Saturday, June 30, 2007

Retirement Planning and Alchemy

Retirement Planning and Alchemy

I begin the second section of the book titled "Seven Misunderstandings" with a brief discussion about the alchemist. The history of this pseudo-science, archaically referred to as Ars Magna has its roots on many different continents. The practice of transmutation was practiced by the Arabs, the Chinese, the Hebrews, and the Indians.

Many believe that the nature of alchemy can be broken down into three distinct categories. Some suggest four, adopting a French term to describe the alchemists who persisted in a single quests rather than anything that might resemble scientific methodology. Called "Les Souffleurs" or blowers, their goal was almost solely for material gain.

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But alchemist struggled with religious implications as much as the did with the philosophical and scientific disciplines of their profession. Because of the nature of the art form, transformation was necessary and given the time frame when alchemy arose, there was no one better at achieving such changes than the Pope himself. Unfortunately, alchemy does not lend itself to quick study.

It was far easier for the Pope to simply call it the work of the Devil. Roger Bacon, Albertus Magnus and Thomas Aquinas all supported the notion that alchemy was otherwise.

The scientific alchemist invented, discovered or were among the first to develop gunpowder, arsenic, phosphorous, a wide variety of acids and most importantly, some sort of method to prove their findings. The alchemist believed that there were "three principles - salt, sulphur and mercury and that sources of these three principles were the four elements: earth, water, fire and air". Simply boil water in a kettle and you can see how the alchemist arrived at such conclusions. After the water boiled, what was left but earth and air (in the form of steam).

Among the most notable scientists to embrace alchemy was Newton. He was an astronomer as well. In Newton's time, astrology and astronomy were one and the same for thousands of years leading up to and during Newton's time in history. Astrology and alchemy had also been intertwined for thousands of years. This made Newton's deep studies into mathematics and his related breakthrough theories in gravity and astronomy, for which he is best known, possible. Newton was a mystic and possibly an occultist but much of what he worked on was destroyed in a fire.

Is it any wonder they have been described as Sorcerers? Because of the time needed to devote to such pursuits, the philosophical alchemist arose. This alchemist searched for elixirs to prolong life or inanimate objects that would provide wisdom.

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Alchemist did finally achieve some degree of notoriety when in 1935, the Nobel Prize for Chemistry was awarded to Doctors Irène Joliot-Curie and Frédéric Joliot of Paris for their synthesis of new radioactive elements carried out in partnership. In the speech given at the ceremony, Professor W. Palmaer who was serving as chairman of the Nobel Committee for Chemistry said,"

    "Madame, Sir. In awarding to both of you in equal shares the Nobel Prize in Chemistry for this year, the Royal Academy of Sciences has been pleased to be able to reward, in a brilliant way, the synthesis, achieved by your united efforts, of new radioactive elements.

    Thanks to your discoveries, it has become possible, for the first time, to transform artificially one element into another hitherto unknown. At last the old dream of the alchemists has become reality. Their main object, the production of gold, has been attained, though by a path, it is true, less direct than they thought would lead them there. The results of your researches are of capital importance for pure science, but in addition, physiologists, doctors, and the whole of suffering humanity hope to gain from your discoveries, remedies of inestimable value.

Retirement planning can have similar goals. We seek to transform years of hard work and toil, diligent saving and scrimping in the hope that the reward will be a comfortable, work-free lifestyle. Is this any less the work of an alchemist who tries to change one thing into another.

It is my hope that we can, in this section of the book, redirect some of the misunderstandings you might have and transform them into gold.

I leave you with this quote from Bertrand Russell: "The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts."

Wednesday, June 27, 2007

Retirement Planning and Misconceptions

Retirement Planning and Misconceptions

Misconceptions live quietly on the dark side of retirement planning. These are understandable and largely forgivable human traits that are often quite innocent in their origins.

Given two pieces of information, we can often form child-like combinations, jumbling facts in a process that resembles sound thinking. In part two of the book I am writing, I discuss the idea that homes are not investments. Many of us make this mistake. And because we do, this is probably the largest preconceived notion we make about retirement planning.

This kind of conceptual misunderstanding often leads us to make unfounded assumptions about our wealth and more importantly, our plan. And because of that, it hinders our ability to make good long-term decisions.

The greatest problem facing someone who harbors many of these kinds of beliefs, of which I mention seven that can have a detrimental effect on your retirement, is the fact they tend to become a sort of gospel filled with what we believe to be undeniable truths.

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Bill Beaty at the American Institute of Physics has complied a list of common scientific misconceptions that plague good understanding of our world around us. When it comes to retirement planning, the list is much shorter but with more disastrous results if not corrected in time.

But how did we get to the point where we follow what we think we know and argue so vehemently against the truth? Perhaps it was a simple as following the person who traveled the road before we did.

I am reminded of a poem by Sam Walter Foss (1858-1911) titled the Calf-Path. Mr. Foss it should be noted, was a librarian and a poet from rural New Hampshire. The poem below is not his most famous but does tend to illustrate that idea that once we are given an idea, in this case a path, we tend to take it unwittingly even if it is not the shortest distance to the place we seek.

    The Calf-Path
    One day, through the primeval wood,

    A calf walked home, as good calves should;

    But made a trail all bent askew,

    A crooked trail, as all calves do.

    Since then three hundred years have fled,

    And, I infer, the calf is dead.

    But still he left behind his trail,

    And thereby hangs my moral tale.

    The trail was taken up next day

    By a lone dog that passed that way;

    And then a wise bellwether sheep

    Pursued the trail o'er vale and steep,

    And drew the flock behind him, too,

    As good bellwethers always do.

    And from that day, o'er hill and glade,

    Through those old woods a path was made,

    And many men wound in and out,

    And dodged and turned and bent about,

    And uttered words of righteous wrath

    Because 'twas such a crooked path;

    But still they followed - do not laugh -

    The first migrations of that calf,

    And through this winding wood-way stalked

    Because he wobbled when he walked.

    This forest path became a lane,

    That bent, and turned, and turned again.

    This crooked lane became a road,

    Where many a poor horse with his load

    Toiled on beneath the burning sun,

    And traveled some three miles in one.

    And thus a century and a half

    They trod the footsteps of that calf.

    The years passed on in swiftness fleet.

    The road became a village street,

    And this, before men were aware,

    A city's crowded thoroughfare,

    And soon the central street was this

    Of a renowned metropolis;

    And men two centuries and a half

    Trod in the footsteps of that calf.

    Each day a hundred thousand rout

    Followed that zigzag calf about,

    And o'er his crooked journey went

    The traffic of a continent.

    A hundred thousand men were led

    By one calf near three centuries dead.

    They follow still his crooked way,

    And lose one hundred years a day,

    For thus such reverence is lent

    To well-established precedent.

    A moral lesson this might teach

    Were I ordained and called to preach;

    For men are prone to go it blind

    Along the calf-paths of the mind,

    And work away from sun to sun

    To do what other men have done.

    They follow in the beaten track,

    And out and in, and forth and back,

    And still their devious course pursue,

    To keep the path that others do.

    They keep the path a sacred groove,

    Along which all their lives they move;

    But how the wise old wood-gods laugh,

    Who saw the first primeval calf!

    Ah, many things this tale might teach -

    But I am not ordained to preach.

Tuesday, June 26, 2007

Retirement Planning and Life Expectancy

Retirement Planning and Life Expectancy

No retirement planning book would be complete without a look at life expectancy. Trying to determine how long you might live, whether you will outlive your money and exactly how much money will be needed should you break all-time length of life records affects every plan.

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In the book, I point to the work done by Wharton School of Business professors Dean P Foster, whose field is statistics and Lyle Unger, an expert in Genomics and computational biology. Their work on longevity based on how much walking one does was expanded into a full fledged calculator with the addition of Chua Choon Tze, who brought his finance background from the Lee Kong Chian School in Singapore.

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The calculator was expanded to include numerous diseases and charts that will narrow your possibilities by ranking you among your peer group.

Included are references to fitness using a maximal treadmill exercise test as a measure of fitness with an initial speed set at 3.3mph, 0% grade for 1st minute, 2% grade for 2nd minute, an increase of 1% for each subsequent minute until 25 minutes thereafter, the speed is increased by 0.2mph each minute until test is terminated

To do this of course, you would need to compare what you think the maximum amount of time that you can stay on the treadmill with mean time for men of 16 minutes 52 seconds and a mean time for women of 11 minutes 28 seconds.

They also asked the user to judge their diet (Dairy, Meat, Grain, Fruit, Vegetable) and their stress level. The following list would have a negative effect on your overall life span:

  • Serious Illness in a family member (excluding death)

  • Serious concern about a family member (excluding illness)

  • Death of a family member

  • Divorce or separation

  • Forced to move house

  • Forced to change job

  • Been made redundant

  • Feelings of insecurity at work

  • Serious financial trouble

  • Been legally prosecuted

More fun can be had at NW Mutual's longevity game. As you input the information, your body changes shape and often not for the better. Starting out at the average life expectancy of 74, each question prompts an increase or a decrease in that anticipated age.

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There is much more to creating enough wealth to weather a long lifetime. And these calculators and games only hope to illustrate the changes you can make to achieve a longer healthier life. My job is to help you get the money you need.

Monday, June 25, 2007

Retirement Planning and Star Stuff

Retirement Planning and Star Stuff

As our discussion with time progresses, there is no better way to explain the effects of time better than a look to the stars. Stars are a window to the past. They offer us a glimpse of what was and although we perceive them in the present, what we see is actually an event that has traveled across space only to appear as a fixed apparition in our night sky.

There are 400 billion stars in the Milky Way galaxy, most of which are clustered at the center. Our little solar system of which the sun would be considered not much more than typical is on the outer reaches of the spiral. In fact, we are mostly guessing what the Milky Way looks like. When we depict the galaxy as a spiral, we are actually assuming that we are much like Andromeda or M31.

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As I introduce the section just before compounding, I mention a celestial event that took seven years to reach our night sky. When SuperNova 1987A exploded into the night sky astronomers were thrilled.

It was the first "nearby" supernova to appear in the last 3 centuries. In addition to the light show, astronomers were able to detect 19 of the elusive neutrinos produced by the collapse of the star's core. It is estimated that for an instant in 1987 on the earth the neutrino luminosity of SN1987A was as large as the visible-light luminosity of the entire universe.

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Compounding has similar astronomical qualities. The savings socked away at an early age literally explode as time progresses. In the same way the light from SN1987A traveled, compounding offers a chance to illuminate an other wise inanimate lump of cash.

Einstein, yes, the same one with those revolutionary theories about relativity and time and space is credited with the following quote: "compounding is the most powerful force in the universe". But it is doubtful that he actually said exactly that. With his death occurring in 1955 and closest attachment to the quote appearing almost 25 years later and in numerous versions, his affiliation to the quote appears remote.

He may have appreciated the elegance of the math, the way money can grow as if by magic using compounding. What he wouldhave been marveling at was the mathematical simplicity of the Rule of 72.

Rule of 72 works like this: If you wish to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. For example, if you want to know how long it will take to double your money at six percent interest, divide 6 into 72 and get 12 years.

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If you are curious at how far that beam of light from SN1987A traveled in a year, you would be required to just a little math. A light-year is the distance that a beam of light, uninterrupted and in empty space, would travel in a year -- which is about 9, 470, 000, 000, 000 (nine million million, four hundred seventy thousand million) kilometers. Multiply that by seven.

Douglas Adams' The Hitchhiker's Guide to the Galaxy described the vastness of space as "Really big. You just won't believe how vastly hugely mind-bogglingly big it is. I mean, you might think it's a long walk down the road to the chemist, but that's just peanuts to space."

Friday, June 22, 2007

Retirement Planning and Behavior

Retirement Planning and Behavior

First and foremost, retirement planning is about how you approach the subject. It is for most of us, a sort of behavior modification. We want to do better. We plan to do better. But in the end, we often fail and there are numerous statistics to prove that to be true.

While reading about some other person's failures is far more entertaining, reading yourself into some of the studies I present in this section of the (as-yet-to-be-edited) book can be eye opening.

Sharon A. DeVaney, who is a Professor of Family and Consumer Economics, Department of Consumer Sciences and Retailing, Purdue University and Sophia T. Chiremba, Ph.D. candidate, Department of Consumer Sciences and Retailing, Purdue University co-authored a paper discussing the different types of savings habits titled Comparing the Retirement Savings of the Baby Boomers and Other Cohorts

In that paper, they reveal some interesting statistics about who we are and how we approach savings. For instance, Ms. DeVaney and Ms. Chiremba noted the following:

    There was at least one retirement account in 57 percent of the households. The average or mean amount in the retirement accounts was $49,944. The median amount held in retirement accounts was $2,000.
    About 34 percent of households preferred not to take any risk when saving or investing, while 39 percent would take average risk, and 27 percent would take above average or substantial risk.

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    The Swing cohort was the smallest group mentioned in the paper, representing just 14 percent of households. They wrote that "On average, respondents had completed about 13 1⁄2 years of education. Forty-six percent of the households had children aged 18 years or younger living in the home. Thirteen percent of the heads of household were self-employed. The average or mean household income of the sample was $72,673; the median household income was $44,000.

    Forty-four percent claimed that they had spent less than their income in the previous year, while 19 percent indicated that they had spent more than their income, and 37 percent reported that they had spent an amount equal to their income.

I mention several other studies in this section of the book including an update on what is known as "the Life-cycle Hypothesis", a suggestion that savings is determined by your age. Bracketed by younger people who borrow against future earnings and older folks who spend what they have saved, this hypothesis suggests that middle-aged people are most likely to save.

Icek Ajzen suggested something entirely different. He published a paper in 1985 that first appeared in an article titled “From Intentions to Actions: A Theory of Planned Behavior”. Mr. Ajzen believed that savings is determined by our approval rating among our peer group and the successes we may have had in the past.

To overcome that, we need to focus on what is not known, couple that with what is possible and soldier on without any notion of perceived gains. The possibility of a more comfortable future if we plan our retirement without the burden of our bad behavior is a huge but not insurmountable challenge.

Thursday, June 21, 2007

Retirement Planning and Calendars

Retirement Planning and Calendars

I began the discussion in section one of the book with calendars. Let's face it, time is what we are most focused on when it comes to retirement planning. While the book focuses on how we can make the best use of time and how to offset many of the problems along the way - each of which seems to act as a subtracting force - we often ignore the importance of our linear march to the end.

Time is a powerful, almost spiritual force that early peoples believed was better left to the priests. While I mention the earliest calendars in the book, the real breakthrough work was not being done in Europe or Egypt but here in the Americas.

Using the regularity of Venus, Mesoamerican Indians had calculated the rather regular movements of this planet.

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This planet moves in a regular pattern. It spends 263 days in the morning sky, disappears for 50 days behind the sun and then spends 263 days as fixture on the evening horizon. But to these ancient Mayans, this was not enough. In fact, they developed a much more complex calendar of which Venetian observances became only one of three measures of time.

They also used a calendar that tracked a solar year much the way we do now and something called a Long Count, which meshed the other two calendars into one.

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The Long Count calendar gave these early time keepers the ability to extend beyond the boundaries of secular and solar timekeeping where every day in a 52 year period had an exact and distinct name. According to Charles C. Mann, author of 1491, early peoples took their birth date as their name.

A Long Count calendar was important for numerous reasons. It gave coherence to the other two measures of time. And even more importantly, it gave them the ability to extend their thinking into the future.

How far? They were able to set a beginning date - somewhere around mid-August 3114 B.C. and an ending date 23 billion plus years into the future.

Because our retirement plans are based on a much shorter time period - our work years, we are left with a sense of urgency to accomplish great things in a relatively short period.

When we begin our saving for retirement later than we like, we are often left with feelings of guilt and apprehension. I hope to fix some of those problems. Not all of them, just the issues pertaining to your money.

When we begin early, we are often sidetracked as life begins its relentless quest for our attention and money.

Time is our foil. Perhaps we can fix that and turn this steady march into a more rewarding journey.

Wednesday, June 20, 2007

Retirement Planning and Chiaroscuro

Retirement Planning and Chiaroscuro

One of the first words in the new book deals with the rather obscure term chiaroscuro. Described by Richard Larmann of the University of Evansville as "a method for applying value to a two-dimensional piece of artwork to create the illusion of a three-dimensional solid form. This way of working was devised during the Italian Renaissance and was used by artists such as Leonardo da Vinci and Raphael. In this system, if light is coming in from one predetermined direction, then light and shadow will conform to a set of rules."

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Retirement planning is an art form that harbors subtle shadows and nuances that too often draw your eye away from where you need to focus. Painters using this method understand that it is the foreground the commands your attention but it is the background that lends the art its visual depth.

We often focus solely on how much we are saving for those after-work-years and not on the shadows, which because we do not pay as close attention to, often subtract from the effort.

You can see this used in the following paintings by Caravaggio and van Honthorst.

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My personal favorite is by German artist Elsheimer seen here in the burning of Troy.

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Tuesday, June 19, 2007

Retiring with a Plan

Retirement planning has become a hot button topic of late with investment industry professionals, financial planners and insurers all lining up to get a piece of this underdeveloped market.

The blog will follow several threads. We will offer you a look at some of the unedited sections from my new book due on the shelves in January of 2008. It will also supply you with some additional source material related to the book plus some articles of interest that focus on this time of life.

The blog however will not be restricted to just retirement planning but will incorporate many different financial aspects that could, if they were not managed properly, have an effect on your plan later in life.