Investing Curiouscatblog

Tag: Personal finance

Capital One Bank Agrees to Refund $150 Million to 2 Million Customers and Pay $60 Million in Fines
Sadly, Congress refused to allow the person that should have headed to the Consumer Financial Protection Bureau (CFPB) to do so: Elizabeth Warren. If we are lucky she will be joining congress as the new senator from Massachusetts to reduce the amount of big donnor favoritism that prevails there now. That attitude will still prevail, she will just be one voice standing against the many bought and paid for politicians we keep sending back to Washington (there are a couple now, but they are vastly outnumbered).

Even with congressional attempts to stop the CFPB from being able to enforce laws against their big donnors, the CFPB has announced their first public enforcement action: an order requiring Capital One Bank to refund approximately $140 million to two million customers and pay an additional $25 million penalty. This is a good, small step that is helping creating a rule of law instead of a rule of those capturing regulators and giving lots of cash to politicians. But it is a very small step. The system is still mainly about captured regulators and giving lots of cash to politicians.

This action results from a CFPB examination that identified deceptive marketing tactics used by Capital One’s vendors to pressure or mislead consumers into paying for add-on products such as payment protection and credit monitoring when they activated their credit cards.

“Today’s action puts $140 million back in the pockets of two million Capital One customers who were pressured or misled into buying credit card products they didn’t understand, didn’t want, or in some cases, couldn’t even use,” said CFPB Director Richard Cordray. “We are putting companies on notice that these deceptive practices are against the law and will not be tolerated.”

Consumers with low credit scores or low credit limits were offered these products by Capital One’s call-center vendors when they called to have their new credit cards activated. As part of the high-pressure tactics Capital One representatives used to sell these add-on products, consumers were:
- Misled about the benefits of the products: Consumers were sometimes led to believe that the product would improve their credit scores and help them increase the credit limit on their Capital One credit card.
- Deceived about the nature of the products: Consumers were not always told that buying the products was optional. In other cases, consumers were wrongly told they were required to purchase the product in order to receive full information about it, but that they could cancel the product if they were not satisfied. Many of these consumers later had difficulty canceling when they called to do so.
- Misinformed about cost of the products: Consumers were sometimes led to believe that they would be enrolling in a free product rather than making a purchase.
- Enrolled without their consent: Some call center vendors processed the add-on product purchases without the consumer’s consent. Consumers were then automatically billed for the product and often had trouble cancelling the product when they called to do so.
One of the less obvious costs of a poor credit rating these days is large companies see you as someone to take advantage of. They often target those with poor credit for extremely lousy deals that they wouldn’t try to sell to those with good credit. The presumption, I would imagine, is someone able to maintain a good credit rating is much less likely fall for our lousy deals.

Related: Protect Yourself from Credit Card Fraud (facilitated by financial institutions) – Anti-Market Policies from Our Talking Head and Political Class – Banks Hope they Paid Politicians Enough to Protect Billions in Excessive Fees

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July 18, 2012
USA Social Security Disability Insurance
Studies show that a 20 year old has a 30% chance of becoming disabled before reaching retirement age. In the USA, the Social Security Administration provides disability benefits for total disabilities. You still want to get your own long term disability insurance (this can cover for partial disabilities), but here is some information on the SSA disability coverage.

To qualify for Social Security disability benefits, you must first have worked in jobs covered by Social Security. Then you must have a medical condition that meets Social Security’s definition of disability. In general, they pay monthly cash benefits to people who are unable to work for a year or more because of a disability.

Benefits usually continue until you are able to work again on a regular basis. There are also a number of special rules, called “work incentives,” that provide continued benefits and health care coverage to help you make the transition back to work.

If you are receiving Social Security disability benefits when you reach full retirement age, your disability benefits automatically convert to retirement benefits, but the amount remains the same.

Generally, you need 40 credits, 20 of which were earned in the last 10 years ending with the year you become disabled. You earn essentially 4 credit each year you work. There are reduced requirements if you are young and haven’t had a chance to earn 10 years worth of credit. So essentially you have to have worked 10 years (and 5 years in the last 10 years) paying social security tax.

The definition of disability under Social Security is different than other programs. Social Security pays only for total disability. No benefits are payable for partial disability or for short-term disability.

“Disability” under Social Security is based on your inability to work. The Social Security Administration consider you disabled under Social Security rules if:
- You cannot do work that you did before;
- We decide that you cannot adjust to other work because of your medical condition(s); and
- Your disability has lasted or is expected to last for at least one year or to result in death.
This is a strict definition of disability. Social Security program rules assume that working families have access to other resources to provide support during periods of short-term disabilities, including workers’ compensation, insurance, savings and investments.

The benefit amount is calculated based on your average annual earnings and is subject to a maximum of $2,346/month (in 2011). The average benefit payment, last month, was $1,111. Minor, dependent, children are also eligible for a small monthly payment.

In June 2012, 8.7 million people received disability benefits. Theoretically the number of recipients shouldn’t increase just because there is a recession, but they generally do increase in recessions.

There is no means testing on receiving the disability payment from the SSA. It is based on your income and disability. There are other Social Security programs (SSI, Medicare) where you must show you have very few assets before you are eligible for benefits.

Related: SSA Disability website – Personal Finance Basics: Long Term Disability Insurance – Disability Insurance is Wise (in addition to SSA disability benefits)
July 3, 2012
Curious Cat Investing, Economics and Personal Finance Carnival #34
Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival. This carnival is different than many blog carnivals: I select posts on those topics from what I read (instead of posting those that submit to the carnival as many carnivals do). If you would like to host the carnival add a comment below.

Mushroom, Rocky Gap State Park, Maryland, USA by John Hunter
- The U.S. Content of “Made in China” by Galina Hale and Bart Hobijn (SF Federal Reserve) – “Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label.”
- 7 equations to build a secure retirement by Robert Powell – the equations are not complex but might scare those that don’t like math. Even without really understanding the equations the text is useful.
- Stock Market Capitalization by Country from 1990 to 2010 by John Hunter – The USA was 32.5% of the total stock market capitalization of the global stock markets in 1990. The USA grew to 46.9% as the tech, finance and housing bubbles were all underway (also Japan was stagnating and the Chinese stock market hadn’t started booming to a significant extent) in 2000. By 2010 the USA was back down to 31.4%.
- 5 stages of retirement crisis–and what to do about yours by Jim Jubak – “Certainly you weren’t planning for three-month Treasury bills to be paying you 0.08% or 10-year Treasuries 1.61%. And you’re worried by projections that say the real return on stocks going forward is going to be more like 5% (if we’re lucky) than the 7.5% real return that has been the assumption of choice recently. (That assumption replaces the 10% assumption that was the common wisdom in the years before the 2000 bear market.)
July 1, 2012
Looking for Yields in Stocks and Real Estate

The extremely low interest rate environment created by the too big to fail financial institution bailouts has severely harmed savers. Most severely harmed those in retirement that didn’t count on irresponsibly regulators and bankers creating a situation where to avoid a depression they had to punish savers to favor large banks (and others).

For some savings that might normally go into bonds (if the bond market were not so manipulated by the central banks to punish savers) dividend stocks are a good option. The stocks have risks but frankly with extremely strong companies with huge amounts of positive cash flow the future looks brighter than it does for those debt ridden governments.

Apple (AAPL) announced they will start paying a $2.65 quarterly dividend which works out to $10.60 annually. At the current stock price, this is a yield of nearly 1.9%. That is hardly going to make you rich but it is extremely attractive when you can get a much higher yield than savings account, treasury bills… and have the potential gains in stock price. Yes you do also have risk of a declining stock price, but as I have said I think Apple’s stock is an extremely good investment now.

Other good options include: Intel (INTL) which offers a 3.3% yield and Abbott (ABT) which offers a 3.4% yield. I own those 3 and also ONEOK Partners (OKS) which sports a 4.8% yield (but is a bit tricker situation that is suitable for a lower investment I think).

Even a stock like Toyota (TM), which I like as an investment, while it offers only a 1.8% yield that is much higher than you get for savings or treasury bills. So even stocks that are not about yield in the normal market conditions offer an attractive yield today.

I am a bit nervous about health care dividend investments but Pfizer (PFE) is worth considering at 4.1% (as are JNJ and MRK). I really like ABT (they have raised dividends for over 40 straight years, I think), sadly they are splitting into 2 companies. Even so I am planning on staying invested but it is avery big change and would make me worried about having too much committed to ABT.

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June 5, 2012
Curious Cat Investing, Economics and Personal Finance Carnival #32
Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival. This carnival is different than other carnivals: I select posts, and articles, from what I read (instead of posting those that submit to the carnival as many carnivals do). If you would like to host the carnival add a comment below.
- How Much Should You Contribute To Your 401k? by David Weliver – “If your employer matches 401k funds, contribute enough to get the full match. Do this first. Even if you’re in debt. Even if you don’t put in a penny more. Next, if you can contribute to a Roth IRA, work on contributing the full $5,000 a year to that account before you contribute elsewhere.”
- USA’s creaking infrastructure holds back economy by Paul Davidson – “The U.S. is spending about half of the $2.2 trillion that it should over a five-year period to repair and expand overburdened infrastructure, says Andrew Herrmann, president of the American Society of Civil Engineers.
  Inland waterways, for example, carry coal to power plants, iron ore to steel mills and grain to export terminals. But inadequate investment led to nearly 80,000 hours of lock outages in fiscal 2010, four times more than in fiscal 2000. Most of the nation’s 200 or so locks are past their 50-year design life.”
- Earth to Dimon: Banks Don’t Have a Right to Profit by Yves Smith – “banks that exist only by virtue of state-granted charters — and more recently, huge transfers from the public — have persuaded public officials and regulators that they have a God-granted right not just to high levels of profit but also high levels of employee and executive compensation.”
- Road Map for Saving Health Care with Fareed Zakaria – “our [USA] out-of-control health care costs continue to climb. No other nation spends more than 12 percent of its economy on health care. America spends 17 percent. What’s more, we don’t really benefit from the huge price tag. Our healthy life expectancy, the standard measurement, ranks only 29th in the world, behind Slovenia… All of them, including free market havens like Taiwan, have found that they need to use an insurance or government sponsored model. And all of them provide universal health care at much, much lower costs than we do.”
June 1, 2012
Curious Cat Investing, Economics and Personal Finance Carnival #31
Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival. The carnival is published twice each month with links to new, related, interesting content online.
- Long Term Care Insurance – Financially Wise but Current Options are Less Than Ideal by John Hunter – “The questions about long term care insurance are not about the sensibility of the coverage abstractly, it is very wise. But the complexities, today, in the real world make the question of buying more a guess about what coverage you will actually receive if you need it.”
- Figuring Out The Real Price Of College by Jacob Goldstein – “For the current school year, the average sticker price for tuition and fees at a private, nonprofit college is $28,500, according to a report from the College Board.
  The average price students actually pay is less than half that — $12,970. That’s almost identical to the $12,650 that students paid, on average, in the 2001-2002 school year. (These are inflation-adjusted dollars.) Of course, this is just the average. What students actually pay varies wildly.”
- The Philippines Astounds the Skeptics by Bruce Einhorn – “Much of the credit for the good feeling should go to Aquino and his efforts to tackle corruption and improve the country’s infrastructure… As wages rise in China, the Philippines has a chance to attract investment from companies looking for low-wage alternatives, but the country’s notorious culture of bribery remains a major obstacle to growth”
- Periodic Table Of Dividend Champions by David Van Knapp – the post looks at the 105 stocks raising dividends 25 straight years and looking at current yield and dividend growth rate highlights 34 for further study by an investor “Similarly, some investors may be interested in stocks that have a low current yield coupled with a high rate of dividend growth.”
May 15, 2012
Long Term Care Insurance – Financially Wise but Current Options are Less Than Ideal

The expenses for long term care is exactly the type of financial risk insurance is best for. The problem is the whole area is so uncertain that what you buy may not provide the coverage you planned on (the health care system is so broken that it is not certain insurance will cover the costs, companies can go bankrupt, change coverage rules drastically…).

The questions about long term care insurance are not about the sensibility of the coverage abstractly, it is very wise. But the complexities, today, in the real world make the question of buying more a guess about what coverage you will actually receive if you need it.

Many of my posts here are focused on the USA but applicable elsewhere, or just applicable wherever you are. This post is mainly focused on the USA, long term care insurance options in other locations will be very different and have different considerations (in many countries it may not even apply, mainly due to a less broken health care system than the USA has).

Long-Term-Care Insurance: Who Needs It? by Marilyn Geewax

“the reality is that each year, an estimated 11 million U.S. adults need some type of long-term care.

Such care can be crushingly expensive: Just one hour of home-health-aide care costs roughly $20, while the average private nursing home room costs $87,000 a year. Neither routine employer-based medical insurance nor Medicare will pay for extended periods of custodial care.”
…
Also, some people pay their premiums for years, and then get hit with rate hikes they can’t afford.

Insurance has a transaction cost. Paying that transaction cost for expenses you can afford is just waste. You should pay the cost directly. This is why higher deductibles are most often wise. It doesn’t make sense to cover pay insurance costs every year to pay for a $500 risk you can afford to absorb yourself.

But huge expenses are exactly what you want coverage for. Long term care expenses are huge. However, long term care insurance is still in flux, which isn’t good for something you want to provide long term protection. A huge risk is paying premiums for years, and then getting hit with rate hikes that may well be designed primarily just to get people to drop coverage (or be so expensive that those that stay pay enough that the insurance company makes money).

Ideally such insurance would be set so maybe the cost rose at some preset limit when you signed up. The problem is the USA health care system is so broken this won’t work. No one can predict how much more excessively expensive long term coverage will be in 30 years so the insurance companies can’t predict. It leaves consumers in a risky place.

Insurance is regulated by the states. There are huge differences in which states do a good job regulating long term care insurance and those that don’t. The majority don’t.

This is one of the more important areas of personal finance. Unfortunately there is no easy answer. If the system were stable, reliable and predictable, long term care insurance would be a definite requirement for a sound financial plan. Today it is wise to insure yourself from those risks, the problem is determining whether any of the options available are worth it. The risk of needing this insurance is high: it is both likely and costly. So getting coverage is definitely wise if you can find some you think is reliable over the long term. Because of the uncertain nature of the options, this will require much more effort on your part than many personal finance actions (I included several links below to help your research).

Also look at how long the coverage is for. This is another limitation insurance companies have put in place that makes it much less worthwhile.

Related: Personal Finance Basics: Long-term Care Insurance – National Clearinghouse for Long-Term Care Information – AARP advice – Disability Insurance is Very Important – How to Protect Your Financial Health

May 14, 2012
Retirement Planning – Looking at Assets

The basics of retirement planning are not tricky. Save 10-15% of your income for about 40 years working career (likely over 15%, if you don’t have some pension or social security – with some pension around 10+% may be enough depending on lots of factors). That should get you in the ballpark of what you need to retire.

Of course the details are much much more complicated. But without understanding any of the details you can do what is the minimum you need to do – save 10% for retirement of all your income. See my retirement investing related posts for more details. Only if you actually understand all the details and have a good explanation for exactly why your financial situation allows less than 10% of income to be saved for retirement every year after age 25 should feel comfortable doing so.

There is value in the simple rules, when you know they are vast oversimplifications. I am amazed how many professionals don’t understand how oversimplified the rules of thumb are.

Here is one thing I see ignored nearly universally. I am sure some professions don’t but most do. If you have retirement assest such as a pension or social security (something that functions as an annuity, or an actually annuity) that is often a hugely important part of your retirement portfolio. Yet many don’t consider this when setting asset allocations in retirement. That is a mistake, in my opinion.

A reliable annuity is most like a bond (for asset allocation purposes). Lets look at an example for if you have $1,500 a month from a pension or social security and $500,000 in other financial assets. $1,500 * 12 gives $18,000 in annual income.

To get $18,000 in income from an bond/CD… yielding 3% you need $600,000. That means, at 3%, $600,000 yields $18,000 a year.

Ignoring this financial asset worth the equivalent of $600,000 when considering how to invest you $500,000 is a big mistake. Granted, I believe the advice is often too biased toward bonds in the first place (so reducing that allocation sounds good to me). To me it doesn’t make sense to invest that $500,000 the same way as someone else that didn’t have that $18,000 annuity is a mistake.

I also don’t think it makes sense to just say well I have $1,100,000 and I want to be %50 in bonds and 50% in stocks so I have “$600,000 in bonds now” (not really after all…) so the $500,000 should all be in stocks. Ignoring the annuity value is a mistake but I don’t think it is as simple as just treating it as though it were the equivalent amount actually invested.

Related: Immediate Annuities – Managing Retirement Investment Risks – How to Protect Your Financial Health – Many Retirees Face Prospect of Outliving Savings

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April 23, 2012
Curious Cat Investing, Economics and Personal Finance Carnival #29
Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival. The carnival is published twice each month with links to new, related, interesting content online.
- For Capitalism to Survive, Crime Must Not Pay by Bruce Judson – “Justice must be blind so that both parties — whether weak or powerful — can assume that an agreement between them will be equally enforced by the courts.
  There is a second, perhaps even more fundamental, reason that equal justice is essential for capitalism to work. When unequal justice prevails, the party that does not need to follow the law has a distinct competitive advantage. A corporation that knowingly breaks the law will find ways to profit through illegal means that are not available to competitors. As a consequence, the competitive playing field is biased toward the company that does not need to follow the rules.” (the crony capitalism that has grown in the last few decades in the USA is poisoning the country with a failure to justly prosecute those that break laws if they are rich and connected to the other powerful cronies. This is a serious problem. – John).
- Don’t Expect to Spend Over 4% of Your Retirement Investment Assets Annually by John Hunter – “This is likely one of the top 5 most important things to know about saving for retirement (and just 10% of the population got the answer right). You need to know that you can safely spend 5%, or likely less, of your investment assets safely in retirement (without dramatically eating into your principle.”
- What America Pays In Taxes – In 2011 the USA government collected $1,100 billion in personal income taxes, $741 billion in payroll taxes (social security and medicare) [this should be a hint that look only at income taxes paid it might be very misleading – John], $200 billion in corporate taxes, $10 billion in estate and gifts taxes and $268 billion in other taxes (customs duties, excise taxes on products such as gasoline…).
- Value Investing is Not Necessarily Buy and Hold Investing by Shailesh Kumar – “Value investors choose to buy a stock when it is cheaper than the intrinsic value of the stock and sell it when it becomes more expensive.”
April 15, 2012
Investing in the Poorest of the Poor

I have donated more to Tricke Up than any other charity for about 20 years now. There is a great deal of hardship in the world. It can seem like what you do doesn’t make a big dent in the hardship. But effective help makes a huge difference to those involved.

My personality is to think systemically. To help put a band aid on the current visible issue just doesn’t excite me. Lots of people are most excited to help whoever happens to be in their view right now. I care much more about creating systems that will produce benefits over and over into the future. This view is very helpful for an investor.

Trickle Up invests in helping people create better lives for themselves. It provides some assistance and “teaches people to fish” rather than just giving them some fish to help them today.

The stories in this video show examples of the largest potential for entrepreneurship. While creating a few huge visible successes (like Google, Apple…) is exciting the benefits of hundreds of millions of people having small financial success (compared to others) but hugely personally transforming success is more important. Capitalism is visible in these successes. What people often think of as capitalism (Wall Street) has much more resonance with royalty based economic systems than free market (free of market dominating anti-competitive and anti-market behavior) capitalism.

Related: Kiva Loans Give Entrepreneurs a Chance to Succeed – Micro-credit Research – Using Capitalism in Mali to Create Better Lives

April 11, 2012