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Your Money and Your Life

Stanford University Press

Contents

List of Figures and Tables.....................................................................................vii1. Introduction and Overview...................................................................................12. "Day-Old Bread" Is Worth $20,000 a Year.....................................................................153. Managing Your Credit and Your Cash..........................................................................324. To Rent or to Buy: That's the Question......................................................................495. How Much Insurance Should Noah Have Carried on His Ark?.....................................................736. The Most Expensive U.S. Colleges Are the Best Bargains......................................................987. Minimizing the Bites of the Tax Collectors..................................................................1198. Bernie Madoff: Mugger, Con, or Scam Artist?.................................................................1319. The Merrill Lynch Hustle: Can You Trust the Brokers?........................................................14510. Why Are There 10,000 Mutual Funds in America and Only Two and a Half Automobile Firms?.....................17611. If You Won $100,000 in the Lottery, How Should You Invest the Money?.......................................20612. An Overview of Financial Planning..........................................................................24913. Your Social Security Benefits Could Be Worth $300,000......................................................26314. If You Don't Know How Much to Save for Retirement, You Won't Save Enough...................................27915. Three Plans So You Won't Outlive Your Assets...............................................................30016. A Cruel Choice: Paying for Medical Recoveries or Health Care...............................................32817. You Can't Take Your Money with You, But You Can Say Where It Goes..........................................34318. Ciao and Shalom............................................................................................359Glossary.......................................................................................................363Index..........................................................................................................379

Chapter One

During your lifetime you've made—and will make—thousands of financial decisions. Should you rent a home or should you buy one? If you buy a home, when is a fixed-rate mortgage preferable to an adjustable-rate mortgage? Should you buy a new or a pre-owned car? Is a term life insurance policy a smarter choice than a permanent life insurance policy? How much life insurance do you need—and when do you need it? Are stocks a better investment in the long run than bonds? Should you buy shares in a mutual fund or, instead, should you buy the shares of the firms that the mutual funds own? Should you drink Grey Goose or Absolut vodka rather than Smirnoff or Popov, or some other generic or near-generic? How can you best protect yourself from a health care problem that could cost tens of thousands of dollars? How can you determine how much you need to save for a comfortable retirement? How can you best protect yourself from financial disasters, like the sharp decline in stock prices from 2001 to 2003 or the collapse of home prices in many states that began in 2007?

Some of your choices involve current consumption—the amounts you spend for food, housing, and transportation. Some are related to investments as you seek to increase your accumulated savings so you'll have the money for the down payment on a home, your children's education, and your retirement.

You have to deal with two types of uncertainty as you make these decisions. One type involves changes in your personal circumstances—the size of your family, health issues, and changes in your employment or income. The second type of uncertainty centers on changes in the financial environment, including changes in the consumer price level and inflation rate and changes in the prices of real estate, bonds, and stocks. American house hold wealth declined by 10 percent between 2007 and 2009; millions of families that had recently purchased homes for the first time or had traded up to more expensive homes and had mortgage indebtedness that was 70 or 80 percent of the purchase price of their homes lost nearly all of their wealth as real estate prices declined.

America is one of the richest countries in the world as measured by the standard of living, the education its universities and colleges offer, the diversity of family vacations, the quality of housing, and the level of health care. Yet tens of millions of Americans are worried about their financial futures. Despite the country's great wealth, the incomes of more than 20 million Americans are below the poverty level. Many of those are below this level temporarily while they grapple with their bootstraps and search for new employment opportunities. Sadly, some millions will remain bogged below this level, perhaps because of the lack of skills. Many of those with poverty-level incomes are seniors who are partially or fully retired. You may have read that fewer than 15 percent of Americans save enough for a comfortable retirement, and you're concerned that you may be among the other 85 percent.

These apprehensions in part reflect U.S. economic uncertainties. The large U.S. imports of automobiles, electronics, and apparel and the country's massive trade deficit have led to concerns about a diminution of U.S. dominance in global competition. General Motors (GM) and Ford, once the icons of American production prowess, have stumbled, losing market share to firms headquartered in Japan, Germany, and South Korea; GM and Chrysler have become bankrupt and have received loans from the U.S. Treasury because their futures seemed so challenged that no private bank or institution would lend them any more money. The U.S. industrial hegemony strikingly evident in the first seventy-five years of the twentieth century has been challenged by the rapid expansion of Toyota, Sony, Canon, Daimler-Benz, and Hyundai. Increased de pen den cy on imported energy has led to a sense of vulnerability, especially when prices at the gasoline pumps have climbed above $4 a gallon. Many Americans once assumed that they would be part of a corporate family—IBM or the Pennsylvania Railroad or Sears Roebuck or Eastman Kodak or Chase Manhattan Bank—for thirty or thirty-five years, but that kind of employment security has become a relic.

Once-great firms such as United Airlines, Delta Airlines, and Bethlehem Steel have gone bankrupt, and their pension obligations to their retired workers and their current workers have been shunted to the Pension Benefit Guaranty Corporation (PBGC), a U.S. government agency that had a deficit of more than $11 billion at the end of 2008—a deficit that will surge when PBGC takes over responsibility for the pensions of the workers in the failed U.S. automobile firms and their suppliers. Tens of thousands of retired workers have taken "haircuts" on their anticipated pensions, which in some cases have...