Advanced Personal Finance

There’s an interesting, but not very surprising, article in the Wall Street Journal today entitled “Not Your Father’s Pay: Why Wages Today Are Weaker.” Although the article doesn’t actually answer the question, it does present more evidence that my Generation X male cohort is losing ground relative to their parents. It’s based on a study written principally by John Morton of the Pew Charitable Trusts in conjunction with the Brookings Institution, American Enterprise Institute, Heritage Foundation, and the Urban Institute.

From the article:

“In 2004, the median income for a man in his 30s, a good predictor of his lifetime earnings, was $35,010, the study says, 12% less than for men in their 30s in 1974 - their fathers’ generation - adjusted for inflation” [italics mine]

“Between 1974 and 2000, productivity rose 56% while income rose 29%. Between 2000 and 2005, productivity rose 16% while median income fell 2%, challenging ‘the notion that a rising tide will life all boats,’ the report says.” [italics mine]

So where’s the money going if not to workers? I have an idea. How about dramatically higher wages for the executives? The article also suggests two other possibilities - fewer wage earners per family and increased cost of benefits like health care.

I don’t think there’s any doubt Generation X is worse off than their parents. What’s worse is that with the U.S.’s unfunded liabilities (for Medicare and Social Security, for example) in the double-digit trillions, it’s going to get worse.

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Last week, I published my dislike of the way the federal government calculates the Consumer Price Index (CPI). In that post, I declared I was going to calculate my own inflation number using my own basket of good and services and my own methodology.

Right off the bat, I have to admit this is my own calculation and basket. It reflects my life and how I think inflation should be reported. That said, I welcome comments about how and why I do what I do with it.

I’m going to report my CPI monthly (if I can remember to do it). Here’s the basket of goods and services I’ll be tracking:

• Regular gasoline (from the Sunoco I typically use)
• Gallon of skim milk (purchased from Aldi)
• Dozen eggs (purchased from Aldi)
• Target brand toddler wipes
• Store brand frozen waffles
• Store brand boneless, skinless chicken breast
• Chick-fil-a chicken sandwich meal
• 9-pack Juicy Juice drink boxes
• Grapefruit (from the produce market we use)
• Bananas (pound)
• Apples (pound)
• DVD rental from library
• Gas & electric bill (as compared to last year’s)

Let’s see how this goes…

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Several years ago when my daughter was born, both my wife and I bought term life insurance (outside what we already had through our respective employers). I got the best (lowest) rate possible and my wife, because of family history, got a slightly higher rate.

Since then, things have changed for us. We’re expecting another baby this fall. And I’ve had a medical situation that, I am sure, would put me in a higher risk category. In short, if I wanted to get more life insurance, it would probably be more expensive than before. I say probably because life insurance rates are one of the few things that are decreasing in price.

So now I face the task of reevaluating our life insurance coverage and determining how much more life insurance to purchase, if any. I also have to factor in the likely fact that it’ll cost more than the original policy. So that brings up the question, what do you do when additional life insurance is too costly?

Factors in term life insurance cost

There are several factors that go into the cost of term life insurance.

• The length of coverage
• Your current age, health, and lifestyle
• Amount of coverage

What if you can’t afford more?

f this combination of factors puts additional term insurance out of your financial reach, you face a dilemma. You have to balance your need for insurance with your ability to pay for it. If the cost of an additional policy is truly out of reach, you can try these:

• Buy more insurance through your employer. Buying life insurance through your employer may not make sense if you’re young and healthy (you can get cheaper coverage outside the company) but if you’re older and/or in poor health, this makes sense for you.
• Make smart health decisions. Stop smoking (or using any form of tobacco). Lose weight. Control your blood pressure. It’s not only healthier, it’s cheaper. The cost of life insurance for smokers is out of this world compared to non-smokers.
• Make lifestyle changes. Believe it or not, when getting a quote, you’ll be asked if you fly a plane, skydive, or work at heights. All of these and more increase your rate.
• Buy the right kind of insurance. Even within term life insurance, there are two types. Level term policies never increase in price throughout the term of coverage. Annual renewable do. Look at the total cost of ‘ownership.’
• Get the right term. Carefully evaluate how long you need the coverage.
• Wait. It may make sense to wait for two reasons. First, rates will likely continue to fall or at least remain flat. Second, if your reason is medical, a sufficient period of time can mitigate the damage to your rate. In other words, if you put enough time between you and the medical event, your rate may improve.
• Do without. This may go against advice many would give. The bottom line is, if you can’t afford something, don’t buy it. That applies to life insurance, as well. Maybe instead of having college paid for if you die, your kids will have to do what millions of other kids do - take out loans and work through school.

What I did

Ok, so what did I do? I increased my coverage through my employer. I had been buying salary x 5 coverage and I increased it to salary x 6 and increased my AD&D (accidental death and dismemberment) to salary x 7. My thinking is, I’m young enough that, if I die, it’ll likely be because of an accident. The coverage costs a bit more than my rate on the outside-the-company insurance policy, but I believe it’s lower than if I tried to get more coverage now.

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International investing is gaining in popularity, and with good reason. International index funds have outperformed most U.S. index funds for the past several years. And as that performance continues, more people are pouring money into overseas markets. The Wall Street Journal reports that, according to the U.S. Treasury, in March U.S. investors bought $40.3B more foreign stocks and bonds than they sold. Only December 2006 had a higher monthly outflow.

International investing is typically used to diversify a portfolio, but it also has a hidden benefit - currency risk. Currency risk is the risk that one currency’s value will fluctuate relative to another. The U.S. dollar has been falling recently and in my opinion will continue to do so. As the U.S. dollar depreciates, foreign stock and bond gains are magnified.

The effect of all this foreign investing further depresses the dollar. That leads to more attractive gains, which leads to additional investment. The cycle is self-reinforcing.

Euro versus Dollar

It is called currency risk for a reason, however. Should the dollar strengthen, any gains in foreign investments will be tamped down. If foreign investments turn negative (and they are historically more volatile than their U.S. counterparts), those losses will be magnified that much more.

I’m personally convinced of two things relevant to this discussion - the dollar will continue its 4-year slide and foreign stocks will continue to perform strongly. I’ve recently changed my 401(k) allocation to reflect that sentiment.

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The 101st Carnival of Personal Finance is up at FIRE Finance. Enjoy the carnival.

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