Insurance Companies, Kafka, PITB Expenses and High Deductibles

Tuesday, February 12, 2013 at 12pm
By John Friedman

I don’t often do rants (or do I?). Today, though, I’ve a bit of a rant to share. The things we do in the name of writing about improved financial health!

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Most people know Franz Kafka as the fellow who wrote the story about the traveling salesman who woke up one day and found himself to be a bug. Literally.

But Kafka also wrote stories about bureaucracies that, as a result of their obstinate approach to doing everything in only certain ways, absolutely confounded the purpose for which they existed.

See, e.g., Kafka’s The Trial.

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Insurance companies have a reputation, sometimes rightly deserved, of being Kafkaesque. Interestingly enough, the few times I’ve mentioned that term to a customer service representative of an insurance company — as in, I feel like I’m in a Kafkaesque nightmare here — none of them has known what I was talking about.

I have a little story for you today. You be the judge.

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Hearing the Two Words in “Social Security”

Thursday, February 7, 2013 at 1pm
By John Friedman

Sometimes we use a combination of two words together frequently enough throughout our everyday language that the two essentially become one; we cease to hear the two words as words on their own, and instead hear the two words as a single amalgamated word. It’s a case of near portmanteau-hood.

When this happens it can be helpful to step back from our everyday use of that combination of two words, and slow down to hear the content of the phrase — to stop and smell the roses, so to speak, which here means stopping to hear the separate words.

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The best, most germane-here example of this concept is the phrase Social Security — something I’ve been mentioning a lot of late in the John Friedman Financial Blog (here, here, here and here, to name just the most recent mentionings).

So ask yourself this: when you said the phrase “Social Security” in your head right now as you read the paragraph above (or, for that matter, as you read it now), did you actually hear the two words — first the word social and then the word security — or did you simply hear the word socialsecurity, all conjoined and all said-as-one, lickety-split?

My hunch is that most folks hear the phrase as a onesy rather than as a twosy.

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It needn’t be that way.

Think of it: there’s the social part (the part that involves all of us pooling our interests and risks together, just like car insurance companies and life insurance companies pool our interests and risk together), and then there’s the security part (the part that helps ensure that, throughout our lives, we have fewer fears of financial enfeeblement in our retirements and in the retirements of our loved ones than would otherwise be the case).

So next time you hear the phrase Social Security, please think about stopping for a moment to consider how, by truffling a vig off of each and nearly all (social) of our paychecks (with some exceptions for paychecks of high-earners and of a few folks not contributing to the system . . . ), we each and nearly all (social) ante up into a kitty that’s more or less owned by each and nearly all (social) of us, which in turn makes it easier for each and nearly all of us (social) to enjoy our and our loved ones’ later years, and have those years be something other than financially terrifying (security), with the end result being that we are all less apt to be a burden on family members and they on us, or, for that matter, we or they being a burden on anyone else around us (social and security).

So ya’got’ch’yer social and ya’got’ch’yer security — two words which, taken together, have made a big difference in our lives and in those of our loved ones.

From here on, then, as you go about using the everyday language of socialsecurity, please do stop from time to time to hear those two words — social and security — each on its own, won’t’ch’ya please?

 

 

 

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Defined Benefit vs. Defined Contribution Retirement Plans: Why 401k Plans are Not Your Father’s Oldmobile

Wednesday, February 6, 2013 at 1pm
By John Friedman

Making the rounds the past 24 hours is a piece by Atrios in USA Today called “401Ks are a Disaster.”

Here are the first two paragraphs:

We need an across the board increase in Social Security retirement benefits of 20% or more. We need it to happen right now, even if that means raising taxes on high incomes or removing the salary cap in Social Security taxes.

Over the past few decades, employees fortunate enough to have employer-based retirement benefits have been shifted from defined benefit plans to defined contribution plans. We are now seeing the results of that grand experiment, and they are frightening. Recent and near-retirees, the first major cohort of the 401(k) era, do not have nearly enough in retirement savings to even come close to maintaining their current lifestyles.

No doubt these notions about higher Social Security benefits strike a lot of people out there as sheer lunacy, while striking many others as a very good idea indeed. I leave it to you to decide, Rorschach Test-like, which side (or sides?) of that spectrum you find yourself on today.

Here I instead want to emphasize the defined benefit vs defined contribution shift — the DB-to-DC shift mentioned in the second paragraph of the piece. Do you know what Atrios is talking about there? If you have any sort of historian in you, or you are simply a curious person — or, more practically, if you have a 401K plan or other similar retirement plan — then it’s a good idea to understand what changing that trailing B in DB to a C is all about.

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Hey Baby Boomer: a Simple-Math Slight Reprise, with Happier Math this Time

Tuesday, February 5, 2013 at 1pm
By John Friedman

It’s always with a bit of trepidation that I put into the general world out there a bunch of specific numbers about how much it takes to retire. Others apparently are not (see, e.g., Lee Eisenberg’s The Number and its ilk, though, if memory serves, Eisenberg teases more than steps on The Number).

And you better believe I am trepidatious when I put a 7-figure number into the world, let alone one that is close enough to the middle of the 7-figure world to constitute mid-7-figures, as I did the other day in the piece entitled, The Simple Math: Hey, Baby Boomer, How Much Money Will You Need When You Retire?

Today, then, a more modest set of numbers await you.

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So let’s say that you are part of a couple and that your monthly nut — the amount you normally spend each month — is $7.5k. But let’s say also that $2.5k of that is for your mortgage, and that you’ll be done with that ball and chain (. . . Or is it? That’s a topic for another day . . . ) by the time you retire.

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The Heartbreak of Student Debt

Wednesday, January 30, 2013 at 1pm
By John Friedman

As a financial planner, I sometimes hear really sad stories. And sometimes I hear stories that are so . . . repugnant, let’s say . . . that I feel them in my gut and it takes my breath away and leaves a big pit in my stomach.

On the brighter side, I’ve never listened to a story and found myself with one of those impossible-for-normal-folks-to-conjure-up-on-demand constricted-throat lumps, tears welling up in my eyes. I am, after all, a professional (though I have gotten the lumpy-throat watery-eye thing going more than once when clients finished a phase of their work with me and told me that the work changed their lives for the better . . . ).

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Earlier today I read these lines:

Delinquency rates on student loans made in the past two years stand at 15 percent in the U.S. as recent graduates struggle to find jobs, Fair Isaac Corp. said.

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