower, you would have to live an exceptionally long time to make them work out.

Depending on your circumstances, an annuity might play a useful role in your long-term financial plans. There is much to be said for transferring some risk to a quality insurance company. However, transfering one risk without planning for another could be catastrophic. Even something like a 5% inflation rider might not protect you if higher inflation rates become a reality. If a considerable portion of your portfolio is in annuities, then another portion needs to be balanced to fight inflation, with holdings such as precious metals.

While it’s impossible to make the risk of inflation go away, there are a few simple things you can do to minimize it:

• Never hold a very large portion of your portfolio in annuities. If high inflation picks up you could be entirely cleaned out.
• If you’re holding annuities, make sure that another part of your portfolio is geared to hedge against inflation.

Now, I’m not shouting caveat emptor just for the heck of it. As a retirement advocate and senior editor at Miller’s Money Forever my mandate is transparent financial education for seniors, conservative investors and anyone serious about building a rich retirement. That’s why my team of analysts and I have put together a free, comprehensive special report called Annuities De-Mystified—Three Simple Tools for Choosing the Right Annuity.

Get the full truth on annuities by downloading your complimentary copy of Annuities De-Mystified today.

The article When All You Have Left Is the Cost of Breakfast at McDonald’s was originally published at Millers Money

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Minimum Wage, Maximum Stupidity

By Doug French, Contributing Editor

The minimum wage should be the easiest issue to understand for the economically savvy. If the government arbitrarily sets a floor for wages above that set by the market, jobs will be lost. Even the Congressional Budget Office admits that 500,000 jobs would be lost with a $10.10 federal minimum wage. Who knows how high the real number would be?

Yet here we go again with the “Raise the minimum wage” talk at a time when unemployment is still devastating much of the country. The number of Americans jobless for 27 weeks or more is still 3.37 million. And while that’s only half the 6.8 million that were long term unemployed in 2010, most of the other half didn’t find work. Four fifths of them just gave up.

So, good economics and better sense would say, “make employment cheaper.” More of anything is demanded if the price goes down. That would mean lowering the minimum wage and undoing a number of cumbersome employment regulations that drive up the cost of jobs.

But then as H.L. Mencken reminded us years ago, “Nobody ever went broke underestimating the intelligence of the American public.” Which means the illogical case made by Republican multimillionaire businessman Ron Unz is being taken seriously.

We Don’t Want No Stinkin’ Entry Level Jobs

 

Unz says the minimum should be $12 and recognizes that 90% of the resistance is that it would kill jobs. So what’s his answer to that silver bullet to his argument? America doesn’t want those low paying jobs anyway. In his words, “Critics of a rise in the minimum wage argue that jobs would be destroyed, and in some cases they are probably correct. But many of those threatened jobs are exactly the ones that should have no place in an affluent, developed society like the United States, which should not attempt to compete with Mexico or India in low wage industries.”

He doesn’t think much of fast food jobs either. But he knows that employment can’t be shipped overseas, so Mr. Unz’s plan for those jobs is as follows:

So long as federal law requires all competing businesses to raise wages in unison, much of this cost could be covered by a small one time rise in prices. Since the working poor would see their annual incomes rise by 30 or 40 percent, they could easily afford to pay an extra dime for a McDonald’s hamburger, while such higher prices would be completely negligible to America’s more affluent elements.

The Number of Jobs Isn’t Fixed

 

He believes that if all jobs pay well enough, legal applicants will apply and take all the jobs. This is where Unz crosses paths with David Brat, the economics professor who recently unseated House Majority Leader Eric Cantor.

Brat claims to be a free-market sympathizer and says plenty of good things. However, in his stump speeches and interviews, Brat says early and often, “An open border is both a national security threat and an economic threat that our country cannot ignore. … Adding millions of workers to the labor market will force wages to fall and jobs to be lost.”

That would make sense if there were a fixed number of jobs, but that’s not the case. An economics professor should know that humans have unlimited wants and limited means, which, as Nicholas Freiling explains in The Freeman, “renders the amount of needed labor virtually endless—constrained only by the economy’s productive capacity (which, coincidentally, only grows as the supply of labor increases).”

An influx of illegal immigrants may or may not drive down wages, but even if it does, that’s a good thing. Low wages allow employers to invest in other things. More efficient production lowers costs for everyone, producers and consumers, allowing for capital creation. In the long run, it is capital investment that creates jobs.

Employers Bid for Labor Like Anything Else

 

Mr. Unz claims that low-wage employers are being subsidized by the welfare state. “It’s a classic case of where businesses manage to privatize the benefits of their workers—they get the work—and socialize the costs. They’ve shifted the costs over to the taxpayer and the government,” writes Unz.

It makes one wonder how the businessman made millions in the first place. Wage rates aren’t determined by what the employee’s expenses are. “Labor is a scarce factor of production,” wrote economist Ludwig von Mises. “As such it is sold and bought on the market. The price paid for labor is included in the price allowed for the product or the services if the performer of the work is the seller of the product or the services.”

Mises explained that a general rate of wages does not exist. “Labor is very different in quality,” Mises wrote, “and each kind of labor renders specific services. each is appraised as a complementary factor for turning out definite consumers’ goods and services.”

Not every job contributes $12 an hour in production benefits toward a finished good or service. And many unskilled laborers can’t generate $12 an hour worth of output. The Congress that created the minimum wage knew this and carved out the 14(c) permit provision in the Fair Labor Standards Act of 1938, allowing an exemption from minimum wage requirements for businesses hiring the handicapped.

That Congress included in the act this language:

The Secretary, to the extent necessary to prevent curtailment of opportunities for employment, shall by regulation or order provide for the employment, under special certificates, of individuals ... whose earning or productive capacity is impaired by age, physical or mental deficiency, or injury, at wages which are lower than the minimum wage.

Entrepreneurs must purchase all factors of production at the lowest prices possible. No offense to labor—that’s what customers demand. All cuts in wages pass through to customers. If a business pays more than the market wage rate, the business “would be soon removed from his entrepreneurial position.” Pay less than the market, and employees leave to work somewhere else.

Who Picks Up The Tab?

 

First, Unz says, “American businesses can certainly afford to provide better pay given that corporate profits have reached an all-time high while wages have fallen to their lowest share of national GDP in history.” So, instead of taxpayers supporting the poor, Unz wants business to pay. No, wait: later he writes that consumers will support the poor by paying higher prices.

“McDonald’s and fast food places would probably have to raise their prices by 8 or 9 percent, something like that. Agricultural products that are American-grown would go up by less than 2 percent on the grocery shelves. And those sorts of price increases are so small that they would be almost unnoticed in most cases by the consumer.” Walmart would cover a $12 minimum wage with a one time price increase of 1.1%, he says, with the average Walmart shopper paying just an extra $12.50 a year. So it’s consumers—who are also taxpayers—who get to be their brother’s keeper either which way with Unz’s plan.

Walmart Must Be Offering Enough

 

Fortune magazine writer Stephen Gandel appeared on Morning Joe this week, making the case that Walmart should give its employees a 50% raise (his article in Fortune on the subject appeared last November). According to him, the company is misallocating capital by not paying higher wages. He says investors are not giving the company credit for the lower pay in the stock price, so they should just do the right thing and pay their employees more.

But Walmart does pay more when it has to compete for employees. In oil rich Williston, North Dakota, the retail giant is offering to pay entry level workers as much as $17.40 per hour to attract employees.
Walmart isn’t alone. McDonald’s is paying $300 signing bonuses to attract workers. The night shift at gas stations in Williston pays $14 an hour.

By the way, whatever Walmart is paying, it must be enough, because it has plenty of applicants to choose from. In 2005, 11,000 people in the Bay Area applied for 400 positions at a new Oakland store. Three years later near Chicago, 25,000 people applied for 325 positions at a new store.

Last year a new Walmart opened in the DC area. Again, the response was overwhelming. Debbie Thomas told the Washington Post, “It’s hard to live in this city on $7.45 or $8.25 an hour. I’ve lived here all my life, and I want to stay here. In the end, I’m just glad Walmart’s here. I might get a job.”

Throughout history, people have had to relocate to find work. Today is no different.

In the long run, as the minimum wage increases, capital will be invested to replace labor. We’ve seen it for years. Machines don’t call in sick, sue for harassment, require health insurance, or show up late. Now patrons pour their own drinks. Shoppers scan their own groceries and pump their own gas. Soon we’ll be ordering from electronic tablets at our tables in sit down restaurants to cut down on wait staff, and the cooks will be replaced by automated burger makers.

Unz may well believe what he proposes would be doing good; however, it means kids and the unskilled go unemployed and in the end, are unemployable.

You read an excerpt from the Daily Dispatch, Casey Research’s wildly popular e-letter. Stay in the loop on big-picture trends, precious metals, energy, technology, and more. Sign up Here to receive the Daily Dispatch free of charge in your inbox.

The article Minimum Wage, Maximum Stupidity was originally published at Casey Research

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What You and Monica Lewinsky Might Have in Common

By Dennis Miller

Collateral damage can assume many forms—and though some may be more newsworthy than others, the latter are no less real, nor any less frightening.


On Tuesday, controversial radio talk show host Rush Limbaugh called Monica Lewinsky “collateral damage in Hillary Clinton’s war on women,” saying that President Bill Clinton and his wife destroyed the former White House intern “after he got his jollies, after he got his consensual whatevers.”

Last month, Jeremy Grantham, cofounder of GMO, a Boston based asset management firm that oversees $112 billion in client funds, dubbed savers “collateral damage” of quantitative easing and the Federal Reserve’s continued commitment to low interest rates.

Would it be worse to be known as the “president’s mistress” for more than a decade and, as Lewinsky claims, to be unable to find a normal job? Maybe. But it’s no laughing matter either to find yourself penniless in your “golden years.”

Signs of Monetary Collateral Damage Among Seniors

 

The 55-plus crowd accounts for 22% of all bankruptcy filings in the U.S.—up 12% from just 13 years ago—and seniors age 65 and up are the fastest growing population segment seeking bankruptcy protection. Given the wounds bankruptcy inflicts on your credit, reputation, and pride, it’s safe to assume those filing have exhausted all feasible alternatives.

But even seniors in less dire straits are finding it difficult to navigate low interest rate waters. Thirty seven percent of 65 to 74 year olds still had a mortgage or home equity line of credit in 2010, up from 21% in 1989. For those 75 and older, that number jumped from 2% to 21% during the same timeframe—another mark of a debt filled retirement becoming the norm. With an average balance of $9,300 as of 2012, the 65 plus cohort is also carrying more credit card debt than any other age group.

While climbing out of a $9,300 hole isn’t impossible, the national average credit card APR of 15% sure makes it difficult. For those with bad credit, that rate jumps to 22.73%—not quite the same as debtor’s prison, but close.

None of this points to an aging population adjusting its money habits to thrive under the Fed’s low interest rate regime.

Minimize Your Part of Comparative Negligence

 

A quick side note on tort law. Most states have some breed of the comparative negligence rule on the books. This means a jury can reduce the monetary award it awards a tort plaintiff by the percentage of the plaintiff’s fault. Bob’s Pontiac hits Mildred’s Honda, causing Mildred to break her leg. Mildred sues Bob and the jury awards her $100,000, but also finds she was 7% at fault for the accident. Mildred walks with $93,000. (Actually, Mildred walks with $62,000 and her lawyer with $31,000, but I digress.)

Comparative-negligence rules exist because when a bad thing happens, the injured party may be partly responsible. For someone planning for retirement, the bad thing at issue is too much debt and too little savings. Through low interest rates, the Federal Reserve is responsible for X% of the problem.

Though ex-Fed chief Bernanke doesn’t seem to see it that way—in a dinner conversation with hedge fund manager David Einhorn, he asserted that raising interest rates to benefit savers wouldn’t be the right move for the economy because it would require borrowers to pay more for capital. Well, there you have it. And there’s nothing you can do about that X%. You can, however, reduce or eliminate your contribution.
In other words, you don’t have to be collateral damage; you can affect how your life plays out.

Money Lessons from Zen Buddhism

 

This might sound like a “duh” statement, but it bears repeating from time to time. Inheritance windfall from that great-aunt in Des Moines you’d forgotten about aside, there are two ways to eliminate debt and retire well: spend less or make more.

Rising healthcare costs, emergency car repairs, and the like are real impediments to reducing your bills. Costs rooted in attempts to “keep up with the Joneses,” however, are avoidable. Those attempts are also futile. A new, even richer Mr. Jones is always around the bend.

Instead of overspending for show, make like a Buddhist and let go of your attachment to things and your ego about owning them. Spring for that Zen rock garden if you must and start raking.

One of the wealthier men I know drove around for years with a gardening glove as a makeshift cover for his Peugeot’s worn out, stick shift knob. It looked shabby, but this man wasn’t a car guy and had no need to impress. As far as I know, the gardening glove worked just fine until he finally donated the car to charity and happily took his tax deduction. Maintaining your car isn’t overspending, but you catch my drift. Dropping efforts to show off can benefit us all.

That said, keeping up isn’t always about show. You may feel pressure to overspend just to be able to enjoy time with your friends and family. Maybe you can no longer afford the annual Vail ski week with your in laws or the flight to Hawaii for your nephew’s bar mitzvah. Maybe your friends are hosting caviar dinners, but you’re now on a McDonald’s budget and can no longer participate.

Spending less in order to stay within your budget can mean missing out on experiences, not just stuff. If you’re in this camp, there’s no reason to hang your head. As I mentioned above, you can spend less or you can make more. The latter is far more fun.

An Investment Strategy to Prevent You from Becoming Collateral Damage

 

While it’s tempting to start speculating with your retirement money, resist. If you have non-retirement dollars to play with and the constitution to handle it, carefully curated speculative investments can give you a welcome boost. However, if all of your savings is allocated for retirement, just don’t do it.

Unless you’re still working, how, then, can you make more money in a low-interest-rate world? At present, my team of analysts and I recommend investing your retirement dollars via the 50-20-30 approach:

• 50%: Sector diversified equities providing growth and income and a high margin of safety.
• 20%: Investments made for higher yield coupled with appropriate stop losses.
• 30%: Conservative, stable income vehicles.

No single investment should make up more than 5% of your retirement portfolio.

Whether you’re designing your retirement blueprint from scratch or want to apply our 50-20-30 strategy to your existing plan, the Miller’s Money team can help. Each Thursday enjoy exclusive updates on unique investing and retirement topics by signing up for my free weekly newsletter.

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The article Collateral Damage: What You and Monica Lewinsky Have in Common was originally published at Millers Money

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