Thursday, March 27, 2014

Why Even Bother to Save Your Money?

Simple question, why save money in any bank? At half a percent interest your money will double in 142 years. Wow, start saving at these terrific rates! There are people saving dollars in IRA’s and 401K’s to avoid paying taxes. Most of these people are in the 50 to 65 age bracket. The 20 to 45 age bracket are immortal and don’t even need to think of retirement, plus they pay into Social Security. So where are we with this mess? We have a government that can’t pay its bills. 17 Trillion In debt is just a number, it has no association or concept of understanding with the man on the street.

Where will the new rich come from? It certainly isn’t going to come from a savings account built up over 40 years. A million dollars in 1964 was a lot of money. At 3.5 percent interest, you would have had an interest income of $35,000 and never touched the principle. That was about 5 times more than what my dad at the time made in a year, to support our family of 4. In today’s world, that million will get you about $10,000 in interest income and the principle will be completely consumed in retirement after 35 years. This assumes you can live unassisted in your own home and need very little medical financing.

From 1964 to 2004, a zero was added to the price of everything. Houses went from 30K to 300K, and cigarettes went from 25 cents to $2.50 a pack. If that wasn’t bad enough, the price of Cigarettes, steak, beer, charcoal and gasoline have doubled in the last 10 years. The schools don’t teach concepts dealing with inflation and I can see why, it’s a meaningless exercise when the student’s world revolves around sex and music and hanging out. Our government is printing dollars, a lot of them, and inflation is a concept you begin to understand with age, it is a tax on long term savers.

So if we go back to the 1920’s, the banks loaned real money and got real money back. The dollar was backed by gold. In today’s world the dollar is backed by nothing. Why should I loan $100,000 to someone for 20 years at 3 percent interest and at the end of the transaction, the 100K now has the buying power of 10K from inflation?

There does appear to be a way to avoid the inflation produced by government spending when you are projecting for retirement income 40 years away. What you really need to do is buy gold and silver. They are worthless as income generators, but they preserve your savings from the Congressional printing tax (which is a lot higher than most investment returns). Our government has joked around and thinks that the national debt will never be a problem. Call it financial irresponsibility.

Normally in an inflation driven market, real estate is the best medium to be in, but, it is nothing more than a registered tax base, a piggy bank, that can be taxed as needed by the government with no say so from you. If you’re a landlord, the government could even freeze the rent you can charge. Buy a car in California and pay 8% sales tax on drive out. Buy a home, and pay 1% real estate tax every year you own it.

From the 1900’s to the 1960’s gold was about 32 dollars an ounce. Then for the next 40 years it never went below $300. 60 years of 30 dollar gold then 40 years of $300 dollar gold kind of suggests that maybe we are due for $3,000 gold a lot sooner than we think.

The increase in the price of gold only reflects the loss of purchasing power of the dollar. My grandfather lived to be 98 and died in 1964 and he understood inflation quite well. It took me 50 years to understand why his blood would boil when he explained how a loaf a bread was a nickel when he was a kid. He knew what the government had done to him and there was nothing he could do about it. Of course at the time in 1964 I was only 17 years old, and didn’t understand why the increase in the price of a loaf of bread could upset him so much, he had plenty of money.

So if you are starting a retirement plan that spans 40 years, Gold and Silver make more cents at these interest rates. If you don’t give a damn, spend it now and enjoy yourself, the government always seems to have money for those that have none or conveniently run out. Our government wants you to stimulate the economy and buy something. That way when you grow old, you can tell your grandson how you bought a loaf of bread for a dollar when you were a kid. Come to think of it, I just paid $4.29 for a loaf of Russian Rye bread the other day (Jewish Rye would have been more politically correct but the Russian rye has a stronger flavor).

The thing to realize at retirement age, is the value of assets that are visible. The house, the car, the bank account. Your visible assets can ultimately determine what future benefits you are entitled to and the taxes you have to pay.

So what do you want to save, Dollars or Gold and Silver? The older you are the more meaningless the decision becomes; time becomes your enemy. Congress can promise the moon with printed dollars, the poor will follow and the rich will get handed the bill.

In Europe they are proposing negative banking interest rates to induce investors to build new businesses. At the same time, we can get more money back on our credit cards by spending dollars than we can by saving them in a bank. This sort logic reminds me of an incident many years ago when my young nephew was using a hammer, he accidently hit his thumb with it. He was crying and I suggested with a serious face to do the same thing to the other thumb and make them both match. He stopped crying, kind of looked at me and backed away. To this day, I think he considers me to be a few cards shy of a full deck. You have to consider the secondary implications of any logical solution. The future pain might not be immediately apparent.

Compound interest is still the 8th wonder of the world, and we can all wonder where it went!


dearieme said...

The era of low interest rates has some odd consequences in Britain. Some savings accounts pay 0.01%. Some current accounts (i.e. checking accounts) pay 5% on a balance of up to several thousand pounds. One pays 3% on up to £20,000. Madness.

On the other hand, there's no capital gains tax to pay on gold sovereigns because they are coin of the realm. No doubt that'll be changed in due course.

Jim in San Marcos said...

Hi dearieme

I'm just about ready to open up a bank account in your country.

I've got 40k in a retirement account in the US getting 1.4% interest--its kind of like throwing pennies in a beggars cup. It doesn't make anybody happy. And you can almost hear them laugh.

Anonymous said...

Hi Jim,

Practice what you preach - Withdraw most (all) of your fiat funds in your retirement account and buy physical gold and silver. My wife and I did this years ago (paid early withdrawal penalty) and we both sleep well at night. Get yer'self out of the system and don't look back. You'll be glad you did.

You even motivated me to buy a few more gold eagles today. I don't hear my bank laughing.

Jim in San Marcos said...

Hi Anon 7:22

I kind of feel like Noah building an Ark. The wife says "one dog, one bird and one fish."

I've got the concept down, but I'm not in charge of the game plan.

I just bought another roll of silver maple leafs and wouldn't you know it, silver dropped 50 cents this week.

I do believe that silver and gold for those that have 20 to 30 years to retirement is a wise way to go, but the closer you get to retirement, it becomes more of a moot point.

I don't think you can lose by converting everything, I am somewhat motivated by tax breaks. This year, I'm going to start reducing my contributions to my IRA and put more into precious metals. I'll just pay a little more in taxes.

The important thing is as you suggested, "a good nights sleep." I can remember investments that kept me awake all night.

Take care.

Joseph Oppenheim said...

Whether the story of Noah is complete fiction or not, there are lessons in it, which many have learned and still are using successfully....including having to do with money.

Jim in San Marcos said...

Hi Joseph

you could be right, I was alluding to the fact that my wife doesn't accept the world as I see it. And if you want to stay married, you have to be accommodating somewhat. Our differing opinions force us to be more diversified in our investments.

Anonymous said...

Great post. However, I am not sure gold should be in my investment portfolio. It seems too played out in the media.

Jim in San Marcos said...

Hi Anon 11:35

Gold has its drawbacks, but consider platinum. There are 5.1 billion ounces of gold in the world and only 186 million ounces of platinum.

The reality perspective used is that all of the platinum in the world would fit in you living room.

I moved half my gold holdings to platinum when platinum was lower than gold a year back.

I'm 67 and my wife is 13 years younger, so she has the time to wait out what may happen next.

Here is a
Link to a blog article I wrote over a year ago on this.

Platinum could be the deal of the Century. Common sense suggests that its scarcity dictates a far higher price.