Category: Investing

Are Timeshares a Good Idea?

Beach Yes. If you can arrange bridge financing, they are a great way to pay off the construction of your new resort. You will have to hire a sales staff and wait a few years to sell the full inventory, but when it is done you will have made a tidy profit.

What’s that? You meant is it a good idea for a consumer to buy a timeshare? Oh.

No. It isn’t.

I am reminded of this by a recent item at SmartMoney telling us how the prices for some second-hand timeshares, that is, those owned by consumers who now want out, have dropped to $1. They are not so much for sale as up for adoption, free to a good home. Given the annual fees involved, that is not as illogical as it might sound, but it is a stark contrast to the five figure sums those consumers were dazzled into paying just a few years ago.

 

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No End of Year Tax Planning

Normally, this is the time of year that money advisors and gurus trot out the old canned advice on end-of-year tax planning. Not this year. This year we are all just too confused.

Generally, we can do little things in November and December to slightly lower our tax bill because, generally, we can predict what the tax rates will be in January. Not this time. Congress managed to adjourn for the elections without doing anything at all about the expiring Bush tax cuts, and when they Capitol reconvene for the lamest of lame duck sessions today I do not foresee a sudden clarity of purpose.

Could there have been any larger indication that the Democrats were in very serious trouble than that they passed up an opportunity to enact tax cuts a few weeks before an election? Yes, there were (and are) differences of opinion on what bits of the Bush cuts should be extended, but those differences ought to have been bridgeable. Instead, the Democrats became frozen in fear and indecision, petrified (and not entirely without reason) that any legislation they passed, whatever the particulars, would cost votes.

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Longevity Insurance

As I have written a few times before, I consider the unpopularity of fixed annuities to be one of the larger personal finance conundrums.

Aside from the obvious problem of just not having enough money saved up, longevity risk is probably the number one challenge in planning a retirement. If you do not know how long you are going to live, how can you know how much of your kitty you can spend each year?

Park Bench Crop Annuities neatly solve this problem. You pay a lump sum to an insurance company and that company agrees to send you a check every month for as long as you are around to cash them. They even come in inflation-adjusting versions that will send you larger checks as the CPI goes up.

This sort of arrangement is practically identical to the defined benefit (a.k.a. pension) schemes that are often wistfully referred to as a part of the Good Old Days. And yet, as products, annuities are remarkably unpopular. They do exist, you can even get quotes for them online, but it is a comparatively tiny niche market. I have never seen firm numbers, but it seems safe to infer that something like only one or two retirees in a thousand buys one.

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ING Calculates Numbers

A reader sent me a link to a tool published by ING. Ingyournumber.com asks for six simple inputs and spits out, with clever animation, your “number,” that is, the dollar amount you will need at the start of retirement.

ING Logo The six inputs are your current age, martial status, current income, planned age of retirement, desired annual retirement income, and through what age you want to have income. (In other words, how long you expect to live.)

I can immediately see why they need the last three, but the first three are mysterious. My Money Blog wrote about this tool in September and attempted to reverse-engineer the inputs. His theory on the current age input is that it is used to work out how many years you have until retirement, which is then used to adjust your retirement income needs for inflation. Apparently, all inputs are assumed to be in 2010 dollars.

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Negative Yields are Not Crazy

How much would you pay to lend money to the government? Most of us have this arrogant idea that the government should pay us to borrow our money. And yet, last week a Treasury auction of $10 billion in 5-year bonds resulted in a price that will yield negative 0.55% to their new owners.1977 Treasury Bond

It is not quite as crazy as it sounds. These are Treasury Inflation Protected Securities (or TIPS) that will yield inflation plus some stated interest rate. So these bonds are set to return to their owners inflation minus 0.55% over five years. Given that normal unprotected five year bonds are currently paying only 1.18%, this implies a five year average inflation rate of 1.73%.

Annual inflation over the past five years has averaged 1.83% and over the past twenty five it has been 2.82%. If you think inflation over the next five years will be higher than 1.73%, then the TIPS, negative interest and all, are a better bet than the regular Treasurys.

So it is not crazy after all.

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