Rich On Money

Sad Retirement

Years ago, I had a conversation with John Templeton, the creator of the Templeton Family of Mutual Funds and a billionaire investor in his own right. He possessed an extraordinary mind, not just an investment mind, but a very versatile, broad ranging mind. One of the things he taught me is that investments are common sense, and you must use common sense to evaluate an investment. Warren Buffet has another way of putting it, but it’s the same thing really.

Buffet says if he needed algebra and calculus to figure out if an investment made sense, he’d still be delivering newspapers in Omaha. In keeping with this line of thinking from two extraordinary investment minds, I wanted to talk about retirement planning and using common sense to figure out what is really going on out there. So much of what we read in newspapers is not common sense, its nonsense that has been run through the political filters of one party or another, and then fed to us like pabulum and we are supposed to believe it. So here goes, listen up: 

• What about those Bush tax cuts – Remember back in the late 1990’s, this country supposedly was generating tax surpluses under Clinton that virtually guaranteed that President Bush would have approximately $7 trillion in surplus to work with during his Presidency. I went back over the numbers and figured out, this was all nonsense. The so called $6 trillion in surplus disappeared and was replaced by a $6 or $7 trillion deficit between 2002 and 2011. How did it happen? Well the Bush tax cuts accounted for only 14% of the difference. New spending accounted for 32%, and interest on the debt was an unanticipated 12%. Another 33% of the difference came from mistakes made in the assumptions of the Congressional Budget Office that put the deal together to begin with. Guess what, when people do not know what they are talking about, than the answers they come up are generally wrong also. 
• People are retiring and they hear President Obama talking about President Bush being responsible for all the deficits that are upon us today. He says we are looking at projected deficits of $8 billion over the next ten years. Now if Obama had his way he would tell you the problem is that we had two tax cuts, two wars, a prescription drug program for the elderly, and put together, this is causing the problem. I don’t think so. When these programs were implemented in the early part of the decade, seven years later by 2007, the deficit for the year was under $200 billion. Actually, it came in at $161 billion. So how do you get to trillion dollar deficits from $161 billion in 2007? I have an investment mind; I use common sense, not advanced differential equations to solve financial problems. The answer is simple. You need to pay for the stimulus program, and you have collapsing revenue figures from the recession. That’s how you get to a trillion dollar deficit, simple as that. 
• I think Obama’s numbers are wrong. I think they are too conservative. He is looking at $8 trillion in deficits over a ten year period. I am coming up with $13 trillion in deficits in the same period. It’s really simple, over the next ten years, I see $33 trillion in revenues coming in, and $46 trillion in government expenditures, and that’s $13 trillion in deficits.  

The Bottom Line

A couple of years ago, I listened to a brutal discussion with Fred Smith who founded FedEx. He said something interesting, and that is that tax revenues have never really deviated from being 18% of gross domestic product. Now the Congressional Budget Office feels that even if you extend the Bush tax cuts, and fix the Alternative Minimum Tax, tax revenues should come right back to the mean of 18% of gross domestic production in 2020. At the same time spending is out of control under this President.  By 2020, it should approach 26.5% of GDP. This would be a domestic record. 

If you are thinking about retirement, you must use real numbers in order to determine the consequences of the government’s political and economic actions on your personal life. Look at the pictures below and tell me which one you want to be? The financial decisions you make today, will determine which picture you are tomorrow.