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Rich Man, Poor Man Revisited

I don’t make a habit of taking financial advice from professional football players.

No offense to the gentlemen suiting up for Monday night football this evening, but athletes aren’t known for being paragons of financial virtue. Sports Illustrated reported a while back that 78% of ex-NFL players were either bankrupt or in financial stress within two years of retirement.

And it’s not just football players. Kareem Abdul-Jabbar, one of my favorite basketball players as a kid, lost everything after taking lousy advice from an unscrupulous advisor.

So, imagine my surprise when I caught a video of Tampa Bay Buccaneers defensive end Carl Nassib standing in front of his former Cleveland teammates explaining the power of compound interest.

In language any red-blooded American male would understand, Nassib explained that he wanted to buy a new Rolex to try and impress pop princess Taylor Swift. But after considering what that money would be worth if he let it compound for 40 years, he thought the better of it.

Now that’s a tightwad after my own heart!

Miss Swift would have likely been more impressed with Nassib’s knowledge of compound interest than with a flashy watch. She’s reportedly worth over $300 million herself and is considered to be a savvy businesswoman and investor.

All of this reminds me of a classic written by the late Richard Russell titled “Rich Man, Poor Man.”

Russell, who penned the Dow Theory Letters for nearly six decades, was one of the most respected financial writers in history, and “Rich Man, Poor Man” is his most influential piece. I plan on making both of my sons memorize it once they’re old enough to understand the basic math.

Russell used the example of two young men. One started contributing $2,000 per year to his IRA at the age of 19 and stopped investing new money at age 25. He never invested another penny after turning 26. The second young man started contributing $2,000 per year at age 26 and continued to do so for the following four decades. Both enjoyed 10% annual returns. At the age of 65, guess which one had more money?

Almost incredibly, the first young man – who started at 19 and stopped at 25 – amassed a larger fortune than the second young man once you subtracted the initial investment… despite the fact that the second young man invested nearly six times as much money over a much longer period of time.

If you don’t believe me, open a spreadsheet and do the math. (Or just look here.) I didn’t believe it the first time either.

Just for grins, I wanted to see if the numbers still work today. When Russell first wrote the article, IRA contributions were limited to $2,000 per year. Today, the same two young men could invest $5,500 per year.

Now, the amount of the contribution doesn’t affect the outcome. Whether both invest $2,000, $5,500 or $5.5 million per year, the young man who started earlier always finishes ahead under Russell’s assumptions.

But are the assumptions themselves realistic? Can someone investing today really hope to earn 10% per year over the next 45 years?

I have my doubts. So, let’s see what the numbers like if we assume 7% per year.

Rich Man, Poor Man

 Investor A Investor B 
AgeContributionYear End ValueContributionYear End Value
192,0002,200
202,0004,620
212,0007,282
222,00010,210
232,00013,431
242,00016,974
252,00020,872
262,0002,200-22,959
272,0004,620-25,255
282,0007,282-27,780
292,00010,210-30,558
302,00013,431-33,614
312,00016,974-36,976
322,00020,872-40,673
332,00025,159-44,741
342,00029,875-49,215
352,00035,062-54,136
362,00040,769-59,550
372,00047,045-65,505
382,00053,950-72,055
392,00061,545-79,261
402,00069,899-87,187
412,00079,089-95,905
422,00089,198-105,496
432,000100,318-116,045
442,000112,550-127,650
452,000126,005-140,415
462,000140,805-154,456
472,000157,086-169,902
482,000174,995-186,892
492,000194,694-205,581
502,000216,364-226,140
512,000240,200-248,754
522,000266,420-273,629
532,000295,262-300,992
542,000326,988-331,091
552,000361,887-364,200
562,000400,276-400,620
572,000442,503-440,682
582,000488,953-484,750
592,000540,049-533,225
602,000596,254-586,548
612,000658,079-645,203
622,000726,087-709,723
632,000800,896-780,695
642,000883,185-858,765
652,000973,704-944,641
Less Total Invested:(80,000)(14,000)
Net Earnings:893,704930,641
Money Grew:11-fold66-fold

(To view Richard Russell’s original tables with my new additions see Rich Man, Poor Man Tables.)

Assuming a 7% annual return, the young man starting at 19 would need to contribute for an additional couple of years in order to come out on top. But he could still quit investing at the ripe old age of 29 and beat the young man who started at 26 and continued to 65.

Playing with the numbers, the young man that started investing his money at age 26 made four times his money. But the young man that started investing at 19 multiplied his original investment by a factor of 17.

It pays to start early.

The lower the assumed rate of return, the longer the 19-year-old has to contribute in order to come out on top. For example, lowering the assumed annual return to 5% would mean the 19-year-old would have to continue contributing until age 32.

But the lesson is clear: Time is your greatest ally in accumulating wealth.

By age 40, you’d need to invest $24,367 to make up for that $5,500 contribution you didn’t make when you were 19 (assuming 7% annual returns). By age 50, the number jumps to $47,934. And it just goes up from there.

Of course, that knowledge doesn’t do you a lot of good if you’ve already got a little gray in your hair. You can’t go back in time and force your younger self to invest.

But you can sit down with your children or grandchildren and explain to them how compound interest works. Do the math. Show them what the money they want to spend on that new PlayStation game or music download would be worth in 20 or 30 years if they invested it instead.

This article first appeared on the Rich Investor.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Next Ten Years of My Life

There’s no dignity in a groin pull.

You can’t walk without limping, and there’s not much you can do about it other than sit with your legs propped up with an ice pack on your crotch.

I ponder this as I sit at my desk with my leg propped up (minus the ice pack).

It seems that playing a Labor Day dads vs. sons soccer game with a bunch of hypercompetitive Brazilian, Colombian, and Venezuelan families without warming up or stretching properly beforehand was a phenomenally bad idea.

It’s OK. I’ll live.

But being laid up has given me time to think about a few things.

To start, at 41, I’m not getting any younger, and I have no business playing soccer with South Americans.

But apart from finding new hobbies to occupy my free time (something low-impact like golf?), I can’t help but think it’s time to reevaluate my goals for the next 10 years of my life.

I think this is a useful exercise for anyone else, too.

While my job is to tell other people what to do with their finances, my own goals have been somewhat nebulous.

At 20, looking ahead at the next decade of my life, I expected to graduate from college, find a job and maybe go to graduate school.

I also figured I’d be married before 30 and might even have a kid or two.

And, naturally, I assumed I’d be rich.

Well, I accomplished most of those goals.

I graduated, got that first job and then took a break to get a master’s degree in finance. I also managed to see a good bit of the world, traveling through three continents.

I failed, however, to find a wife or have kids and I sure as hell didn’t get rich.

I didn’t really have defined goals for my 30s. That decade just sort of happened, and most of it is a blur at this point.

I got married, had two kids, bought a house and even managed to start my own business. But none of that was really planned ahead of time.

Most of it was spontaneous and driven by the emotions of the moment. It was great. But it was also total chaos.

Meanwhile, I still didn’t get rich, and my finances actually went backwards for a few years while I struggled to make the business work.

I made some phenomenally poor decisions, throwing good money away on bad projects, and failing to take advantage of a lot of good opportunities that would’ve made me some serious money.

Yet despite making every mistake there is to make, I did manage to play the long game phenomenally well in one critical way.

With the zeal of a religious fanatic, I maxed out my Roth IRA and 401(k) every year, even when the shekels were tight.

Even when it meant foregoing a new car or a nicer apartment.

Even when it meant having to look my wife in the eye and tell her that I couldn’t afford to buy her a new purse she really wanted or a nicer stroller for the kids.

It wasn’t easy. It wasn’t fun. It caused me a lot of stress, and it took a toll on me physically.

But because I did that, I now have a respectable nest-egg. It’s not enough to retire on today. (Alas, not even close.) And I still have to get up and work for a living.

But it is big enough to take care of me in my golden years.

If I stopped adding new savings today and simply let the nest egg grow on its own for another 20 years, I’ll be in good shape, even with conservative assumptions.

Of course, I’m not going to quit saving any time soon.

A leopard doesn’t change its spots, and I’m hardwired to be a frugal tightwad. But now I no longer feel the pressure to save and if I want to blow a little money on a vacation or something frivolous for the wife and kids, I can. I’m in a good spot.

This brings me back to my goals for the next 10 years of my life.

We’ll go ahead and keep “getting rich” on the list. Perhaps the third decade will be the charm.

Even though I don’t “need” to, I’d like to continue maxing out my 401(k) every year. And by the time you read this, I will have maxed out the full $18,500 401(k) contribution for 2018. If nothing else, this sets a good example for my sons.

I’d also like to have my mortgage paid off and my children’s college tuition mostly prepaid. I like the idea of being 100% debt free by 50.

I need to avoid spoiling my children. They’re enjoying the benefits of seeds I planted more than a decade before they were born, and I can’t let them take that for granted.

And naturally, I need to find new hobbies that don’t result in pulled groin muscles. I’m open to suggestions!

Take a minute today and write down a few goals for the next 10 years of your life.

If you feel you’ve gotten behind, don’t beat yourself up.

As you can see from my examples, I didn’t meet all of my goals on schedule either. Few people do.

And, as I say here and my Peak Income readers know, there is a way to catch up to your retirement goals if you know where to look.

But going through the exercise of making goals gives you something to aspire to and helps you focus.

Though if you’re over 40, I would advise against adding competitive soccer to the list.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Celebrate The Risk Takers This Labor Day

This piece first appeared on the Rich Investor.

I always make a point of working every Labor Day, if even just writing a few emails on my way to the pool.

I do it in an act of impotent protest.

Don’t get me wrong, I’m not a total ideological nut job. A day off is a day off.

Far be it from me to walk away from a day of cold beer and barbecues to make a point. I’m not going to die on that hill.

But all the same, it irks me that we celebrate Labor Day and give the lumpenproletariat a collective pat on the back, yet we don’t also take a day to honor the entrepreneurs and innovators that provide employment to the ungrateful slobs.

Labor Day really is an outlier.

Virtually every other public holiday celebrates risk-takers.

Think about it.

On the Fourth of July, we celebrate the independence of our country – a risk-taking venture, if there ever was one.

On Veterans Day, we honor our soldiers who risk their lives to guarantee our freedoms. And on Memorial Day, we honor those soldiers who risked and gave their lives.

On Thanksgiving, we give thanks for the harvest. But the first Thanksgiving was done by pilgrims who risked it all to settle a new land.

And Christmas celebrates the birth of a man whose entire reason for being was to offer himself as a sacrifice for others.

In January, we dedicate a holiday to Martin Luther King, Jr., a man who risked – and ultimately gave – his life for the cause of racial equality.

And even Columbus Day celebrates a man who took enormous personal risk sailing into uncharted waters to find an alternative path to India… and managed to find the Americas instead.

Presidents’ Day is sort of iffy.

Sure, most of the men to have held the office were rent-seeking parasites who risked other people’s lives and money rather than their own. But there were at least a few risk takers in the mix worth celebrating. I’ll be generous and give it a pass.

I can even stretch it and argue that New Year’s Day celebrates risk taking because the only thing there is to do that day is watch college football… and the college football players might be risking injury in order to get a pro contract come spring. (Hey, I told you this one was a stretch. Humor me.)

But Labor Day…

Labor Day is the only federal holiday that doesn’t honor risk-taking.

It’s the proverbial participation trophy of holidays, a day that celebrates Homer Simpson for doing nothing more than showing up to collect a paycheck.

That’s ridiculous and un-American.

Now, like I said earlier, I’m not a total ideological nut job. I’m not going to tell you to forego Labor Day festivities. The beer isn’t going to drink itself, and it’s flat-out wrong not to enjoy one last day of sunshine before the days start getting shorter and temperatures start dropping.

But take a moment and raise a glass to all the entrepreneurs since the dawn of the Republic that have taken the risks that helped to create the abundance we have today.

Think of Steve Jobs slaving away in his parents’ garage with Steve Wozniak as they made the first Apple computers.

Think of Jeff Bezos, who also started Amazon.com in a garage.

Think of Ray Kroc, who nearly went bankrupt building McDonald’s into a fast food empire.

Think of the Wright Brothers, who could have gotten themselves killed building the first airplanes.

Think of the countless aspiring entrepreneurs pouring their hearts into new business plans on their kitchen tables.

Most of their plans will fail. Many of these men and women will be ruined financially.

Some may see the marriages fail or see friendships ruined as a result.

Some may quite literally drop dead of a heart attack from the stress. It happens.

But their sacrifice will not be in vain.

It’s not just the successful entrepreneurs that create jobs and opportunities. Failed entrepreneurs push us forward too by allowing others to learn from their mistakes.

Some enterprising young lad or lass may find a way to do it better the next time.

But that evolution can never happen without the first entrepreneurs that took those initial risks and ultimately failed.

From the humble taco stand owner to the founder of the next great tech startup, every person that puts their ass on the line and forgoes the safety of a regular paycheck for the uncertain risk of business ownership is a hero, whether they get a holiday or not.

That’s enough grandstanding for today. Enjoy the rest of your holiday.

Throw a steak on the grill, toss a football with your kid, and take pleasure in the fact that we live in a country wealthy enough to enjoy something as frivolous as Labor Day.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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When Should You Take Social Security?

This article first appeared on The Rich Investor.

Florida Senator Marco Rubio proposed a plan earlier this month that gives new parents additional paid time off work to care for their children.

That sounds good, of course.

Parental leave benefits are a little on the skimpy side in America, and a lot of mothers and fathers would love to spend more time with their newborns.

There’s a catch though: Rather than fund the additional leave via new taxes or simply by forcing companies to eat the costs, Rubio’s plan would allow the new parents to effectively cash in their Social Security benefits decades early.

In exchange for taking benefits in your child-bearing years, you would accept lower benefits in retirement and might have to work longer (i.e. retiring at 71 instead of 70).

Rubio’s bill isn’t likely to pass. Parental leave tends to be more of a priority for Democrats rather than Republicans, and the current Democrat proposal on the table calls for additional payroll taxes.

Furthermore, Social Security is the proverbial “third rail” of American politics. You touch it at the risk of getting electrocuted.

But let’s say Republicans decide to take Rubio’s proposal seriously and it passes.

Should you take Social Security benefits today in order to spend more time with your newborn?

The answer is “probably.”

My reasoning here is a little unorthodox, so hear me out.

I love Whataburger, a delightfully unhealthy burger chain based in my beloved home state of Texas.

I love the way their hamburger grease bleeds through the wax wrapper, and I love washing it all down with a large Dr. Pepper over crushed ice.

And the fries… I can taste their salty goodness as I write.

Perhaps not surprisingly, my cholesterol is a little on the high side.

My doctor has nagged me for years, telling me I’ve probably taken a good five years off my life by eating as many burgers as I do.

But it’s not like the five years I’ve potentially lost are my hellraising years of 18 to 23. Those years are long gone.

The lost years will (presumably) be in my 80s or 90s, and I’m OK with that.

If I check out at 90 rather than 95, that’s five fewer years of riding in a motorized scooter and yelling at hooligans to get off my grass. I’m not going to miss those years.

So, by all means, take the benefit now and spend time with your new baby. Those years are precious, and if it means you might have to work a little longer, then so be it.

This is why we go to work in the first place.

There’s another element as well. As I wrote recently, I have very little faith in Social Security.

There’s no Social Security trust fund, and the program is essentially a Ponzi scheme.

It’s highly likely your benefits in old age will be curtailed or, at the very least, allowed to lose ground to inflation.

It’s likely better to take a sure thing today rather than hold out for an uncertain payoff later. A bird in hand is worth two in the bush.

The downside to taking Rubio’s offer is that low and middle-income Americans – the ones that depend most heavily on Social Security to fund their retirement needs – are also the most likely to need the money for parental leave.

Taking the money today means lower benefits later.

This could lead to widespread poverty among the elderly a few decades from now, creating a far-bigger crisis that will need to be fixed.

I can’t argue with that logic. But unfortunately, I fear that day is coming regardless of whether Rubio’s proposal is passed.

While I hope to draw Social Security in retirement, I’m not planning on it.

This was my rational when I started writing Peak Income. I wanted to create durable income streams that could fund a comfortable retirement.

As I write, the stocks in the Peak Income portfolio yield an average of 7%, which is more than double the yield you’re likely to find in the bond market, at least if you’re buying investment grade and avoiding junk.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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I Hate AT&T

This piece first appeared on The Rich Investor.

I’ll be blunt: I hate AT&T.

But before you chime in with an enthusiastic “me too,” I’m not referring to AT&T’s mobile phone service or home internet service (both of which I dumped years ago for being overpriced).

I’m talking about AT&T stock (T). Though to be fair, I’m not any more fond of Verizon (VZ), Vodafone (VOD) or any of the other large telecom stocks.

As you might know, I’m Dent Research’s “income guy.” I focus on retirement issues and income stocks in my Peak Income newsletter.

Given that I recommend high-yield stocks, you might assume that high-yielding telcos like AT&T – especially with its merger with Time Warner (slowly) pushing forward – would be right up my alley.

AT&T sports a dividend yield of 6.1%, making it one of the highest-yielding stocks in the S&P 500. It’s also raised its dividend for 34 consecutive years and counting. That’s not a bad run.

So, if it pays a nice dividend and has a history of raising it… what’s not to like?

Let’s start by listing a few criteria I like to see in a dividend stock:

  1. The company should have competitive “moats” around it that protect it from competition. Companies in low-margin, hyper-competitive industries tend to be risky payers that cut their dividends when times get tough.
  2. The company should also be “future proof,” or as close to future proof as possible. You don’t want its business model disrupted by new technology.
  3. Demand for the underlying products should be growing or at least very stable.
  4. The company should pay out a relatively low percentage of its earnings as dividends. This gives the company a cushion in the event that earnings fall a little short one year. (Certain stocks, such as MLPs and REITs, are exceptions to this rule. Tax laws require them to pay out substantially all of their net income, and depreciation and other non-cash expenses tend to skew the numbers and make them hard to compare.)

So, how does AT&T stack up?

Well, to start, AT&T has nothing in the way of competitive moats. Not only does the castle lack a moat, the guards left the drawbridge down and left for lunch.

You can change mobile carriers in a matter of minutes now, and contracts are less of an impediment to leaving than they were in the past. Led by T-Mobile, virtually every carrier now advertises no-contract plans.

And its not just mobile phones. These days, it’s generally pretty cheap and easy to change your cable TV or home internet provider. So whatever moats AT&T might have enjoyed a decade or two ago have long since dried up.

Is AT&T future proof?

Not exactly.

Much of AT&T’s infrastructure consists of legacy copper wiring originally used for landline phones, and the company constantly is upgrading its mobile network to stay competitive. AT&T is stuck on a technology treadmill, and it has to keep running… or risk getting thrown off.

But isn’t demand for its services rising, at least?

Yes and no.

Yes, we all use more data today than we did a few years ago, and that trend isn’t likely to reverse any time soon.

But the smartphone market is now saturated in every developed country and not far from saturation in many emerging markets.

Everyone already has a smartphone. So, the only way to gain market share is to poach customers from another carrier, which means lowering the price and offering incentives… both of which lower margins.

So, while demand for service (particularly data) is growing, that growth is not leading to higher revenues or profits. And that’s just mobile data.

Home internet is a saturated market, and paid TV is actually shrinking due to cord cutting. All of AT&T’s businesses are mature, no-growth businesses at this point.

But the dividend payout ratio is low, right?

Sort of.

AT&T’s dividend payout ratio looks low, at 40%. But this headline number misses the fact that net income was inflated last year due to corporate tax cuts passed in December.

AT&T realized a $20 billion extraordinary tax benefit, which will not be repeated.

Between 2014 and 2016, the payout ratio averaged 107%, meaning the company paid out more than it was earning.

Lower tax rates going forward will help, of course. But in the first quarter of this year, the payout ratio was 67%.

That’s not a range that puts the company at immediate risk of cutting the dividend, of course.

But in order for AT&T to safely raise it from here, they need growth. And free cash flow has barely budged over the past decade.

AT&T changed its business model by merging with content creator Time Warner, the parent of HBO, CNN and a host of other networks.

But given the glut of content these days and the unrelenting competition from Netflix (NFLX), Amazon (AMZN), and other up-and-coming creators, its’s hard to see this being the growth vehicle AT&T needs.

And all of this assumes the government doesn’t torpedo the deal, which it has indicated it intends to do.

Bottom line, don’t expect to see AT&T in my Peak Income portfolio any time soon. We can do better.

Incidentally, I’ll be speaking at Dent Research’s annual Irrational Economic Summit October 25th to 27th in Austin, Texas, and I’ll be giving my thoughts the best places to hunt for income in this environment.

I’ll share some of my favorite investments… and, like I am today, I’ll tell you which ones – like AT&T – to avoid.

If you’d like to see me and the rest of the team, click here for more information and our list of speakers. And don’t wait. Only 200 seats remain. As a valued Network member you already have access; just reserve your spot.

Apart from speaking, I’ll also be making the rounds, talking to the attendees. If you want to pick my brain or just enjoy a beer with me, this is a good chance.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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