This is a repost from Forbes. 
 

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Hundreds of underground seismic motion detect early warnings signs of earthquakes. Economists have their own recession early warning detectors and some are going off.

Early warnings for recession include:

  • Oil prices – and other commodity prices – increased steeply before nearly every U.S. recession since World War II. What are oil prices doing now? They’ve been rising in the first half of 2018 (gaining more than 20 percent) and reached their highest level in August this week at $70 a barrel according to MarketWatch.
  • Asset bubbles precede recessions, but, of course you never know if healthy prices are air-filled bubbles or solid growth until they are pricked. Equity prices rose quickly before the dot-com bust in 2000 and housing prices went through the roof before the financial crisis of 2008. The Financial Times noted two weeks ago that profit margins seem to be peaking – reaching their highest levels in 10 years – and the SP 500 price earnings ratio has been climbing steadily from 14.87 in June 2012 to over 25 this month. 20 seems to be the Goldilocks number.
  • Interest rates also begin to act oddly before recessions, but the reasons change and the reasons matter in whether its a good signal.  Burglar sensors detect thieves and dogs moving on your patio.  When interest rates on short-term debt (say, three-month Treasuries) is higher than the interest on long-term debt (say, 10-year Treasuries) it is a sign that market actors think prices will fall and demand for loanable funds will be in the doldrums. When the yield curve inverts, it can represent a crowd sourcing for information about the business person’s expectations. The yield curve is somewhat inverted now. The gap between short and long is the smallest since 2007. The 2-year and 10-year yields on Monday, August 24, 2018 narrowed to as little as 18.3 basis points, the smallest differential since 2007, having started the year more than 30 basis points higher. This signal could be orange or red. 

And other traditional pre-recession early warning systems are flashing orange to red.

The National Bureau for Economic Research (NBER) – a nonprofit organization founded in the 1920s by economists and universities to help a modern US government maintain economic order and full employment – tracks the chronology of the U.S. business cycle. Its Business Cycle Dating Committee looks at real GDP, economy-wide employment, and real income as indicators for economic health.

  • Real personal income is not doing very well since wage growth is anemic in this expansion. But, consumer spending is growing fast – too fast? – and capacity utilization and industrial production is not particularly robust – a bad sign and a correlate to imminent downturns.
  • Since the current recession indicators are generally less perfect predictors, economists are trying out other early warning indicators. Other trends have preceded recessions and they are flashing red, like private debt accumulation. When households and corporations have access to easy credit, debt default risk increases. The pattern of 2008 seems to be repeating itself as a similar credit bubble is forming again. Now, compared to 2008 when households were using liar loans and subprime mortgages, corporations are using readily available and cheap debt to give cash from their balance sheets to shareholders as increased dividends. Too many of these extra liabilities can eventually force corporations into cutbacks, which would in turn drive down activity and cut tax revenues.

And when the recession happens, we want to know how deep it will be. Economic inequality can make recessions deeper and more prolonged.  For instance, right before the great recession (2006-2007), the nation’s bottom 40 percent of households held no net worth and consumed almost 25 percent of the nation’s goods and services. Moving up to the middle class, households in the bottom 60 percent of the income distribution accounted for 40 percent of the nation’s consumption. But when unemployment rose to over 10 percent, households in 2008 drastically cut consumption. In an unequal economy when many households have no wealth and can’t self-insure against a downturn, cuts in personal consumption are particularly drastic and the recession grows deeper.

Lastly, some economic measurements that we think of as good indicators are not always helpful. The unemployment rate is low but it may truly indicate an overheated economy with no more capacity to grow. The official unemployment rate does not include workers who are discouraged or marginally attached to the labor market. The non-inclusive definition of the unemployment rate combined with the fact that wages have been stagnant for decades indicates that the labor market is actually not robust.

One of the best indicators of a coming recession is time, and it is about time for a recession. This expansion, which started in June 2009, is the second longest ever recorded in August 2018 – 9 years and two months old. The longest was exactly ten years in the 1990s. The average length of an expansion is 4 years and 9 months. Though business economists surveyed are optimistic – most of them think the economy will go into recession by 2020 -– we know the tax cuts have not produced economic investment. Most academic and government economists know that models, including surveys of hunches, are inaccurate. Even the IMF agrees predicting is inaccurate.

The best we can do is watch the correlates to previous recessions, which right now paint an ominous picture.

This is a repost from Forbes. 
 

Getty Pictures, Royalty Free

Realtors screamed and home owners worried.

In late 2017, Congress and the President wanted to make the $1.5 trillion plus cuts in corporate and other taxes not look so big. So they raised taxes for some people by drastically limiting the deductions for state and local property and income taxes (SALT), capping the deductability of mortgage interest, and increasing the standard deduction (which makes itemizing less valuable). Of course, these tax hikes affect people with houses and mortgages, especially those living in states with high real estate and income taxes.  Before this change, they could write off those SALT taxes when they paid federal income tax. The National Association of Realtors (NAR) led the scare, predicting house values would generally fall, and especially in California, New York, Massachusetts, and New Jersey.

But housing prices generally have not fallen.  In the first half of 2018, the Federal Housing Finance Agency’s house price index rose by 3.8 percent.  Even in California, housing demand is strong.  The chief economist for the Relators  said, “We thought there would be some impact…but the market is saying, so far, there is not an impact.”

But don't tax deductions affect housing values? Generally, economists would not expect the change in the tax deductibility to have a major impact on house prices because several other factors have larger effects on home values than government tax breaks. Of course, those tax breaks can be a factor in buying a home or willingness to bid up the price--they just aren't the biggest factor.

Let’s look at the big picture. We might want to say good riddance to special deductions for owning a home. Mortgage deductions and other tax subsidies for home ownership may in fact be bad policy.  They tell society that the government wants you to own a single-family house. But home ownership could be bad for you financially and inefficient for the larger economy.  Not only is renting a perfectly decent decision but housing tax breaks may steer too much investment capital into housing debt and away from productive investments and diversified household portfolios. Harvard economist Edward Glaeser has argued that tax subsidies and related policies result in “the government...essentially bribing Americans to live in suburban, detached homes.”  And the 2007 financial and economic crash was caused in significant part by too much housing debt, especially for lower and middle income households.  That rise in debt, amplified significantly by risky Wall Street financial manipulation, ended up putting the entire economy at risk.

So why aren't the loss of the SALT deductions for some taxpayers and the mortgage deduction cap suppressing housing prices?

First, the tax bill also contained a large increase in the standard deduction, which is a significant gain for most households.  Using the standard deduction means less itemizing overall, so the value of the mortgage and tax deductions fell for many taxpayers.  Relatively few taxpayers will be deducting their state and local property taxes so they are untouched--in fact, they are probably a bit better off.  So they may want to buy a house, pushing up demand and keeping prices high.  Only high tax payers in states with both high income and property taxes may feel a pinch from losing the SALT and mortgage deductions.

Second, housing prices are what economists describe as “sticky downwards.”  Homeowners are notoriously prone to overvalue their house and reluctant to lower the asking price until faced with continuing bad news – and, of course, no offers.

Third, buyers, especially higher-income consumers, are wealthier because of the legislation's other windfall tax breaks, especially lower rates. And they feel wealthier because of the run-up in the stock market.  The psychological effect of both may be bidding up the price of the better houses they want to buy.

Does this mean we shouldn't worry about house prices?  No.  Prices could fall as the Federal Reserve continues to raise interest rates, although some fear that could tip the economy into recession which of course would lower house prices.  And there are some signs of weakness in housing markets.  For example, new private housing starts have barely reached the levels of just before the 2007 economic collapse.  There seems to be some slowing of price increases in places where the tax bill has its largest negative impacts. And slow income growth for many American households means that buying a house is moving beyond their reach.  A recent report concluded that in twenty large metropolitan areas, middle-class families are increasingly unable to afford a house.

Like many other aspects of today's economy, we may see housing prices favoring the rich over the middle class and below. House prices for higher income families may be rising, which might in turn nudge more and more middle-class families with stagnant incomes out of the housing market and also put upward pressure on rents.  If that megatrend continues, it may swamp whatever effects the tax legislation is having and housing prices will fall.

This is a repost from Forbes. 
 

A for sale sign outside a mansion at Miami Beach. (Photo by: Jeffrey Greenberg/UIG via Getty Images)

Everybody worries and everybody worries about retirement in a different way.

Almost everyone nearing retirement wonders whether they should pay off their mortgage. To answer the question yourself, start with the financial golden rule: get interest, don’t pay it. Real estate brokers, home developers and banks love the 30-year mortgage -- they have marketed long mortgages for generations. A 30-year encourages people to stretch to ever more expensive homes. That works for banks. A 30-year mortgage doubles the interest revenue for mortgage lenders.  Marketing works. Despite the much lower cost of a shorter term mortgage, over 90% of mortgages are 30 year.  

Example: In April 2018, a 30-year mortgage charged a 4.18% interest rate and a 15-year 3.75%. Borrowing $100,000 for half the time, lowers the total interest payment by 60% not 50% from $75,626 to $30,900. But why pay a bank anything? Put the mortgage interest payment in your own retirement account, you earn the interest, and the return accumulates tax free.

My conversation with two correspondents about their mortgages may help individuals make good mortgage payoff decisions for themselves.  

First question: "Ms. Ghilarducci, I am over 60, but have two children still in school, one in college and one in high school.  I have two homes, one is our residence and the other a vacation home.  I have a 15-year loan (3.35%) on my home that matures in 2029 and a 30-year mortgage (4.25%) on the vacation home whose term ends in 2045.  I can pay off one of these loans using stock I have now.  After reading your article in Forbes, it seems the right thing to do, but which one should I pay off?  Any thoughts you have will be appreciated.  I understand that you cannot give me financial advice. Thank you."

My answer: I wrote "I think you already have the answer -- I am a teacher after all. What do you think the right answer is?" She shot back with exactly the right answer:

“Unless conventional wisdom is that you always pay off your home first in case something happens, I would pay off the second house and then put that payment toward the first because that one costs about $900 per month in interest and my home is about $500 per month in interest. The second house will cost about 260k to pay off, while my home is more like 180k, so that will use most of my stock... also may be a consideration.” I couldn't do better with that.

Second question: "My mortgage is about 400 dollars per month for principal and interest. I pay another 500 dollars to escrow to pay insurance and taxes. The tax and insurance do not go away if I pay off the mortgage early. I could pay off early but would do so by selling stocks with high appreciation or IRA shares with tax obligations. It seems that I am better off paying the monthly installments for the remainder of the mortgage than withdrawing the 34,000 dollars from my accounts to pay off the mortgage to save $1,200 this year and even less in the years to come.  Mortgage rate is 3 5/8 percent per year."

My answer: If the cash you need to pay off your mortgage is earning a higher rate of return and liquidating triggers high transactions costs, paying off your mortgage may not make sense. But it probably does. Your question contained the false certainty your stocks will always appreciate. (Two weeks ago, the Financial Times suggested profits may be at their peak.)  If you pay off your mortgage you guarantee yourself a 3 and 5/8 percent  return. It is hard to get a guaranteed return. Assuming your stocks returns will always be positive and more than, say 3 and 5/8 percent is highly risky. In fact, we know your stocks' value will fall in the next recession. But tapping your IRA before you retire is not a good idea. May I suggest sprucing up your IRA by owning only index funds, you will earn more by paying lower fees. And, instead of withdrawing, cut your consumption in order to double up on the mortgage principal payments to cut interest costs. 

Still not sure? Use a mortgage payoff calculator to analyze your choices. But do one thing, construct scenarios where your property taxes increase and your house does not appreciate. Simulate the 2008 crises and scenerio your home falling 20% in value. I like the calculators from Dinkytown – a former Wall Street Journal columnist Jonathan Clements turned me on to them. And Clements makes a relevant point about paying off your mortgage in an economic expansion. He writes, "... I like to see people in retirement with lower fixed costs. The lower your fixed costs, the less money you need to pull out of your portfolio every year. That’ll leave you in good shape if we get a period of rough financial markets." You don't want to pull money out of the stock market at distressed prices to make a mortgage payment.

In sum: there are two sides to retirement planning -- accumulate wealth and reduce spending. Paying off your mortgage is preparing for less income, more expenses, and a coming recession that might hit when you retire. Eliminating your monthly mortgage payment leaves room for fun and other expenses. Besides, paying off all debt transfers money from the bank's pocket to yours. 

Unless you like banks and think they don’t make enough profit, you’ll want to keep the money for yourself. Paying off your mortgage means paying yourself first. 

This is a repost from Forbes. 
 

(Photo by Justin Sullivan/Getty Images)

The janitor and the chief executive are miles apart in wages -- what they are paid in cold hard cash. We are accustomed to CEO pay relative to the average worker's pay soaring - up from 20 to 1 in 1965 to over 271 to 1 in 2017. But, if the janitor is not outsourced – a big "if" because many firms are fissuring --  the janitor and CEO must be covered by the same health insurance -- its an old requirement from the IRS aimed to avoid tax evasion by the rich.  Mark Warshawsky, a researcher at the conservative-based Mercatus Center at George Mason University, argues how the inequality of pay is overstated. Since low and high income workers get the same health insurance the gap between them is not so large.

Warshawsky confirms top earners have moved away from middle class and low earners in the years he studied, 1992 to 2010. The top 10% enjoyed a 80% wage growth, while the middle 50th saw only a 60% increase. But, he wonders, if unionized workers  sacrifice cash wages explicitly in collective bargaining, to maintain their health insurance, all workers must swap health insurance for cash. If so, pay inequality may be overstate. Hey, its a reasonable guess, if if all workers, regardless of pay, have employers pay, say $15,000 per year on a health care premium, then Warshawsky reasons, the total compensation gap is not so big. But, in reality, the story is not that easy and the pay gap is still high and growing and the rich have better health insurance than the middle class and lower income workers.

High Income Workers Have More and Use More Health Insurance Than Low Income Workers

Even though the long-standing policy of the Internal Revenue Service going back to the 1920s and strengthened in 1978 and by the ACA in 2010 is aimed at preventing tax evasion by the rich by ensuring employers aren’t avoiding taxes by giving tax deductible fringe benefits just to high income workers, there are still many ways a firm can favor high income over low and middle income workers. And they do.

High income workers are much more likely to have access to health insurance at work and use it when they have it. But even if every worker is covered by the employer’s medical plan at work the $1,000, $2,000, $5,000 deductible is charged to every worker regardless of pay and so is the, say $50, copay. Using the health insurance plan is much more expensive for the low income worker than the high income worker. Assuming that every worker is paid the value of the average employer health premium hides key differences in the value of the benefit. Warshawsky assumes that the medical plan is equally valuable for high and low earners, but the health insurance benefit is increasingly adding  more and more  regressive elements.

Bottom line: even if people are covered by health insurance recent studies show that rising costs of copays and deductibles discourages lower income workers from ever using their insurance.  Also, this study did not consider that low income workers are likely to have periods of unemployment and have longer waiting spells to be on health insurance.

Also, a startling finding in this study is that the cost of health insurance per hour of work for high income people is much higher than for low income people. This gap reflects the fact that low income people work for firms that pay less and also have inferior health insurance. In 2008, the cost of health insurance per hour work for the lowest paid worker was $2.38 per hour. But, for workers in the top 95th percentile, the cost per hour of help insurance was over five dollars per hour.

  Cost of Health insurance per hour worked in 2010
  Earnings including paid leave but not stock options
Middle class (50th percentile) $2.38
Highest income (95th percentile)  $5.14

Source: Mark Warshawsky, The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance for Earnings Inequality Benefits Quarterly, Third Quarter 2017


The growth of earnings and growth in total compensation became more unequal between 1992 to 2010. For workers in the 50th percentile earnings growth was 60% and total compensation grew 65%. Workers in the 95th percentile enjoyed earnings growth of 81% and their total compensation growth was 84%.

The growth of earnings and total compensation, which includes health insurance (assuming every worker has same premium and uses the same amount of health care) is still unequal.

  Growth of Earnings and Compensation 1992 to 2010
Place in Earnings Distribution Earnings including paid leave but not stock options Total Compensation including health insurance
Middle class (50th percentile) 60% 65%
Highest income (95th percentile) 81% 84%

Source: Mark Warshawsky, The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance for Earnings Inequality Benefits Quarterly, Third Quarter 2017

Warshawsky argues an appropriate political policy response to pay inequality should include reducing the rate of increase of healthcare costs. Who can argue with that recommendation. Reduced health care costs will help employers be able to pay more cash to their workers.

But the more important thing to remember in examining these studies is that health insurance premiums is not the same thing as pay. On paper, the employer may be paying – on average – more in health insurance premiums; but, that doesn’t close the important material gaps between workers. In this country, workers need cash money to pay for housing and adequate food – the important elements of living standards. The inequality of living standards between people in American who work hard for their living is still on the rise and higher than in any rich nation.

This is a repost from Forbes. 
 

Credit: Getty Images

Despite the economic boom an increasing number of older Americans are finding themselves in severe debt. The New York Times’ Tara Bernard Siegel wrote about bankruptcies among the elderly that took a steep rise to the top of the most read stories of the week. Stories of older people shamefully filing for Chapter 11 were heart breakers. A retired carpenter who filed for bankruptcy in Siegal’s story was Mr. Sedita, who has Parkinson’s disease. “A medication that helps reduce his shaking, a symptom of Parkinson’s, rose to $1,100 every three months from $70, Mr. Sedita said. “I haven’t taken my medicine in three months since I can’t afford it,” he added. He said he and his wife, who has cancer, filed for bankruptcy in June after living off their credit cards for a time. Their financial difficulty, he said, “has drained everything out of me.”

The system has not worked and that some retirees feel drained is no surprise.

The erosion of retirement income security started decades ago. When in 1983, Congress and the President [Reagan] decided to restore Social Security solvency by cutting benefits and raising revenues equally. The FICA tax [Federal Insurance Contributions Act tax] was raised slightly and benefits were cut by raising the age people can collect full benefits from 65 to 70, which is actually a benefit cut. People can collect Social Security at age 62 and for every year they wait until 70, benefits increase on an average 6.34% per year. Therefore, those who can wait get a large boost and those who have to collect before 70 have a lifetime cut of over 11%.

This change and an increase in Medicare premiums and the rising cost of health care was enough to cause financial fragility  among retirees, though the erosion of the voluntary, occupational, pension system contributed to the stratification and inequity of retirement wealth, prospects, and security.

Also, all the signs that private plans would fail were right. Instead of employers making pensions more available, generous, and widespread, more and more companies shifted financial risks of retirement savings to workers through a cheaper and less generous kind of pension - the 401(k).

And despite the hope that the do-it-yourself retirement accounts  — 401(k)-type plans and individual retirement account IRA — would mean more workers would have some source of income besides Social Security, the retirement plan coverage rates of prime- aged workers has fallen from about 70% to close to 50%.

The median account balance of all people – whether they have account from their current job, a past job, and no account at all on the eve of retirement (age 55-64) and who worked a full career under the defined-contribution employer pension revolution with ever-increasing tax breaks is only $15,000. The low median account balance is because half of older workers have no retirement account balances at all, no 401(k) – type plan or an Individual Retirement Account (IRA). Let me repeat that almost half of all workers nearing retirement age will have nothing but Social Security to rely on.

For the lucky half who have some account balance in a 401(k) type plan or IRA, their median balance is $92,000. Spread that amount over a person’s retirement life and it will pay for a cheap dinner and a movie once a month.

If we do nothing to reform the current retirement system, the number of poor or near-poor people over the age of 62 will increase by 25% between 2018 and 2045, from 17.5 million to 21.8 million, and middle class workers will become downwardly mobile. Inadequate retirement accounts will cause 8.5 million middle-class older workers – a whopping 40% of all middle class older workers (aged 55-64) and their spouses to be downwardly mobile, falling into poverty or near poverty in their old age. Boomer and G-xers will do worse than their parents and grandparents in retirement.

Worse, since the current system is voluntary and used more by high income people in stable jobs the tax breaks go disproportionately go to the top 20 percent of workers. The system creates hardship and inequality!

Many employers may be afraid to offer a retirement plan if their competitors don’t – a classic collective action problem. Unfortunately, unions are too weak to help employers coordinate and universally provide pensions, so pensions should be mandated.

My co-author and I, Tony James, propose a fairly straightforward plan in our 2018 book Rescuing Retirementa Guaranteed Retirement Account (GRAs) that is a retirement-plan-for-all plan. It is a federal plan that mandates a prefunded layer on top of Social Security, which needs more revenue (which is another subject).

A universal public option for retirement saving. The idea is to enhance the best features of the decentralized system while making up for its deficits.

Ostrich thinking is rampant – ignoring a future problem is a basic human reaction – but not responding as a nation to patch up the system that has failed in the last 38 years is folly. Senator Cory Booker, a Democrat, and Senator Todd Young, a Republican, have proposed a Commission to examine solutions to the nation’s failed private pension system. Congress forms the commission and I agree with and second -- with two hands waving -- long time analyst Chris Farrell, “We can’t wait any longer."

This is a repost from Forbes. 
 

Photo: Getty Images

Some Democratic candidates are running (and occasionally winning) as Democratic Socialists. Socialism? In America? Would Karl Marx recognize a rising up of workers to control the means of production in something more radical than an ESOP (employee stock ownership plan)? This primer looks past labels and spotlights the modern-day American socialist candidate and where the Democratic Socialists of America (DSA) platform is both in line and out of step with voters’ preferences.

Disclosure: When I was a new faculty member at the University of Notre Dame in 1985, a group of earnest students asked me to be their “faculty advisor” so they could schedule campus meeting rooms. They were both the Student Democrats and the Student Democratic Socialists. In the 1980s the Notre Dame Democrats and Socialists were the same kids.

An upset win in a New York City Democratic House primary has put Democratic Socialists on the national stage. Alexandria Ocasio-Cortez, 28 years old and a member of DSA, defeated longtime incumbent Joseph Crowley, the fourth-highest-ranking Democrat in the party’s House leadership this summer. She campaigned in the district for 19 months and found a weakened target: Crowley hadn’t faced a primary in 14 years while his district had become majority non-white.

Ocasio-Cortez’s win caused some pundits to wonder if a center-left fight was about to break out among Democrats. But Ocasio-Cortez's program of economic policy is fairly mainstream Democrat, including restoring stronger regulations on banks and the financial sector, comprehensive health insurance (Medicare for All), expanding Social Security, a federal jobs guarantee and higher taxes on corporations and wealthy Americans.

When Americans are polled, many aspects of Ocasio-Cortez’s “socialist” economic agenda often have a majority or close-to-majority support. Within the past year, polls have found majority support for the federal government ensuring health care for all, for free college tuition at public universities, and for the proposition that upper-income people and corporations pay too little in taxes. Even a federal jobs guarantee received 46% approval in an April poll.

Of course, polls can be unreliable reads of what people want; when the price tags are fleshed out, support for expensive programs often drops. But, several polls have found that policy ideas seen as too-far “left” by pundits command substantial support from voters like raising the federal minimum wage. Ocasio-Cortez and others also advocate ideas that do not command majority support and can be divisive, like abolishing ICE, but her economic policy ideas resonate with many voters.

Bottom line: On economic policies, many voters aren't hostile to a lot of democratic socialist ideas, although they surely shun the label “socialist.” And Ocasio-Cortez herself is not a purist, but rather someone looking to get these ideas into the national dialogue, perhaps like the Tea Party introduced extreme right-wing ideas such as privatizing Social Security.  She calls Democrats a big tent party: “You know, I’m not trying to impose an ideology on all several hundred members of Congress…”  She views her campaign not as “selling an -ism or an ideology,” but about “selling our values.”

Record-low unemployment – less than four percent – isn’t relieving Americans’ insecurity about health care, retirement security and their own as well as their children’s future. A majority of voters don’t view Republican tax cuts as helping people other than the rich. Calls for higher wages, lower costs for college, more health care and retirement security – sometimes mislabelled “left” or “socialist” – will doubtless persist. Some candidates and parties may wish to advocate these ideas and label them as centrist.

A candidate calling for higher pay, reduced inequality and economic security may not be too far left. Calls for higher minimum wages, stronger labor unions, fair housing and equal pay policies were all part of Harry Truman’s policies and his 1948 winning platform.  Was “give ‘em hell, Harry” a Democratic Socialist?  No, but he was seeking practical solutions to real problems. (When once urged by a bystander to “give ‘em hell,” Truman replied, “I just tell the truth on them and they think it’s hell.”)  President Truman, coming after World War II and facing political unrest and economic uncertainty, was as practical a politician as many on the scene today, seeking solutions for economic inequality and insecurity. That seems to be Ocasio-Cortez’s goal, along with many candidates campaigning in the November elections. Stay tuned.

This is a repost from Forbes. 
 

Photo: Getty Images

A couple times a week middle-aged and older people come to my office or email me asking for advice about what to do with their work, finances, retirement. They ask what their life plans should be. I love it. Whether you're transitioning to a new job or going into retirement, taking stock is a special moment in people’s lives. Doctors, psychologists, sociologists and writers (anyone better than Phillip Roth?) are more eloquent than economists on the human condition. See Michele Silver’s new book about how people feel about retirement. But, still, my conversations are as poetic as they are practical.

Life course stories share the same basic issues, though every person’s fascinating peculiarity is a challenge. Yesterday, a person in their early 50s wanted me to sit with their papers and plans. Am I invested in the right things? Do I have enough money? Basic. I asked the question I learned from an emergency room doctor who asks patients who come to the ER with a chronic complaint: why are you coming to me now? The answer I got was “I want to get my retirement plan in shape because I want to quit my job to work full-time on my side business.”

And, wow, was their “side business” interesting. I won't reveal the person’s identity, but the business was skilled and esoteric. Not unlike finding rare letters and artifacts, like “find me the original commission of Alexander Hamilton to Major General.” Cool things like that. This person‘s clients are mainly wealthy individuals. Some people in this business, but not my visitor, work for museums or libraries.

I shifted gears as I got a bit alarmed.

First, I was on firm ground. We cleaned up the easy stuff. Most people have junk in their portfolios, like expensive mutual fund products. I advise moving to an index fund manager like Vanguard. Recently, Fidelity is offering a free index fund in order to attract new business. That one can raise investment returns by lowering costs is not hard to understand and most people make the switch. Good first step.

Next, we look at the number. Luckily my visitor was on track with almost $500,000.

But the tricky question was whether my visitor should quit their part-time job they have held for 20 years to work full-time on their side business. The part-time job pays full health care and contributes 10% of pay (their wage is $40,000 per year). My visitor looked exhausted, stress lines, hollow cheeks, and was in desperate need of time off because their side jobs took nights, weekends, and all vacation days.

I suddenly got really nervous and didn’t have an easy answer. And I really like having the answers.

Stop before you read any further. What would you advise?

I could definitely see my visitor’s relief imagining getting caught-up on their side business. Business was booming and each task completed meant a juicy check was on its way.

I worry the boom in activity in my visitor’s side business was because of the asset boom and tax cut -- wealthy people had extra money to buy luxury goods like Hamilton’s commission letter. In a downturn, that side business would dry up and so would the chances my visitor could get a part-time job that paid benefits. I became all caution, all nerves and conducted a mini-lesson on business cycles.

Recessions often give self-employed workers a triple whammy : your own business shrinks at the same time your job prospects shrink and the value of your retirement plans falls by 20 to 25% less. A retirement off-ramp is more difficult just when you need the off ramp.

This individual story reminds me that retirement planning depends crucially on where we are in the business cycle – being at the peak or trough – completely changes your perception of the world.

Most economists expect a downturn in the next one or two years and when that happens my visitor’s financial picture and forecasts will change. I advise not quitting the job and drinking more coffee to do the side business. But I am uneasy because the worker needed a break. What would you advise?