If you look at gross domestic product (GDP), a commonly accepted measure of productivity, you see dramatic differences in the two countries. According to the CIA’s World Factbook website, the GDP of North Korea is estimated at $40 billion for 2011. That’s for a country with 24 million people. The GDP of South Korea is estimated at $1.5 trillion for the same period. What’s the difference? It’s due in part to population differences. South Korea has twice the population at 49 million. But per capita GDP figures, or GDP per person, are significantly different. Per capita GDP for North Korea is $1,800 while per capita GDP for South Korea is $31,700, or more than 17 times greater!

Former Ohio Congressman Bob McEwen says it boils down to freedom. In South Korea, people have the freedom to pursue what they want to do. North Korea is a Communist state, where people are told what they will do. While South Korea is creating a middle class by selling products all over the world, North Korea is having trouble feeding their people. The United States just agreed to send 240,000 metric tons of food to North Korea. In return, we have gotten some agreements to be able to inspect their nuclear facilities. It seems ironic that the ultimate in big government, a Communist state, would have trouble feeding their people. After all, adding government programs and increasing control over the population is normally done under the guise of benefitting “the people.” Yet in North Korea, the people have a standard of living significantly below those of South Korea. Besides the two Koreas, McEwen’s You Tube videos cite other examples of government control and the effects on those economies.

McEwen says half of the people in the world live on the equivalent of less than $2 a day. Half of those, or one fourth of the world’s population, live on less than $1 a day. Even the poorest of families in the U.S. live better than the vast majority of the rest of the world. Those living below the poverty line in the U.S. are still likely to have a phone, cable TV, automobile, and air conditioning.

The U.S. contains only 4 percent of the world’s population but we produce an incredible 25 percent of the world’s output. We have abundant natural resources in the U.S. and that may partially account for some of the differences in productivity. But McEwen attributes the main factor to individuals being free to pursue their dreams; i.e., less intervention from the government.

So what’s the point of this discussion? The last few years we seem to be moving more toward bigger government. How do I define “big government?” Well, the year 2000 was Clinton’s last year in office and a year where our federal government actually ran a surplus of $237 billion. Federal expenditures were 18 percent of our national GDP. The federal debt was $5.63 trillion. In 2005, the middle of George W. Bush’s term, federal expenditures were 20 percent of GDP and the federal debt was $7.91 trillion. In 2010, midway through Obama’s term, federal expenditures were 24 percent of GDP and the federal debt was $13.53 trillion. In a span of roughly 10 years, federal spending went from 18 percent of GDP to 24 percent of GDP. By the way, we haven’t paid for it either, with the federal debt now approaching $16 trillion. That sounds a lot like a move to bigger government to me. McEwen says greater freedom creates greater wealth and greater (bigger) government creates greater poverty. That appears to be borne out in the two Koreas. Reckon it might apply here?

Published in the Texarkana Gazette on March 18, 2012.

Have you noticed what’s going on in the stock market? We had a good fourth quarter in 2011 but so far the first two months have been even better. Since January 1, U.S. stock markets are up sharply. The Dow is at 13000 for the first time since 2008. The NASDAQ is up by more than 10 percent. And its not just the U.S. markets that are humming. Foreign markets are participating in the rally as well. Morgan Stanley’s index of foreign stocks is up by 9 percent and emerging markets, after being down sharply last year, are rebounding as well. Across the board, it’s been a great year for stocks so far, especially when you consider that markets typically deliver returns averaging 10 percent per year.

Do you find yourself anxious to open your statements at month end to see how well you’ve done? Just a few months back you probably dreaded opening those same statements. Do you also find yourself thinking that you should invest more money in the market? Especially since those CD yields are so pitiful. If you’re having those thoughts, you are not alone. If history is any guide, and it probably is, investors will be in a buying mood as stocks move higher. Odds are you are not thinking about selling. But perhaps you should be. I don’t mean you should get out of the market completely. But you might want to consider taking some profits as market levels move higher.

It’s hard to sell stocks when you have a winning hand going. But corrections do come along. They did in 1987, in 2000, in 2008 and they will again. I’m not predicting a correction in the immediate future. But there are plenty of things that could derail an economic recovery. I’ll give you a few examples.

For one thing, gasoline prices have shot up rapidly. This takes funds directly out of consumer’s pockets. And you and I, as consumers, are the driving force behind the economic recovery. If we slow our spending down, businesses sell less and become less inclined to hire. So high fuel prices have the ability to stall a recovery.

For another issue, there is the European problem. We heard some time back that Greece has been spending money like, well, like drunken Americans. So have a few other European countries and the fiscal issues of Europe can have spillover effects to our economy. Economics textbooks have generally taught that governments don’t go broke because they have the power to generate additional revenue, either by taxing people more or issuing more debt to pay their bills. Apparently that’s not always true as Greece has teetered on default. Then there is the tension between Iran and Israel. If these two countries get into it, we’re going to feel it.

These are just a few points as to why a slowdown, or even a correction, could occur. On balance, I am optimistic about the economy. Companies are making profits in general and that’s a good thing. It means they will want to add workers and then unemployment rates drop further. In addition, new oil and gas discoveries on our side of the world have the ability to lower energy costs and decrease our dependence on foreign energy. There are good reasons to believe that the rally will continue.

Alan Greenspan once used the term “irrational exuberance” to describe asset values inflated beyond their true worth. I don’t think the stock market is overvalued but it makes sense to take some profits as the market rises. So if your portfolio has had some nice gains recently due to the run up in markets, you might want to take a portion of those recent gains out of the market. What to do with the funds? You could take some of those profits and put them in a short term bond fund, for example, earning 3 percent or so. A relatively low return, I agree, but remember the idea is to take some gains and limit risk. It makes sense to do some selling when prices are up and do some buying when prices are down. Warren Buffet puts it this way, “Be fearful when others are greedy, and be greedy when others are fearful.”

Published in the Texarkana Gazette on March 04, 2012.

As you know, the company did well and so did the stock. From the initial price of $16.50, Wal-Mart stock rose to a price of $47 by May, 1971 and the company had its first stock split of 2 shares for each one held. An investor who had purchased 100 shares of Wal-Mart was now issued another 100 due to the split and now held a total of 200 shares. And they were thrilled, even though upon splitting the stock, the price of each share was reduced to half its former value. An investor that previously held 100 shares at $47 now held 200 shares worth $23.50. Even though the investor’s total value, $4,700, hadn’t changed at the time of the split, there’s something exciting about getting another 100 shares of stock. It’s almost like manna from heaven.

As a matter of fact, original purchasers of Wal-Mart’s initial public offering, if they continued to hold their shares, would have seen the stock split another 10 times over the next 40 years. 100 shares bought in 1974 would now equate to 204,800 shares. Wal-Mart has been a successful investment for long term holders. But did the stock splits over the years have anything to do with that success? That’s a question that has long been debated by academics and investors over the years.

The majority of finance academics argue that stock prices over time are a reflection of the underlying financial health of the company. Is the company profitable? Are profits increasing or decreasing? Is the company’s debt level manageable? A stock split does nothing to affect the profitability of a company. Sales at the Wal-Mart cash registers are probably unaffected by a split, as is the profitability of those sales. Given those assumptions, splits don’t add value or increase returns.

On the other hand, proponents of stock splits argue that splits generate attention to the stock and may increase the demand for the stock. Stock splits create the impression of a rapidly growing company with a rapidly growing stock price. There’s no question that stock prices in the short term are determined by supply and demand. And companies usually split their stock after a run up in price. Walmart often split the stock as it approached $60 and a 2 for 1 spilt would reduce the price back to $30. Theoretically, this attracts more small investors who are better able to buy $30 shares than $60 shares.

An example on the flip side of stock splits is Warren Buffett’s company, Berkshire Hathaway. You might remember Buffett as the guy whose poor secretary pays taxes at a higher rate than he does. Or you might remember him because he’s worth $50 billion or so. Anyway, his company’s common stock trades at a price of $116,909 per share, as of the close of February 14. Why is it so high, you might ask? The company has never split the stock. Apparently it doesn’t bother Warren that small investors can’t buy a single share of Berkshire Hathaway. It would seem to me that if Buffett, a champion creator of value, thought a split would help his company, then he’d split the stock. I should note that Berkshire eventually allowed an alternate version of it stock, Berkshire B shares, which trade below $100 a share.

So do stock splits matter? I was at the Wal-Mart stockholder’s meeting in 1990, one of the last meetings Sam Walton was able to attend before his death in 1992. It was standing room only at Barnhill arena. Near the close of the program, Sam took questions from the audience. A Wal-Mart employee, perhaps a stocker, stood up and asked Sam when he was going to split the stock. Sam asked the audience if they wanted a stock split and the crowd cheered loudly. He then indicated Wal-Mart would once again split the stock 2 for 1 and the place went wild. Apparently the majority of folks attending the meeting weren’t studied up on all the latest academic research regarding splits. Oh well.

Published in the Texarkana Gazette on February 19, 2012.

As an example, consider the stock of telecom giant AT&T. It currently trades at about $29.50 per share and it pays an annual dividend of $1.76. That means the dividend yield is about 6 percent, which looks great up against a CD paying 0.6 percent. There is no free lunch, however. Even though you are collecting a 6 percent dividend, the price of AT&T fluctuates daily (that translates into risk) whereas that CD at the bank does not fluctuate in price. Another high yielding stock is Credit Suisse, selling at around $27 per share and paying a dividend of $1.48, for a yield of 5.5 percent. $100,000 invested in Credit Suisse would generate $5,500 a year in dividends and that certainly looks tempting with yields on cash next to nothing. Before you become convinced to buy into high yield stocks, you should consider a few things.

First, dividend yield is a function of two numbers, dividend (the numerator) and stock price (the denominator). A high dividend yield could be the result of a declining stock price. A declining stock price could be the result of the market in general or it could be a signal there is something wrong with the company. So don’t buy into a high yield situation without further investigation.

You should also not assume the company can continue the dividend. If the stock has declined in price due to financial difficulty, the company could be forced to reduce or eliminate the dividend.

If you were going to follow a strategy of buying high dividend stocks, it would make sense to buy a portfolio of such stocks to gain some diversification. There are mutual funds that do just that. One popular strategy is to buy the Dogs of the Dow. Out of 30 stocks in the Dow Jones Industrial Average, the investor buys the 10 with the highest dividend yields (these 10 stocks are “dogs” due to their low price). As one “dog” moves up in price, you sell it and reinvest in a new “dog”, likely a stock that has dropped in price, thus maintaining the ten dog strategy. Besides creating significant income, this strategy has the advantage of buying low and selling high. So how does the “dogs” strategy work over time?

Several mutual funds follow this strategy. One is the Hennessey Total Return. For 2011, this fund reports a return of 11.2 percent while the S&P 500 returned only 2 percent. Of course, a one year period is too short to base investment decisions on. Over a 10 year period, the Hennessey fund returned 3.9 percent annually, beating the S&P 500 by about one percent per year and giving some long term credibility to the theory.

A final concern I would have is diversification. If you buy a ”dogs” fund, you are getting large U.S. based companies. What about foreign companies, in both developed and emerging markets? And shouldn’t we include smaller companies and middle sized companies in the portfolio? What about putting some real estate in the mix as well? How does the ‘dogs’ theory stand up to a globally diversified portfolio of stocks?

I ran a simulation of what I would consider a typical globally diversified portfolio over the same 10 year period ending in December, 2011. It included a 65 percent weighting to U.S. stocks and a 35 percent weighting to foreign stocks. I also included a ten percent real estate weighting. Over the same 10 year period, the globally diversified portfolio of stocks returned 5.6 percent versus 3.9 percent for the Hennessey fund. I’d rather have the higher return over time even if the portfolio didn’t produce as much dividend income. I could simply sell off a few shares of a fund to make up any income shortages.

A high dividend strategy appears attractive in today’s low yield environment. But you could give up some important return components by concentrating on such stocks and ignoring other major sectors of the market. Beware of the dogs.

Published in the Texarkana Gazette on February 05, 2012.

Let’s start with retirement accounts. This would include your 401(k) or other plan at work as well as your IRA accounts. Generally when you are designating beneficiaries, you designate one or more primary beneficiaries and then one or more secondary beneficiaries. For example, a husband might designate his wife as the 100 percent primary beneficiary and their two children as each being 50 percent contingent beneficiaries. Then, if the wife predeceases the husband, and the husband never gets around to updating his beneficiaries, the kids would still split the account 50-50. If a third child is born, you should update your account to give contingent beneficiaries one third each. While a will often contains language that additional children born are to be included in any distributions, beneficiary designations don’t include such language, so you need to update for the changed status.

For certain plans at your place of employment, your spouse is required to be your beneficiary unless they sign off and waive their rights as beneficiary. For example, in the case of a second marriage, you might want your kids to get your 401(k) proceeds instead of your spouse. Your spouse will likely have to sign off on that.

Speaking of second marriages, you should be aware that divorce does not automatically remove your ex-spouse as a beneficiary on your account. You have to take care of that with each account to which it may apply to, including your retirement plans at work and your IRA accounts. When designating beneficiaries for your IRA accounts, you should normally name individuals and should not name your estate as the beneficiary. That way, your beneficiaries can take distributions over their lifetime if they want to, thus spreading the associated tax liability over years into the future. If your estate is listed as the beneficiary of your IRA, the account will have to be liquidated within five years since estates don’t have a life expectancy that can be used as a distribution period. Liquidation of a large IRA within that time frame could create a tax liability that might have been deferred years into the future.

The same rules will basically apply to your life insurance policies. Whoever is named as beneficiary will get the proceeds. For example, suppose your will says that you want your spouse to get everything. But one of your kids happens to be listed as the beneficiary on an old life insurance policy. The beneficiary designation will control in that instance and the kid, not your spouse, will receive the proceeds.

Bank accounts don’t generally require you to designate a beneficiary. However, you could add a payable on death provision (POD) to the account. That way, upon your death, the account passes to the named person or persons without having to wait on a probate court to rule on distribution. The same feature is available on brokerage accounts but is generally referred to as a transfer on death provision, or a TOD. Both POD and TOD accounts will bypass the probate court process, resulting in a faster, more private transfer process.

While wills don’t determine distribution of assets on the above types of accounts (since they have beneficiary designations), this still might be a good time to review any will or trust documents you had drafted in the past. Again, circumstances in life change and you may need to revise some provisions. There have been substantial changes to the estate tax laws over the last ten years. These changes could impact the way your will or trust documents are currently drafted. It’s probably worthwhile to sit down with your attorney for a review if it’s been some time since they were drafted.

So this year I am going to get organized by checking my beneficiary designations and reviewing my legal documents. And if there is enough time left, I may clean up my office as well.

Published in the Texarkana Gazette on January 22, 2012.

Why are there costs? For starters, somebody has to keep track of the money going into the funds. Often, you as the employee are contributing money and in many cases your employer is chipping in as well. These funds have to be kept track of in separate buckets because different rules apply to your money versus money your employer puts in for you. Somebody also has to keep track of who is participating. Is it just the fat cats at the top or are the rank and file employees benefitting as well? Then there is the cost of the mutual funds and broker fees and postage. It all adds up but you never see a bill. You probably think your employer is paying for this and in fact they might be. But the majority of plans deduct these fees out of participant accounts in a manner where they are not easily seen.

So you are paying for the services even if you don’t see a bill. Why should you care? Because these fees can add up and may in fact be excessive. Any fees that you pay will reduce the amount of money you end up with in retirement. So it’s important that 401(k) fees be reasonable. Pretty soon, you will have a clear picture of what the fees are in your 401(k) plan. New rules from the Department of Labor will require full disclosure of fees in the first half of 2012. Fees will have to be disclosed in both dollar amounts and percentage terms so that participants have a clear idea of what they are paying and who they are paying it to. The companies that manage 401(k) accounts will also have to disclose whether or not they are acting in a fiduciary capacity. In other words, are they required to act in the best interests of the participants in the plan? Oddly enough, most plans are serviced by non-fiduciary providers such as stock brokers and insurance companies. Violation of fiduciary responsibility carries consequences.

A recent example of how this fiduciary issue comes into play can be found in the case of Wal Mart and their 401(k). A Wal Mart employee sued the company claiming the lineup of mutual funds was not in the best interest of the employees. For example, Wal Mart offered several retail level funds, funds that the average small investor might purchase, when less costly institutional class funds were available. The case developed into a class action lawsuit and recently Wal Mart, along with the 401(k) manager Merrill Lynch, agreed to pay $13.5 million in settlement, with Merrill paying the bulk of it. Merrill was collecting huge fees and yet, as a stock broker, had no fiduciary responsibility on the plan. Curiously, in this particular case, Wal Mart, a company known for controlling costs with a passion, didn’t appear to monitor such costs with the employee’s retirement accounts. Wal Mart has the largest 401(k) plan in the world and certainly could have achieved economies of scale.
Normally, the larger the plan, the lower the overall costs of operating the plan. Therefore, smaller employers are often paying the highest fees, many times without knowing what the costs are. If the new regulations pan out as intended, both employers and employees are going to know what the costs are and whether they are paying reasonable fees. In addition, they will know whether their provider is acting in a fiduciary capacity or not.

How much should fees be? There is no good single answer here. Fees will vary by size of the plan, number of participants, employee turnover and other factors. Obviously, if you are paying 3 percent a year for fees, and some plans are, it puts quite a drag on your portfolio returns. Benchmarking services are available to employers to gauge what is reasonable given their situation. Again, employers often don’t know what the costs are due to the fact that they are buried. But under the new disclosure rules, as an employee, you can see what your investment costs are. If they seem out of line, ask questions. Trimming on the costs of managing your 401(k) can make a huge difference in your balance at retirement.

Published in the Texarkana Gazette on December 25, 2011.

The banker immediately quizzed the fisherman as to why he didn’t stay out longer and catch more fish. The fisherman replied that these few fish were enough to support his family’s immediate needs. “So what do you do with the rest of your time?” asked the banker. The fisherman said that he usually slept late, then played with his kids, fished a little, took a siesta each day, then took a stroll with his wife each evening in the village, where he met with friends and played his guitar. “I have a full life,” he told the American.

The banker scoffed at him, telling him he should spend more time fishing. By catching more fish, he could sell some and buy a bigger boat. That would allow him to catch even more fish and he could then buy a fleet of boats. Then, instead of selling his fish to a middleman, he could open a processing plant and control all aspects of his enterprise, right down to shipping to the grocery stores. According to the banker, this would require moving his family to Mexico City initially and then eventually to New York City in order to run this expanding enterprise.

The fisherman listened wide eyed and then asked how long all of this would take. “Probably 15 to 20 years,” replied the banker. “And then what?” asked the fisherman. “That’s the best part,” replied the banker. “You can sell stock in your company to the public and become very rich. You will make millions of dollars.”

“And then what?” asked the fisherman. “Then you would retire. You could move to a small Mexican village, where you could sleep late, fish a little, play with your kids, stroll with your wife in the evenings and play music with your friends.”

I like this story because it’s the picture of a content person. And we live in a world where there is a lot of discontent. Are you more like the fisherman or more like what the banker wanted the fisherman to become? Are the goals you are pursuing worthwhile or misdirected? Do you have any goals? As we approach the end of the year, this is a good time to reflect on where you are and where you eventually need to get to. As it relates to your financial life, this can be a few simple questions. Did you save any money this year? If so, did you save enough? One of these days you are going to retire and you have to live on something. Set a realistic goal for saving next year. I recently visited with someone who didn’t save any money this year but plans on saving 15 percent of their salary next year. That’s probably not realistic. That’s like me saying I didn’t lose any weight this year (which I didn’t) but I plan on losing 40 pounds next year (which I won’t). If you didn’t save any money this year, saving 5 or 6 percent is an admirable goal for next year.

Perhaps you aren’t in a position to save any money due to job loss or other circumstances. Maybe you need to focus on reducing debt. Again, set realistic goals. Maybe you could pay off half of your credit card debt this year and half next year, or set a goal to pay off certain debts by certain time periods, perhaps starting with the highest interest debt first.

Setting goals is easy but sticking with them takes discipline. We live in a world where we are easily distracted, particularly by material possessions. I’ve observed people over the years chasing goals that were likely misdirected. The fisherman may have listened intently while the banker explained life in New York City. But he was content with his current state. I might could work a few more hours each week and make a little more money. But there would be a price to pay elsewhere and I’m not sure it’s worth it. I think I’ll just take a siesta.

Published in the Texarkana Gazette on December 11, 2011.

Is there any way to breathe life back into that factory or will it just sit there idle forever? I posed this question to a graduate class I’m teaching. The class kicked around the idea of Herman Cain’s 9-9-9 plan, part of which proposes to drop the corporate tax rate from 35 percent to 9 percent. But what if we dropped the corporate tax rate to zero? I know you are already coming up with reasons as to why that is ridiculous, but bear with me a minute.

Let’s assume Whirlpool sells a refrigerator for $1,000. Using averages from Whirlpool’s financial statements, the factory cost of the refrigerator looks to be about $850. Then they have to pay the office help, sales people and interest on debt. Suppose that adds another $100. So total costs are $950 and that leaves them a $50 profit on a fridge before taxes. Then they have to pay 35 percent of the $50 out in federal income taxes, or $17.50. This would leave an after tax profit of $32.50 on a $1,000 unit. What if we decided to let Whirlpool keep the entire $50 and not pay taxes? Would that be enough of an incentive to keep the jobs in the U. S.? Maybe not, but let’s delve a little further.

I don’t know what Whirlpool factory labor costs, but the Bureau of Labor Statistics reports U.S. manufacturing cost of $33.50 an hour in 2009. For Mexico, the number is $5.38. A BusinessWeek article on Mexican manufacturing estimates it takes four hours to assemble a fridge. Using those numbers, labor on a U.S. fridge is $134 and on a Mexican fridge is $22, for a difference of $112. But there are a few other factors to consider. The same BusinessWeek article says it takes about $50 to ship a bulky refrigerator into the U.S. from Mexico. That gets us down to a $62 premium for the U.S. built model after freight.

What if we could get workers to make a concession of 10 percent reduction in wages? That’s not a popular idea with unions but I wonder what those former employees are doing now. I am sure some have retired but perhaps they retired before they wanted to. No doubt many have taken jobs paying substantially less than their Whirlpool job and some may have never found another job. A 10 percent reduction in labor costs would save $13 a unit.

There’s a final issue to consider. Many economists will argue that corporations don’t pay taxes in the long run. Only people pay taxes. Consider for a moment a world with no taxes. A company sells a fridge for $1,000, incur costs of $950, and make a $50 profit after all expenses. Then the government imposes a 35 percent tax on profits. To maintain a $50 profit, the company has to raise the price of the unit to $1,027. So in the end, who actually paid the tax, the company or the consumer? Applying the reverse of that argument, eliminating the corporate tax might allow companies to reduce prices by, say 3 percent. If that filtered through to U.S. suppliers to Whirlpool, it might knock another $20 or so off the cost.

Even if we got the tax concession, the labor concession, and a reduction in materials costs, I still think Mexico has a cost advantage. But what started out as a $60 advantage, after freight, has been whittled down to less than $15 a unit. And that might be enough to keep jobs in the U.S. as opposed to being exported out of the U.S. In return, we would have a factory in Fort Smith that employees several thousand workers again. Those workers would all pay federal income taxes, federal payroll taxes and state income taxes. And they would have more money to spend at the local stores than they get from unemployment compensation or lower paying jobs. That in turn generates more sales tax revenue. The idea of getting rid of the corporate income tax seems distasteful, especially in light of record deficits. But the thought of that Whirlpool factory never opening back up is equally distasteful.

Published in the Texarkana Gazette on November 27, 2011.

Often physicians fit the mold of looking wealthy but in fact may be way off mark in accumulating assets for retirement. There are a number of factors going against physicians in the process of accumulating wealth. For starters, consider how long the training process is for most physicians. After four years of college come four more years of medical school. That’s eight years of no income. That eight year period is followed by another four years of residency on average, where they are paid a small salary. In the best case, a doctor may be ready to enter practice at around age 30. And they often enter the workforce with $100,000 to $150,000 in student loan debt. Meanwhile, the high school graduate has already been in the workforce for 12 years and the typical college graduate has been working for eight years. The 4-year graduate may have some student loans but nowhere near the amount the average physician has racked up.

The extra training pays off, of course, because physicians do have strong earning power. Earnings vary widely depending on the specific field, the geographic area, and other factors, but let me throw out a number of $200,000 per year on average. Entry into medical practice would of course be a good time to work down that student debt and begin a modest lifestyle, as described by Stanley and Danko, but alas, things get in the way of that simple plan. Physicians seem particularly susceptible to what economists term “pent up demand.” So, after years of living on next to nothing, they often go on a spending spree purchasing lots of house, horsepower, and toys. When you are looking at an income stream of that size, one more purchase won’t hurt.

While pent up demand is a major issue for docs right out of school, it’s hard to find the off ramp for a ramped up life style. So those types of consumption habits often continue and they don’t leave a lot of room for savings. But there also are other factors that get in the way of a long range financial plan. Medical professionals may marry later in life which means having children later in life. So, if they are saving, it may be for the kids’ college instead of for their retirement.

Physicians are more likely to encounter relatives and friends seeking financial assistance. They are the golden goose of the family, at least from the point of view of those members with less glamorous, less well-paying jobs. If you’re the people greeter at the local discount store (my dream job after I retire), you don’t get hit up a lot for money.

Finally, even though they have gone to school until they are 30 or so, physicians have had little or no training in running a business or in financial planning. They spent their educational time learning to treat patients, not learning how to run an office or make financial decisions.

Most physicians will need to rely heavily on personal savings accounts, retirement or otherwise, in their retirement years. Most are not covered by pension plans, the plans where you get a check for the rest of your life from your company. They are covered by Social Security but they can’t depend on it to maintain their lifestyle. The maximum Social Security benefit for a 66 year old retiring this year is around $28,000 or so. Besides that, a possible reform to Social Security down the road is means testing, which could curtail benefits to physicians that made a lot of money over the years. So if you are a physician, give some serious thought to how much you need to sock back for retirement. If you are related to a physician, think twice before asking to borrow money. They may be struggling more than you realize. Maybe you should hit up your people greeter cousin instead.

Published in the Texarkana Gazette on October 30, 2011.

So what about the Great Recession of 2008-2009? Has it affected the spending behavior of younger consumers who were perhaps somewhat carefree in their spending habits. Well, it turns out it has and in a number of ways. For example, a recent blurb in the Wall Street Journal reports that diaper sales are down in the U.S. According to the article, it takes $1,500 per year to keep diapers on a child, assuming six changes a day. Six a day seems low to me. I’m pretty sure my kids went through more than that. That’s significant money for a young family and using fewer diapers directly impacts their budget’s bottom line. Buying fewer diapers apparently also impacts bottoms, with diaper rash ointment sales increasing as diaper sales decline.

Besides fewer diaper changes, consumers are also switching to generic diaper brands and that explains part of the sales decline. Use of generic brands in other areas is also on the increase. No doubt you have had the discussion before about whether generics are as good as name brands. I worked for a furniture manufacturer years ago and we made furniture under a variety of brands. We didn’t use inferior grade lumber or hardware just because a different label was on the box. I’ve wondered before if there is a worker in the food plants examining each carrot or pea to see if it goes plain label or Del Monte. I doubt if there is. Regardless, sales of generic brands of household goods are up in the last few years from 15 percent to 20 percent of purchases.

There are other trends as well that indicate consumers have changed their habits. Currently, about 75 percent of consumers shop from a list, which has the effect of reducing unneeded or impulse purchases. Three years ago, only 45 percent of consumers used a list. Consumers are also choosing to buy smaller quantities. I recall hearing years ago how the soft drink companies figured out how to increase sales. They simply had to get the consumer to take more product home with them. So six packs became eight packs and then twelve packs. Well, apparently consumers have figured out the flip side of that argument. If we take home less product, we consume less and make it last. So a number of manufacturers are rolling out smaller package sizes to accommodate thrifty shoppers.

A related Journal article quoted a Target stores spokesperson as saying consumers are making fewer trips to the store. That’s less opportunity to buy unneeded items. I always thought it was law that you had to go to Wal-Mart three times a week. But maybe that was just something my wife had told me. More frugal shopping also helps explain why there is a dollar store of some type on every block.

The net effect of all of this is that consumers are spending 10 percent less at grocery and drug stores than before the recession. While consumers have figured out ways to save money, I still haven’t run across anybody my age or younger who’s turning off the water heater or recycling ketchup. Maybe they are and it just hasn’t come up in the conversation. But I suspect that, though we have been impacted significantly by the sluggish economy, the impact hasn’t been as severe as our parents and grandparents experienced in the 1930s. That raises the question, will we continue the thrifty habits we picked up the last few years or will we abandon them once the good times are rolling again?

At least some of that 10 percent savings at the grocery store is being socked away in savings, as person savings rates have climbed. But once the economy is humming again, will we ditch that plain label raisin bran for the name brand again? Only time will tell. Meanwhile, I’m just glad our kids are out of diapers.

Published in the Texarkana Gazette on October 16, 2011.