Getting ready for retirement is a big deal. Depending on your retirement goals, you may have some ideas of what you would like to do as far as retirement is concerned. Some people plan to travel more. Others plan to get a hobby. Still others just want more time to spend with family members. No matter your goals, however, downsizing can really help you meet your retirement goals. This is because you can enjoy more flexibility and freedom, not to mention you can have more cash on hand, when you downsize your house as part of your retirement plan.
Saving money on property tax payments because of your smaller house is just one of the reasons to downsize. Another reason is lower utilities. A smaller, cozier house costs less to heat and power. And many people find that it is just too difficult to keep up with all of the things a larger house needs. A smaller house is easier to care for. Many retirees find that when they sell their larger house, it brings a great deal more than they originally financed (and many of them already have the mortgages paid off by the time retirement rolls around). Luckily, with the capital gains laws, you can enjoy an exemption for up to $250,000 if you happen to be single or $500,000 if you are married. That means that most of the money you make from the sale of your old home goes right into your pocket.
Another advantage is the fact that downsizing your home forces you to go through your amassed possessions and figure out what to keep. The most cherished heirlooms can be kept or passed on to children and grandchildren. Everything else can go to charity (for a nice tax deduction) or to EBay (to make a little extra cash). Not only will your new home be cleaner, but you will have fewer things to worry about moving. If you plan to travel, having fewer belongings affords you that much more freedom.
If a great deal of travel is in your retirement plan, you might be able to sell your home altogether — and avoid a new one. My grandparents took this tack. They pay for two trailer spaces, one in Arizona and one in Idaho, and have small, tidy, mobile homes (the manufactured variety that look like showroom houses) on each. This works well for them. They haul a camp trailer behind their truck, and they can sleep wherever they want between their two “homes,” or go where they feel like. They got rid of nearly all of their belongings so as to more fully enjoy the true feeling of freedom in retirement.
When it comes to retirement, sometimes less really is more
With December just around the corner, the malls are filling with holiday shoppers, the supermarkets are crowded with people getting ready to bake their favorite seasonal treats, and many are preparing for the cold, snowy days. However, the last thing from most people’s mind is getting their retirement accounts in order for the end of the year. While the holidays are approaching, and many of our days are busy, there is little time for thinking about our future retirement. Your retirement should be a time to enjoy and that may mean taking a little extra time now to speak with a tax advisor about what retirement options you should take advantage of. Doing this now may mean more income for you later in life. Here are some things to keep in mind when speaking with a tax professional.
401K contributions expire December 31st - While account holders may contribute to their IRAs up until April 15thof the following year, all 401K contributions must be made by December 31st of the current tax year.
Traditional vs Roth – One thing to take into consideration when deciding whether to contribute into a Roth IRA or a Traditional IRA is how much retirement income you will have from other sources besides your IRA accounts. Traditional IRA’s can be a great tax break now, but can put you in a higher tax bracket when you have to start taking distributions from it. If this situation is a concern to you, you may want to think about putting your money into a Roth IRA. While there is no tax deduction for this now, you do not have to claim your distributions as income because you have already payed taxes on this money.
Roth Conversion – In 2010 the income restrictions that were once set for contributing to a Roth IRA have been removed. It is beneficial to some to take advantage of this by converting Traditional IRA funds into a Roth IRA. With former President Bush’s tax cuts expiring at the end of 2010, something to keep in mind is whether you would rather pay all the taxes now at a lower rate or wait for a higher tax rate at retirement age. Another reason to convert now is because the current tax code allows you to spread the taxes owed from these funds over a two year period if the Roth conversion takes place in 2010.
Maximize your contributions – Take advantage of catch-up contributions. For 2010, the IRA contribution limit is $5000.00. However, if you are 50 or older, you are allowed to contribute $6000.00.
For those of you who have already retired and have reached the age of 701/2, don’t forget to take your Required Minimum Distribution (RMD) for 2010. RMD’s were waived for 2009, but are required for 2010. Most financial institutions send year end statements telling you how much you are required to take.
Speak to a tax professional today. Whatever your situation, it is never too early to get started on retirement planning.
A Sample Financial Planning Notebook and Diary
I Goals:
Short-term Goals (1 year or less)
1) To make it through the school year with a minimal amount of loans.
2) Minimize excessive spending.
3) Finance a car or truck after researching.
Medium-term Goals (2-10 years)
1) Pay off college debt.
2) Save for a down payment on a house.
3) Start solid retirement and college funds.
Long-term Goals (10-80 years)
1) Completely purchase a home.
2) To live modestly and comfortably. I do not need to own the fastest cars, but I do not want to have any serious financial burdens.
3) To retire happily.
Are your goals detailed? Specific? Complete?
My goals are somewhat vague because there is a lot of grey area in my financial status. Right now I need to manage my debts to the best of my ability, and make sure to finish college. Currently I am changing my status from dependent to independent, so my financial aide from Texas Tech should improve immensely for the spring semester.
II Personal Financial Statements and Budget
Develop and provide explanations on, your:
Balance Sheets
Inc/Exp Statements (track for 2 months or more).
Need more time to accurately prepare balance sheet, inc/exp statements, and calculate my ratios.
Financial Ratios? (solvency, liquidity, savings).
Solvency- Net Worth/Total Assets
Liquidity- Current Assets/Current Liabilities
Savings- Cash Surplus/Net Income
What can you do to improve these in short/long term?
Short term: I would like to find a good paying job in the summertime that could really help with expenses.
Long term: Make sure to pay off college loans before making other large purchases.
Create a budget based on your inc/exp statement:
Random Spending
$395
Apartment Rent
$350
Food and Groceries
$50
Cellular Phone Plan
$40
Gas Money for Friends
$300
TOTAL
$1135
Forecast, Actual, and Differences with explanations.
My actual is always more expensive than my forecast. I need to allocate more money for random purchases/emergencies. Often I do not take into consideration that I will need to buy an ink cartridge soon, buy new light bulbs, or purchase specific tools for classes. Sometimes trying to calculate all of the tedious and infrequent expenses takes too much time, and can be exhausting.
What can you do to follow the budget (better) now/future?
Take budgets more seriously. If I am going to take the time out of my day to make a budget, I need to follow it. I should post the budget on the walls in my room.
III Cash Management
What is your current cash management framework?
I revolve my cash management around a few important things to me, and try to exclude everything else. I take money out of my checking account for items such as apartment rent, food, tuition payments, continuing hobbies (lifting weights, guitar, sports), and of course having fun with friends and family. I like to estimate what monies allocated for hobbies and random fun will be, however the estimate is always less than the actual for me.
Create a chart to show your financial institution's:
Current interest rate on savings:
I do not have a savings account with any bank. I plan on obtaining a savings account next semester.
Current interest rate on checking. Costs?
The current interest rate (APY) for my amount balance is 0.10%. Monthly service charges are waived because of my relationship with the bank.
Current rates on other cash management tools. Costs?
I keep my cash management tools simple, and I do not have to write checks often. I purchase one new order of checks per year, but normally because my address has changed from the previous year.
What cash management vehicles do you plan to use at future stages of your life?
In future stages of my life I plan on having a little bit of every cash management vehicle. I would like to have a checking account linked with my savings account to have overdraft protection. I would also like to have other liquid assets such as money market mutual funds and/or money market deposit accounts.
In all of this, explain where your emergency fund is.
I do not currently have an emergency fund. I suppose my Uncle Dave would co-sign on a loan if I desperately needed money. I plan on fitting an emergency in my financial budget for next semester.
IV Auto and Housing Decisions
On separate pages for Auto and Housing, identify and discuss your short/med/log term car and home plans in terms of lease/rent/purchase. Identify and discuss what/how your current auto/housing influence or support future goals, budget, and credit.
Short term plans: I would like to continue renting housing throughout college. Right now I am renting at University Trails. I would like to finance a car or truck sometime this year.
Medium term plans: Possibly rent a home instead of apartments in my last year or two of college. Hopefully by this time I will have a car or truck entirely purchased. At the end of my medium term plans I want to have enough saved for a down payment on a home.
Long term plans: Purchase a home, purchase cars for my wife and I, and provide automobiles for my kids as long as their grades are good. I would like to own a Lake House or Beach House as a weekend getaway from my first home.
Current Conditions: I do not own a car or home at this time. The lack of bills allows me to build my credit, and hopefully save for a car in the future. Right now, not owning a car or home fits within my budget which will allow owning cars and homes in the future a possibility.
V Credit and Debt Management
Type of user: I try not to use credit cards excessively; however I do make a couple purchases on credit each month to establish a good credit score.
Visa Platinum with $1700 Available Credit: Annual percentage rate of 13.74%, fee structure of
Kohl's Credit Card with $1000 Available Credit:
Improving Credit Card Usage: I want to continue using my credit card as I have in the past.
Type and Number of Cards: Currently I have two forms of credit, a visa platinum card and Kohl's credit card. Right now my credit cards are suitable for my lifestyle, but I am sure I will not be shopping at Kohl's my entire life. I do not want to exceed two credit cards at a time. Copy of Credit Report from Experian is attached
Double Check: I made sure to check my name, addresses, number and type of accounts, payment history, and credit score.
Maintaining my Score: I will keep using my Gold Check Card for the majority of my purchases; however I will make a few purchases on credit monthly to maintain solid credit.
Current Consumer/Student Loans outstanding: $0
Debt Reduction Strategy (short term): I will consolidate loans if I need to, and reduce spending to match my current financial situation.
Debt Reduction Strategy (long term): I will keep savings and retirement a priority and vacations second, I will constantly update budgets and statements, and I will hire a personal financial planner.
Family Goals: I have spoken with my uncle who is helping maintain my financial security, and he wants me to have the smallest amount of loans possible. The lifestyle is frustrating, because family members' help as little as possible, which means you, have to live as cheaply as possible. However, I understand my family's position, and I support the route of continuing education with small credit and loan balances.
VI Insurance Planning
A. Life Insurance- Since I am 21 years old with no dependents or expensive assets, I have no need for life insurance. With my limited income, life insurance would actually hurt my income. Later in life when I have a family and expensive assets, life insurance will be needed. I will want my family to live comfortably if I should die. With a term period of 20 years, and a coverage amount of $150, 000; my monthly premium is estimated at $42.30.
B. Health Insurance- Unfortunately, I do not currently have health insurance. Since I will soon be independent from my father, and my income is too low, I currently am not insured. I would like to be under a managed care plan which allows users to contract with and make monthly payments directly to the organization that provides the healthcare service. Eventually if I live in a big city, I will more than likely take advantage of the Health Maintenance Organization (HMO) which is an organization of hospitals, physicians, and other providers who provide comprehensive coverage. Previously I was under HMO and the plan enabled us to have quality doctors for a low price. Under UniCare's FIT 500 Plan I will have $30 patient visits, 20% in-network in-patient hospitals, maternity leave not covered, and a deductible of $500, my monthly premium is estimated to be $279 dollars.
C. Disability Insurance- I will not buy disability insurance now, but I will consider buying a small policy now with a rider that will let you buy more later. Key information to consider when purchasing disability insurance includes 1) the definition of disability, 2) benefit amount and duration, 3) probationary period, 4) waiting period, 5) renew ability, and 6) other provisions. With monthly income $300, monthly expenses $1, 250, 12 months of disability, and 6 months of coverage, my current shortfall is $875 each month.
D. Auto Insurance- I do not have a car, and probably will not in the near future, so I do not need auto insurance.
E. Renter's Insurance- I need to consider obtaining a policy under Renter' Form HO-4 that covers furniture, carpets, appliances, clothing, and most personal items. For only about $200-$250 a year, I could obtain abut $15, 000 in coverage.
F. Long Term Care Insurance- All the odds are in favor of me opting out of long term care insurance until I reach a very old age. First, I am not even sure if I will be wealthy enough to need to preserve assets for dependents, premiums can be as much as 5-7 percent of annual income, I have no history of disabling disease, and I am a male who typically does not need long term care as much as women.
VII Investment Planning
Objectives: To be a smart investor by maintaining a variety of investments such as common stock, bonds, mutual funds, and real estate.
Constraints: I am a college student, so I literally have no money to invest.
Asset allocation: Since I do not have any investments, asset allocation does not apply to me.
Current Investments: $0
Re-Balance Plans: Undetermined
Future Investments: 5-10% of my yearly income will be distributed among different investment vehicles.
Future Allocation Plans: Besides any real estate plans in the future, I will distribute my money equally among common stock, bonds, and mutual funds to ensure a stable but increasing savings.
In the Future: After paying major bills such as mortgage and college tuitions, I will heavily increase my investments.
Emergency Fund: I would like to allocate an amount equal to 6 months of my salary.
Broad Market Index: Covers 26 Developed World countries and 26 Emerging Markets countries. It includes all listed shares of companies with available market capitalization of at least the local equivalent of US$100 million.
Mutual Funds information attached
VIII Tax Planning
2006 1040EZ form is unavailable because the form was necessary for my dependency override. West Hall at Texas Tech University currently has my form, and I will be receiving the statement back shortly.
Marginal tax rate is 10% because my income was between $1-$7300.
Average tax rate is 0%, because I had zero taxable income.
Strategies:
1) Maximize my 401(K)
2) Contribute to an IRA
3) Defer bonuses
4) Accelerate capital losses and defer capital gains
5) Use the gift-tax exclusion to shift income
6) Invest in treasury securities
7) Consider tax-exempt municipals
Give appreciated assets to charity
9) Keep track of mileage driven for business, medical or charitable purposes
10) Take out a home-equity loan
11) Bunch my itemized deductions
IX Retirement Planning
Lifestyle: I want to travel with my spouse on a yearly basis, and maintain a comfortable living environment. I want to have excess money to purchase gifts for grandchildren and family.
Retirement Planning Strategy: Social security benefits will probably not exist when I retire, so I am not considering this as an option for planning. However, I do want to begin my retirement savings immediately after finishing college. I realize that having kids is a huge financial burden, so saving for retirement before having children is important. My retirement income will probably be based from social security [highly unlikely], earned income, income-producing assets, and pension plans.
Retirement Importance: Having enough money to relax and enjoy life after work is crucial. Starting early and remembering to save for retirement despite other financial burdens is key.
Social Security: Most are eligible for social security benefits between 65-67, and can receive benefits by 1) taking the full benefits to which each is entitled from his or her account or 2) take the husband and wife benefits of the higher-paid spouse. The benefits of each route must be accurately measured to determine the correct course of action. If I am a retired worker and have a spouse and we are both 66, the payment amount for an average worker is roughly $2, 072.
Contributory pension plan: I will probably work for a company where I bear part of the cost of benefits. I hope to have a plan where I pay half the annual contribution and my employer pays the other half. I would like my portion to be taken under a payroll deduction plan.
401(k) Plan: I want a 401(k) in order to maintain a company-sponsored tax-sheltered savings account.
Roth IRA: I want to eventually fill a Roth IRA to its maximum each year to take advantage of tax-free withdrawals.
Social Security Statement: I filled the form out online, but my statement has not arrived in the mail.
Investment Strategies: Develop a sound 401K, and maintain a Roth IRA fund to make up for the lack of social security benefits. I believe picking a quality home is also essential in hopes the value of the home will increase over its life.
X Estate Planning & Wills
Strategy:
1) Make a financial power of attorney
2) Protect my children's property
3) Consider life insurance
4) Name pay-on-death beneficiaries
5) Avoid estate taxes
6)Cover funeral expenses
7)Store my documents in a safe and secure place
Will importance: A will is crucial to ensure the people I love inherit my property after I die.
Will elements: Elements needed to prepare a will include personal data, property, life insurance, health insurance, business interest, employee benefits, family income, family finances, listing of liabilities, and an authorization for information.
My Will: If I were to die today, I would give make my brother the executor and beneficiary of half my estate, and the Waltons the beneficiary of my other half. (Please keep in mind my entire estate would probably not exceed $5, 000.
Estate Tax: The Federal estate tax is imposed “on the transfer of the taxable estate of every decedent who is citizen or resident of the United States.” There is no telling what the estate tax will be when I am old, but I need to worry about the subject when I am nearing the end of my retirement.
Using a trust: A grantor transfers property to a 2n d party, called a trustee. The trustee holds the property for a 3rd party, called the beneficiaries. The trustee is charged with keeping the property until the grantor indicates that the property be moved to the 3rd party beneficiaries. This could be used in order to avoid paying taxes in a higher bracket. This would also be used if an heir is a minor. In that case, the grantor might not want his heir to take immediate control of the assets.
Our bet on one of the most widely followed U.S. equity markets turned out quite nicely, as the NASDAQ surged on the week as broader markets climbed higher. The tech-heavy QQQ, which had lagged behind other broad-based U.S. equity indexes so far in 2011, jumped by more than 6% this week. That gain was better than many other broad-based U.S. indexes; SPY climbed by only about 5.5% during the week.
We’re a bit concerned that the recent rally is without merit; the current environment seems like a great opportunity to take some profits and shift assets to lower risk assets. So now might be a good time to pocket some gains in QQQ after a big jump.
Trade #2 Long IEF: Down 2.4%
We liked IEF this week thanks to a long-term uptrend in mid-term futures, noting that lingering risks in Europe and at home seemingly set the stage for increased interest in safe haven assets. But the relatively uneventful passage of austerity measures in Greece upped investors appetite for risk, and IEF tumbled as desire for Treasury exposure waned.
If you share our thoughts that the market rally came without sufficient justification from underlying fundamentals, IEF might be an appealing way to shift towards safer assets ahead of next week’s activity.
Trade #3 Short RSX: Down 6.2%
We put our faith in technical indicators predicting a short-term pullback in Russian equities this week. But Russian stocks jumped sharply higher over the last several days, thanks to a more broad increase in risk tolerance among investors. As a result, our short position in RSX immediately lost ground; as we mentioned Monday, we recommended bailing if the $38 level was hit. That level corresponded to a loss of about 3.3% on the week; those who stayed in all week realized a more substantial loss of close to 6.2%. We wouldn’t be the least bit surprised if RSX pulls back a bit in early trading after the extended holiday.
ETFdb Portfolios
Retirement ETFdb Portfolios
The rally in global equity markets put a jolt into our long-term, retirement-focused portfolios over the last week; many jumped considerably after sloshing through the first half of the year at close to break-even. Not surprisingly, the longer-term portfolios fared better than those designed for investors approaching retirement; heftier allocations to equities thrived, while many fixed income funds weighed on returns:
In the past 30 years, U.S. life expectancy has increased by an average of five years. Since 1935, when Social Security was first enacted, it has increased by almost 18 years. It’s no wonder that Americans are working more years as they enjoy longer, healthier lives thanks to improved healthcare and technology.
Unfortunately, the federal government hasn’t altered its plans to match the growing number of entitlement beneficiaries hitting their 80s and 90s. The default payment methods definitive of many entitlement programs are hurting America’s economy and pushing the United States deeper into a debt that already tops $14.3 trillion. Reform is required.
Social Security, Medicare and other social entitlement programs were created as safety nets for the elderly, those down on their luck or those experiencing overbearing unexpected financial hardship. Today, such programs are utilized by nearly everyone, and money is running low for those on the early side of 50.
Not only do these programs eat up roughly 50% of our federal budget, but the entitlement culture discourages savings and creates the false notion that government should be taking care of individuals. The reality that Social Security and Medicare will not exist in current form for many young adults has yet to sink in for lawmakers or the young people affected.
The Heritage Saving the American Dream plan reminds:
The underlying problem that it addresses is simple: The government is doing things it should not be doing and spending far more than we can afford to pay or should be paying. It is time to start moving decisively toward a federal government that is limited and carries out its appropriate function.
According to the Employee Benefit Research Institute’s latest study, working significantly longer may be the only real option for folks to have enough money to survive in older age. While working longer is a natural side effect of living longer, it should not be forced to the extreme because of poor decisions being made by today’s legislators.
Reforming America’s entitlement programs today, as laid out in Heritage’s Saving the American Dream plan, is essential if we want any of these programs to be available tomorrow. It’s certainly beneficial for workers to plan on delaying retirement by several years, thanks to today’s longer life spans. This provides the opportunity for people to support themselves and save extra money so they can rely less on the government later.
An article at MarketWatch reports:
Americans who work past age 65 who continue to save for retirement in a 401(k) or some such account earmarked for retirement increase the odds of having enough income in their golden years. ‘One of the factors that makes a major difference in the percentage of households satisfying the retirement income adequacy thresholds at any retirement age is whether the worker is still participating in a defined contribution plan after age 65,’ the co-authors of the report. ‘This factor results in at least a 10 percentage point difference in the majority of the retirement age/income combinations investigated.’
The fact is that America’s budgetary needs are changing according to a changing culture and a longer life span. As Americans live and work longer, the government must reform the entitlement system in tandem to ensure its viability for those who need it later. These programs can become more sustainable, but their open-ended benefits must be reined in now in order to make that happen.
I can’t verify the comment. Take it as you will.
I’m 52. I’m gay. My husband and I have been together, exclusively, for 16 years (on June 25th), and have been married since November 2, 2010.
At the age of 11, I made it possible for my father to discover I had been being molested by a neighborhood man since I had been 8. My father became enraged; I became his personal punching bag and whipping boy. My father, apparently, believed this man when the man said what all child molesters say, when confronted: “He seduced me!” My father believed it so much that on the Monday after that weekend, my father took me to school. I sat in the principal’s office, covered in bruises, while my father and a horrified principal pulled me out of gym class, because of “what (I) might do to the other boys.”
Within months, our home (in a suburban sub-development) was up for sale. My parents found a small farm in the middle of nowhere, moved us there, and when my sisters would ask them why we moved, my parents – instead of saying they had wanted to own some land and farm most of their lives – would say: “Go ask your brother. He embarrassed us so much we had to move.” Somewhere during this time, I had begun drinking – helping myself to the contents of my father’s extensive “Jim Beam” decanter collection.
At our new home, in Lebanon County, PA, my parents enrolled me in a program similar to the one at UCLA, but it was held at Philhaven Mental Hospital in Lebanon, PA. M experience didn’t last long; my mother refused to allow them to attach electrodes to my testicles after the first couple of rounds actually left permanent burn scars on the skin of my testicles.
My parents’ motto: Do anything you want, just don’t leave a mark.
About 4 weeks prior to my 18th birthday, I was out of their house, off to college on the other side of the country. After my first year of college, they cut me off. Over the next 6 years, I would work a year, go to college a year, etc… during one of those years of college, finances became tough, and I had to move back in with them. Finally, after years of a mutual love/hate relationship between me and my entire family, we’d all had enough. One Saturday morning, ironically, in another October, I walked out the door of their house in Ohio, flew back to California, and that was it.
For 25 years, there was absolutely no contact between myself and any member of my family. No holiday or birthday cards or telephone calls. No internet chats. Absolutely nothing. In that 25 years, I learned there was nothing wrong with being gay, had a couple/three lovers, managed to luck out and be HIV-negative (living in NY, 1984-1986; LA, 1986 – 1989; and SF 1989 – 2002, at my first HIV test in 1991, I was absolutely certain I was going to be told I was positive). Met the man I would marry – and knew that the moment we met.
And managed to make peace with my family. Both my parents are gone now, having died in the last 3 years. At the very end, with both of them, I was able to, at least, talk with them (with my father, we actually visited each other, on “neutral ground”), apologize for anything I’d done to hurt them, outside of my control. They managed to apologize to me, as well; my father even met – and liked – my husband.
I watched this, and felt such a kinship with Kirk. I can’t count the number of times I couldn’t get my mind out of suicidal thoughts, and the time I climbed into our hayloft with my 30.06, absolutely certain I would not be climbing back down to the floor of the barn… but not having the guts, ultimately, to blow my brains out.
I hear Kirk’s mother so calmly recite the physical beatings her husband inflicted on her own child, her calm statement: “Today, it would be considered abuse,” and see the look on her face, and am absolutely stricken with the thought: She thinks they did absolutely nothing wrong, and would think nothing of doing it again, as long as the “sissy” stops.
Euro banks remain weak as compared to their US counterparts
Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.
EURO Stress Test Rebuffed, Again
The OECD working paper “The EU stress test and sovereign debt exposures” by Adrian Blundell-Wignall and Patrick Slovik rebuffs the EU stress test, as we have several times in the past. The argument in the white paper echoes BoomBustBlog view that accounting policies allows banks and financial institutions to mask their true economic health. An asset that has declined in value leads to economic loss irrespective of its classification as held-to-maturity or held-for-trading, but accounting policies allow banks to mark down only their trading portfolio to the current market value while leaving a large chunk of held-to-maturity at book value even if said asset loses 50% in value that would take years to recover, or the bank could be presented with the very distinct possibility that there may be no recovery of said value loss. The former event (of recovering back to book value) would mask the true economic picture at a given snap shot of time while the latter (no recovery) is more of time shifting distortion wherein current profits are inflated for future losses.
Coming back to the EU stress test, the paper contends that by focusing only on the trading book exposures, the EU stress test gave a rosy picture of banks true health.
• Sovereign bond haircuts were applied only on the trading book holdings with implicit assumption that bonds held to maturity will receive 100 cents in the euro. This assumption severely understates the banks losses as 83% of banks investment portfolio is in banking books in form of held-to-maturity assets while only 17% of assets are held in trading portfolio. In case of sovereign default, the distinction between the banking book and the trading book simply disappears. By considering only a smaller component of banks investment books, EU stress tests have severely undermined the estimated write-downs on banks books and have given rosy picture about banks true health. The logic of said methodology is that with the EU/ECB/ EFSF SPV (basically, a giant new European CDO) backing, no sovereign state will be allowed to default.
• Second, and more importantly, the market is not prepared to give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the EFSF SPV comes to an end.
o The assumption of no default over 2010-2012 appears reasonable given that the EFSF is made up of a €720bn lending facility (€220bn from the IMF; €60bn from the EU; and the SPV can build exposures for 3 years to the limit of €440bn for the 16 Euro area countries) which provides a guarantee of funding for any countries facing financing pressures, certainly for the next 3 years.
o However, the concerns in the market beyond 2012 are: the longer-run fiscal sustainability problem; and the difficulty of achieving structural adjustments in labor and pension markets and ability to achieve a sustainable growth in a period of budget restraint. The fear is that this will not be resolved by the time the support packages run out, and hence the probability of restructuring may not be put at zero by portfolio managers. Angela Merkel has recently announced her willingness to spearhead several common nation reforms to put the EU block of nations on heterogeneous footing in regards to regulation, debt management etc. This will go a long way to solving the problem at hand, but will also put significant strain on several of the weaker nations, again exacerbating the probability for restructuring to bring said nations in line with their stronger counterparts.
Impact of bank’s banking books on haircuts
EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.
We have also presented an alternative scenario since we believe that EU stress test had failed not only to include banks HTM books but also the loss estimates were highly optimistic, as has much of the economic and financial forecasting that has come from the EU. It is highly recommended that readers review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for a detailed view of a long pattern of unrealistically optimistic forecasting. Here’s and example…
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Revisions-R-US!
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In an alternative scenario, we have assumed weighted average haircut of 10% (exposure, haircut assumptions and writedowns for individual countries are presented in detail in the tables below) and have applied writedowns on both banking and trading books with the results available in the subscription document The Inevitability of Another Bank Crisis? Individual and more explicit haircut calculations are available for the following nations for professional and institutional subscribers:
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- Greek Default Restructuring Scenario Analysis
- Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
- Portugal’s Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy – Professional Analysis
- The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers
- Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
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William H. Frey, Senior Fellow, at the Brookings Institution discusses the Uneven Aging and “Younging” of America as noted in the 2010 census.
America is beginning to show its age as the baby boom generation advances toward full-fledged senior-hood. But the pace of this aging will vary widely across the national landscape due to noticeable geographic shifts in the younger population, with implications for health care, transportation, and housing, and possible impacts upon our ability to forge societal consensus.
An analysis of data from the 1990, 2000, and 2010 decennial censuses reveals that:
Due to baby boomers “aging in place,” the population age 45 and over grew 18 times as fast as the population under age 45 between 2000 and 2010.
Although all parts of the nation are aging, there is a growing divide between areas that are experiencing gains or losses in their younger populations.
Suburbs are aging more rapidly than cities with higher growth rates for their age-45-and-above populations and larger shares of seniors. People age 45 and older represent 40 percent of suburban residents, compared to 35 percent of city residents.
There are far more charts, graphs, and analysis, in the Complete PDF The Uneven Aging and ‘Younging’ of America: State and Metropolitan Trends in the 2010 Census. The excerpts above were from a summary.
Cultural Shift Coming
The Washington Post discusses demographic changes in If baby boomers stay in suburbia, analysts predict cultural shift
During the past decade, the ranks of people who are middle-aged and older grew 18 times as fast as the population younger than 45, according to Brookings Institution demographer William Frey, who analyzed the 2010 Census data on age for his report, “The Uneven Aging and ‘Younging’ of America.” For the first time, they represent a majority of the nation’s voting-age population.
The political ramifications could be huge as older voters compete for resources with younger generations.
“When people think of suburban voters, it’s going to be different than it was years ago,” Frey said. “They used to be people worried about schools and kids. Now they’re more concerned about their own well-being.”
The nation’s baby boomers — 76 million people born between 1946 and 1964 — were the first generation to grow up in suburbia, and the suburbs is where many chose to rear their own children. Now, as the oldest boomers turn 65, demographers and local planners predict that most of them will not move to retirement areas such as Florida and Arizona. They will stay put.
“If you ask younger boomers, who are 45-ish, a lot say they expect to move and retire elsewhere,” said John Kenney, chief of aging and disability services with the Montgomery County health department. “But as people get to 65 and 70, whether because of choice or default, they end up staying. We are planning on people being here.”
“Retirement used to be the golden years,” said Kenney. “No more.”
Local governments are starting to grapple with the implications.
“Clearly, the age wave is coming,” said Pat Herrity (R-Springfield), a county supervisor who heads the 50-plus committee.
Although Florida and Arizona remain retirement magnets, 17 of the 25 states with the highest concentrations of senior citizens are cold-weather states.
Older Americans now represent 53 percent of voting-age adults.
“The political clout of older Americans will be even more magnified if the traditional higher turnout of this group continues, and as the competition for resources between the young and the old becomes more intense,” Frey writes.
Retirement No Longer Golden Years
I have been discussing social trends and changing social attitudes for quite some time. Here is a snip from May 2008 on Demographics Of Jobless Claims
Structural Demographics Poor
Structural demographic effects imply that prospects in the full-time labor market will be poor for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer reentrants into the low-paying service sector; workers who will be competing with younger workers.
Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families.
In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages.
One of the many consequences of boomer demographics is the longer the US opus of reform of Medicare, and Social Security, the more difficult it will become because of voting demographics.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Peak energy is BS. This is from Salon, no less.
http://www.salon.com/news/politics/war_room/2011/05/31/linbd_fossil_fuel…
Everything you’ve heard about fossil fuels may be wrong
The future of energy is not what you think it is
By Michael Lind
Are we living at the beginning of the Age of Fossil Fuels, not its final decades? The very thought goes against everything that politicians and the educated public have been taught to believe in the past generation. According to the conventional wisdom, the U.S. and other industrial nations must undertake a rapid and expensive transition from fossil fuels to renewable energy for three reasons: The imminent depletion of fossil fuels, national security and the danger of global warming.
What if the conventional wisdom about the energy future of America and the world has been completely wrong?
As everyone who follows news about energy knows by now, in the last decade the technique of hydraulic fracturing or “fracking,” long used in the oil industry, has evolved to permit energy companies to access reserves of previously-unrecoverable “shale gas” or unconventional natural gas. According to the U.S. Energy Information Administration, these advances mean there is at least six times as much recoverable natural gas today as there was a decade ago.
Natural gas, which emits less carbon dioxide than coal, can be used in both electricity generation and as a fuel for automobiles.
The implications for energy security are startling. Natural gas may be only the beginning. Fracking also permits the extraction of previously-unrecoverable “tight oil,” thereby postponing the day when the world runs out of petroleum. There is enough coal to produce energy for centuries. And governments, universities and corporations in the U.S., Canada, Japan and other countries are studying ways to obtain energy from gas hydrates, which mix methane with ice in high-density formations under the seafloor. The potential energy in gas hydrates may equal that of all other fossils, including other forms of natural gas, combined.
If gas hydrates as well as shale gas, tight oil, oil sands and other unconventional sources can be tapped at reasonable cost, then the global energy picture looks radically different than it did only a few years ago. Suddenly it appears that there may be enough accessible hydrocarbons to power industrial civilization for centuries, if not millennia, to come.
So much for the specter of depletion, as a reason to adopt renewable energy technologies like solar power and wind power. Whatever may be the case with Peak Oil in particular, the date of Peak Fossil Fuels has been pushed indefinitely into the future. What about national security as a reason to switch to renewable energy?
The U.S., Canada and Mexico, it turns out, are sitting on oceans of recoverable natural gas. Shale gas is combined with recoverable oil in the Bakken “play” along the U.S.-Canadian border and the Eagle Ford play in Texas. The shale gas reserves of China turn out to be enormous, too. Other countries with now-accessible natural gas reserves, according to the U.S. government, include Australia, South Africa, Argentina, Chile, France, Poland and India.
Because shale gas reserves are so widespread, the potential for blackmail by Middle Eastern producers and Russia will diminish over time. Unless opponents of fracking shut down gas production in Europe, a European Union with its own natural gas reserves will be far less subject to blackmail by Russia (whose state monopoly Gazprom has opportunistically echoed western Greens in warning of the dangers of fracking).
The U.S. may become a major exporter of natural gas to China — at least until China borrows the technology to extract its own vast gas reserves.
Two arguments for switching to renewable energy — the depletion of fossil fuels and national security — are no longer plausible. What about the claim that a rapid transition to wind and solar energy is necessary, to avert catastrophic global warming?
The scenarios with the most catastrophic outcomes of global warming are low probability outcomes — a fact that explains why the world’s governments in practice treat reducing CO2 emissions as a low priority, despite paying lip service to it. But even if the worst outcomes were likely, the rational response would not be a conversion to wind and solar power but a massive build-out of nuclear power. Nuclear energy already provides around 13-14 percent of the world’s electricity and nearly 3 percent of global final energy consumption, while wind, solar and geothermal power combined account for less than one percent of global final energy consumption.
(The majority of renewable energy consists of CO2-emitting biomass — wood and dung used for fires by the world’s poor, plus crops used to make fuel; most of the remainder comes from hydropower dams denounced by Greens.)
The disasters at Chernobyl and Fukushima have dramatized the real but limited and localized dangers of nuclear energy. While their initial costs are high, nuclear power plants generate vast amounts of cheap electricity — and no greenhouse gases. If runaway global warming were a clear and present danger rather than a low probability, then the problems of nuclear waste disposal and occasional local disasters would be minor compared to the benefits to the climate of switching from coal to nuclear power.
The arguments for converting the U.S. economy to wind, solar and biomass energy have collapsed. The date of depletion of fossil fuels has been pushed back into the future by centuries — or millennia. The abundance and geographic diversity of fossil fuels made possible by technology in time will reduce the dependence of the U.S. on particular foreign energy exporters, eliminating the national security argument for renewable energy. And if the worst-case scenarios for climate change were plausible, then the most effective way to avert catastrophic global warming would be the rapid expansion of nuclear power, not over-complicated schemes worthy of Rube Goldberg or Wile E. Coyote to carpet the world’s deserts and prairies with solar panels and wind farms that would provide only intermittent energy from weak and diffuse sources.
The mainstream environmental lobby has yet to acknowledge the challenge that the new energy realities pose to their assumptions about the future. Some environmentalists have welcomed natural gas because it is cleaner than coal and can supplement intermittent solar power and wind power, at times when the sun isn’t shining or the wind isn’t blowing. But if natural gas is permanently cheaper than solar and wind, then there is no reason, other than ideology, to combine it with renewables, instead of simply using natural gas to replace coal in electricity generation.
Without massive, permanent government subsidies or equally massive penalty taxes imposed on inexpensive fossil fuels like shale gas, wind power and solar power may never be able to compete. For that reason, some Greens hope to shut down shale gas and gas hydrate production in advance. In their haste, however, many Greens have hyped studies that turned out to be erroneous.
In 2010 a Cornell University ecology professor and anti-fracking activist named Robert Howarth published a paper making the sensational claim that natural gas is a greater threat to the climate than coal. Howarth admitted, “A lot of the data we use are really low quality…”
Howarth’s error-ridden study was debunked by Michael Levi of the Council on Foreign Relations and criticized even by the Worldwatch Institute, a leading environmentalist organization, which wrote: “While we share Dr. Howarth’s urgency about the need to transition to a renewable-based economy, we believe based on our research that natural gas, not coal, affords the cleanest pathway to such a future.”
A few years ago, many Green alarmists seized upon a theory that an ice age 600 million years ago came to an abrupt end because of massive global warming caused by methane bubbling up from the ocean floor. They warned that the melting of the ice caps or drilling for methane hydrates might suddenly release enough methane to cook the earth. But before it could be turned into a Hollywood blockbuster, the methane apocalypse theory was debunked recently by a team of Caltech scientists in a report for the science journal Nature.
All energy sources have potentially harmful side effects. The genuine problems caused by fracking and possible large-scale future drilling of methane hydrates should be carefully monitored and dealt with by government regulation. But the Green lobby’s alarm about the environmental side-effects of energy sources is highly selective. The environmental movement since the 1970s has been fixated religiously on a few “soft energy” panaceas — wind, solar, and biofuels — and can be counted on to exaggerate or invent problems caused by alternatives. Many of the same Greens who oppose fracking because it might contaminate some underground aquifers favor wind turbines and high-voltage power lines that slaughter eagles and other birds and support blanketing huge desert areas with solar panels, at the cost of exterminating much of the local wildlife and vegetation. Wilderness preservation, the original goal of environmentalism, has been sacrificed to the giant metallic idols of the sun and the wind.
The renewable energy movement is not the only campaign that will be marginalized in the future by the global abundance of fossil fuels produced by advancing technology. Champions of small-scale organic farming can no longer claim that shortages of fossil fuel feedstocks will force a return to pre-industrial agriculture.
Another casualty of energy abundance is the new urbanism. Because cars and trucks and buses can run on natural gas as well as gasoline and diesel fuel, the proposition that peak oil will soon force people around the world to abandon automobile-centered suburbs and office parks for dense downtowns connected by light rail and inter-city trains can no longer be taken seriously. Deprived of the arguments from depletion, national security and global warming, the campaign to increase urban density and mass transit rests on nothing but a personal taste for expensive downtown living, a taste which the suburban working-class majorities in most developed nations manifestly do not share.
Eventually civilization may well run out of natural gas and other fossil fuels that are recoverable at a reasonable cost, and may be forced to switch permanently to other sources of energy. These are more likely to be nuclear fission or nuclear fusion than solar or wind power, which will be as weak, diffuse and intermittent a thousand years from now as they are today. But that is a problem for the inhabitants of the world of 2500 or 3000 A.D.
In the meantime, it appears that the prophets of an age of renewable energy following Peak Oil got things backwards. We may be living in the era of Peak Renewables, which will be followed by a very long Age of Fossil Fuels that has only just begun.
