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The Sharing Economy

The Sharing Economy Is Growing

I think we are in a really exciting time for all generations as the sharing economy is growing. In this post, let’s look at companies that allow you to work remotely instead of for one employer.

Traditionally, you would graduate from college and be at the same job for 30 years. Consequently, you would then retire at age 65. You would then go down to sit on the beach in Florida until you die. I think that is changing. I see both baby boomers and millennials getting remote, freelance jobs.

Uber: The ‘Work When You Want To’ Revolution

Look at Uber. The majority of my drivers are either split into two categories, one, retired and do it for extra money. In fact, in my hometown there’s a gentleman that used to be a dentist that is retired that Ubers and has the nicest Acura I have ever seen. It’s got to be an $80,000 or $100,000 four door sedan. I’m a very tall guy. I can sit in the back with no problem, leather interior, gorgeous car. He was a dentist and he does it because it forces him to get out of the house and it brings in extra income for his family in retirement.

The other group that I see in working with Uber are people who already have a 9 to 5. They are picking up extra ways to make money at night and in evenings and on weekends that can also bring in additional income. Hopefully they’re not using it to keep up with the Jones’s. Hopefully they’re using it to pay down debt or to increase their savings rates.

The Traditional Model is No More

But this idea that you can work when you want to, where you want to, is very fascinating. I think if you blend this to the tiny house movement and minimalist movement. You could live wherever you want.

You go back to the traditional model of getting a job at the same company for 30 years, a lot of our parents generation, the baby boomers, stayed within the same town for the majority of their life or were forced to move to towns that they didn’t find appealing only to continue to have that job. That does not sound like something I’m interested in at all.

You also have companies like Upwork and Freelancer.com that allow people to work from anywhere in order to make a living. They work on their own times. The job turns on when they want. They can accept a job when they want, and when they don’t, they can turn off their phone or the app on their phone and they do not need to go work.

Freelance Opportunities May Help Your Retirement Goals

I look at my dad who want to retire and I think that him and his wife could if they were willing to do some type of freelance work, but they didn’t make great savings choices during their working years  (not there fault, job changes and layoffs and low paying jobs), so now they are strapped for cash in retirement and they do not want to get a part time job at a physical location where they have to drive in.

I think the idea of working remote, being a freelancer, traveling to their grandkids’ house, they can turn on and off when their grandkids are at school, that flexibility is really appealing and I wonder why we don’t see more of this. To wrap this up, does anybody have any business ideas that would help the sharing economy? If they do, please contact me, I would love to explore these ideas with you.

Saving Rates Are Decreasing

Younger people in the workforce are not saving as much as the baby boomer generation did. We, as young people, millennials, do not have a high enough emphasis on saving for the future. We live more for the right now and we have a huge issue with instant gratification.

I am at fault at this myself as right after we moved we already had one TV. It was big enough for our family. I needed to go out and buy an even larger TV for the new house. Now, the kids had one TV and we had another TV. Instead of investing $1,000, which is what I should’ve done, I turned around and bought a flat screen TV. Even worse, I put it on a Best Buy credit card for 0% for 18 months. I didn’t use my own money, which was probably smart. I put it on a credit card only at 0%. It was the only way I could reason with it and justify spending that kind of money.

Priorities Have Changed: Baby Boomers vs. Millennials

I don’t feel as bad as I should because there’s cash in the bank to pay for that, but if I get 0% why not use it? Although I still feel incredibly guilty because it is going backwards. It’s not helping our family move forward. I wonder what the baby boomer generation would’ve done if they had an opportunity to buy a $1,000 TV. Would they have done it or not? I would like to think that they would’ve passed on the opportunity to get a larger TV and saved the money for retirement.

If you read another article that I wrote on RMDs and the pressure that’s going to have on the market, you will see that the RMDs will be drawing down investible assets across the United States over the next 20 years. I am fearful that our younger generation and myself will not be able to backfill the amount of money needed to maintain the market.

Spending Habits Can Change: Lessons Are Learned

I read a blog on consumption in America called Mr. Money Mustache where he lays out how he only lives on $27,000 a year and rides his bike everywhere. They have one car. It sounds amazing.

I need to decrease this spending personally so I don’t make the mistake again of buying a large screen TV or the next toy that goes down in value. That money would’ve been much better spent going on a vacation with my three kids for three or four days and having quality family time instead of a TV that hangs on the wall. The lesson is starting to be learned.

What will you change as it relates to your spending habits and are you saving enough?

Pension Funds and Assumed Rates of Return make an A** out of You and Me

assumed-rates-of-return-dont-be-a-jack-ass

Last week I had an interesting conversation with my client regarding our fears about pension funds and assumed rates of return. I mentioned that two of my biggest fears are this year’s seven year bull market and the market’s correction.  My client agreed with me, but I was left confused and intrigued. I wanted to know more. What are pension funds and assumed rates of return?

Most pension funds assume a rate of return to get the target value into their funds. For example, If you have an assumed rate of return of 10%, you’ll need a certain number amount to pay for all employee pensions. You’ll double the amount, however, if you assume a 5% rate of return. Most pension funds currently have 7-8% assumed rates of return.

I eagerly injected as my client is explaining assumed rate of return.  “Shouldn’t there be a 5% assumed rate of return because of the low growth mode?” My client laughed. He answered that the pension companies would never change because the very structure of the system would be dismantled.

Who would have thought that the assumed rates of return was such a realistic fear? This is scary.

What The Experts Are Saying

Global chief economist for Vanguard Group, Joe Davis adds, “Global growth has been frustratingly fragile. In the last three years, it has been significantly lower than the cycle a decade ago, and there is little acceleration in any economy of the world right now.”

Therefore, assumed rates of return should be closer to 6% or lower.  As a result, the state would have to come up with money to fund the deficit created within the pensions promised to employees. For example, Hawaii just lowered the assumed rate of return from 7.75% to 7.50%. The 60% funded ratio was ranked the ninth worst in the country (2013 statistics). Only two states, South Dakota and Wisconsin, were 100% fully funded. Illinois (39%) and Kentucky (44%) were the worst. For more information visit this link.

You can learn even more here.

The Inverse Relationship Between Rate of Return and Your Pension Fund

It is imperative to understand the inverse relationship between the rate of return and pension fund money.

If you lower the rate of return, you will consequently need more money pushed into the pension fund because the capital demand must met in the future. This is based on the assumed rate of return. So where will states get these funds?  The public sector, the taxpayer.

What can be done in the public sector to help this situation?

What if Marijuana Was Legalized?

Did you know that the tax rates of marijuana are 25-40%? Think about it in terms of generating funds from taxpayers.

I would argue that the state pension fund shortage could be offset by the legalization of marijuana. Visit this link for more information.

Medical Marijuana Is A Valuable Asset in Legalized States

I never knew how much money there was in medical marijuana until I had a phone call with a Medical Marijuana Dispensary owner. I was blown away. If you haven’t seen it, please check out the CNBC program that highlights the medical marijuana dispensaries and their business model. Learn more here about the effects of marijuana on tax income growth.

Marijuana tax rates generated by its legalization can effectively mitigate this frightening circumstance, especially after contemplating the fears of assumed rate of return.

Legalizing marijuana would allow its consumers to pick up the tax burden, which would enable states to conservatively decrease their assumed rates of return. Makes sense.

Baby Boomers Forced to take Required Minimum Distribution

Baby Boomers are a very large portion of our population. They’ll be taking their first RMDs this year. RMD stands for Required Minimum Distribution. The Government forces us to pay taxes on our retirement account when we turn 70 years of age. This is only on  qualified plans (being IRAs, 401Ks, and other qualified accounts).

Consequently, only the people who have needed the income have had to take money from the market. That’s only up until this year.

Edward Shane from BNY Mellon adds his own sentiment. “As a result, throughout the next 20 years, billions of dollars annually will be forced from retirement accounts through distributions. These distributions will, in many cases, be taken in the form of a single large annual payment.”

The Required Minimum Distribution & The Bull Market

Our whole population will be forced to pull out their first RMD for the first time this year. The RMD percentage goes up every year to force people to draw down their account value. As a result, the government gets the tax revenue.  Kristen Grind from WSJ said, “Assets held by 401(k) plans ballooned to $4.6 trillion in the fourth quarter of 2014, up 171% from $1.7 trillion in 2000, according to the Investment Company Institute, a trade organization for mutual funds.”

Currently, We are sitting in a 7-year bull market. A bull market means it keeps going up and up. I think if you pair the expectation of an increasing market with a forced RMD, probably any drop in the market would be crushing to Baby Boomers. Consequently this is good for the government and taxes, yes. What about the market and the young people investing in it? Assuming the average size of a retirement account is 250,000, here are the numbers:

Baby Boomers Image 1

In this case, the resulting withdrawal of $9,124.09 represents 3.65% of the retiree’s retirement balances at the time of the calculation. Note that, over time, the formula results in a growing distribution percentage. However, it is eventually applied against a declining balance as withdrawals (likely) begin to exceed earnings in the account.

Forced Required Minimum Distribution

Source: IRS5

Edward adds “The impact of these events will be substantial and will pose a challenge to the retirement industry. After decades of asset accumulation, this unbridled exit of funds is poised to have a material and adverse impact on the retirement companies that manage these accounts. “

Converging Elements

While the actual valuation of current RMD outflows and projections of future distributions are inexact in the absence of hard data, consider the following statistics:

  • The value of retirement assets for all RMD-eligible plans currently totals an estimated $16.2 trillion.
  • The current population of 50-69 year olds who will reach RMD status over the next 20 years will increase by more than 27 million individuals. As a result, by 2035, the total number of retirees taking RMDs could swell to 58.7 million individuals according to census projections.
  • It is estimated that more than 65% of current traditional IRA investors (and their assets) will enter into the RMD strata in the coming 20-year period.6 As a result, if projections are correct, up to $10 trillion in assets will be subject to mandatory withdrawals over the next two decades.
  • A first-year withdrawal, based on the current IRS formula, requires a distribution of 3.65% of eligible assets. Furthermore, the percentage grows as the retiree ages and jumps to 5.35% for that same individual at age 80. As a result, at age 90, the mandated withdrawal percentage leaps to 8.77% of the account holder’s balance.

http://www.cbsnews.com/news/will-retiring-baby-boomers-lead-to-a-stock-market-bust/

http://awealthofcommonsense.com/2015/06/will-retiring-baby-boomers-ruin-future-market-returns/

http://www.wsj.com/articles/net-outflows-befall-401-k-plans-1434408836

http://time.com/money/3922594/401k-millennials-baby-boomers/

Can the Gen Xers, Gen Ys and Millennials replace those lost funds in the market with their contributions to their retirement accounts?  I don’t believe they can.

In conclusion, our younger generations are not savers, rather, they’re spenders. Look at how much housing has gone up and how much they are spending on student loans. That does not leave them enough.  Just my thoughts – what are yours?