The Real Risk to Social Security

Hello,

Enough with the Social Security debate, I’m sure most of us have heard this storyline a million times, don’t get me wrong, what we need is a solution on how to solve this quagmire we are in with our Social Security. Somebody needs to tell us if the younger generation will be entitled to their retirement benefits when they fall due, or we start making preparations early, but I’m sure that majority already know that by now. Just ask yourself if you want to be having this sought of conversation when you retire, or you picture yourself enjoying retirement because you made all the necessary arrangement to ensure you have the kind of life you had envisioned for yourself.  Don’t get me wrong, I’m not to trivialize the subject, all I want is to bring out the issue of having your own retirement package, so that if Social Security goes, it will only be small percentage of your retirement income. As Eric Schruenberg points out in the following article, the debate on the real risk with the Social Security is not as simple as it sounds.

Nothing get clicks from seniors like a scary story about Social Security, and the Associated Press supplied a real granny-grabber last week:  Social Security on Pace to be Drained by 2037. Hyper-ventilating off a new report from the Congressional Budget Office, the headline managed to seize a topic of key interest and entirely miss the point.

To understand what’s wrong with such a headline, you need to grasp one fact: Social Security is, ultimately, just another pay-as-you-go government transfer program. That is, we tax Peter to pay Paul.  The Treasury raises money with taxes and debt and distributes some of it to seniors, survivors, and disabled people according to formulas embedded in the Social Security law. Your benefits are safe as long as voters agree that transferring that much money to seniors is better than transferring it elsewhere, or letting taxpayers keep it. Simple.

What makes it seem complicated is that Uncle Sam’s accountants treat Social Security like a closed ecosystem. Unlike other government programs, it has its own tax — this year a 10.4% slice of your wages (4.2% from you and 6.2% from your employer) officially called the FICA tax — and every year the Social Security trustees estimate how long the system’s inflows from FICA and other revenues will cover its outflows.

But where the system really turns murky is with the trillion-dollar Social Security trust fund, an accounting phantom that has launched a thousand half-cocked headlines like AP’s. Social Security experts like Eugene Steuerle of the Urban Institute regard it as a trillion-dollar distraction. “I try to avoid the trust fund debate,” he writes in an email. “Social Security is mainly a pay-as-you-go system.”

There is a massive trust fund — and this is one case where your definition of “is” really matters — only because FICA has pulled in much more than Social Security needed for the past 27 years. The government treated the FICA surplus the same way it treats all tax revenue: It spent it on aircraft carriers, interest on the debt, haircuts for Congressmen, and all the other purposes of government. The surplus, along with imputed interest, is recorded on the government’s ledgers. That ledger entry is the trust fund.

What does the trust fund do? The Social Security Administration itself describes it as “budget authority.” That is, until the fund runs out, the program can order the Treasury to come up with the money to pay benefits, even if FICA taxes don’t cover benefits (and they don’t, starting this year), without asking Congress for more money.

What the trust fund doesn’t do is change how the Treasury pays for benefits: Trust fund or no trust fund, we still have to tax Peter to pay benefits to Paul. If Peter’s FICA taxes don’t cover Paul’s benefits, the shortfall has be made up out of Peter’s other taxes, or by borrowing. All that matters is how much we want to support seniors, not whether government accountants say the trust fund is a $2.6 trillion or 50 cents.

In the kind of Social Security post you should pay attention to The Truth about Social Security Cuts MoneyWatch writer Carla Fried argues persuasively that voters (including most Tea Party members) support Social Security so strongly that benefits are in zero danger in the short run.  Certainly, no politician has enough of a career death wish to propose stiffing anyone now retired or even within 10 years of retirement.

The question anyone younger than 50 needs to ask is, how long will that popularity last?  At some point, as the population ages and seniors absorb an ever larger share of spending — not just in Social Security, but also in Medicare and Medicaid — voters may simply choke on elderly entitlements. (Remember at that point we may simultaneously be choking on interest payments on the debt.) Ironically, the best way to protect benefits for younger workers today is to embrace gradual changes in the program starting today–thus avoiding more draconian cuts in a crisis a decade or more hence.

In the meantime, forget about when the Social Security trust fund will be “drained.” Indeed, forget about the trust fund altogether. It’s irrelevant. As with all the fiscal challenges we face, Social Security’s biggest risk is failure of political will. There’s no trust fund for that.

Retirement Planning Advice for My 20-Something Son

Hello,

Ok I’ll admit it, I talk about retirement a lot, but that’s because after working for almost half your life or managing your own business, the least and decent thing to do is take care of yourself in your retirement. Many people in their active life never imagine a situation where a time will come when their body will not be able to handle the demands of the work environment, and this will ultimately lead to being laid off on ”medical” grounds or some other lame excuse. In this era of information being readily available by a click of a button, there is no reason you should retire as a pauper. For the individuals who have just started their career, the following article by Steve Vernon illustrates a guideline on how to go about saving for your retirement.

“Hey, Dad! You should write about the steps I should take for retirement.” This advice came recently from my 29-year old son, who started his career a few years ago and will soon become a father. “Should I save money for retirement, a down payment on a house, or for my kid’s college education?”

“Yes” is my short answer to his question, but let’s dig a little deeper to find out why.

The challenge facing most people in their 20s and 30s is juggling competing priorities — usually there isn’t enough money in the budget to do it all. So how do you prioritize?

You might be surprised to hear that I don’t think saving and investing for retirement should have the highest priority on a list of the retirement planning steps you should take when you’re in this age range. Here’s what’s more important:

Invest in your career.

If you don’t make much money, or are in a declining industry with the threat of layoffs, it’s hard to invest much money for retirement. So your first priority is to establish yourself in a successful career that has a future.

Build your nest.

It’s a great time to be a first-time home buyer, with low home prices and low mortgage rates. Consider saving for a down payment, provided you live in an area that doesn’t have economic challenges, like Las Vegas, Detroit, or Florida. But don’t fall into the common trap of buying that large, fancy house to impress your friends; buy just enough house to meet your needs.

Establish smart spending habits.

Live like you’re poor. How do you do that? Drive your cars into the ground, don’t eat out very much, avoid expensive and potentially unhealthy processed foods, buy food in bulk, buy just enough clothes to fit your needs, and use public transportation. Resist the temptation to go overboard on lessons or activities for your children or electronic gizmos in the house. Use credit cards only as a convenience to avoid carrying cash; limit your credit card spending so that you can easily pay off the balance each month. Make every dollar count with your spending, so you can free up money to invest in the future.

Get healthy.

One of the best things you can do for your retirement years is to establish lifelong, healthy, eating and exercise habits. Doing so won’t increase your spending, but it will go a long way to preventing the depletion of your financial resources in your retirement years due to high bills for medical and long-term care expenses.

When it comes to balancing saving priorities, here are a few thoughts:

Set your targets on good public schools for your kids’ college education.

There’s no need to bankrupt your retirement so your kids can go to an expensive private college. This actually does your kids a big favor, since you won’t need to move in with them when you’re retired because you’ve spent money that could have gone to your retirement on their college tuition.

Save at least 10 percent of your pay for your retirement.

This includes any match you might get from your employer. For example, suppose your employer matches dollar for dollar on the first four percent of pay for your contributions. In this case, you’ll need to save six percent of your pay — four percent to get the four percent match, plus two percent to get up to 10 percent. Save this amount for 30 or more years, and you’ll most likely get in the ballpark of having accumulated enough money for retirement. If you’ve got the time or patience, it would be better to use an online retirement planning calculator to get a more accurate estimate your savings needs. Invest your retirement savings in a good target date fund, unless you have the time and skill to learn about investing and constantly monitor your investments.

To wrap up my list of suggestions for my twenty-something son, here are a few closing thoughts I shared with him:

Prepare to retire at age 70.

By the time you retire, it’s inevitable that Social Security’s retirement age will be pushed back. And if you’ve taken care of your health, there’s a good chance you’ll live to 95, so retiring at 70 could still give you a 25-year retirement.

Participate in a traditional pension plan, if you can.

Most likely this won’t be possible unless you work for a government entity or a union, but if a pension plan is available, it can go a long way toward improving your retirement security.

Put some money away in a Health Saving Account (HSA).

These are becoming increasingly popular with large employers. If you have access to one, resist the temptation to spend the money each year on current medical bills; instead, keep it invested in the HSA so it can grow as a resource for you to use in your retirement years for the inevitable medical bills that will crop up.

Invest time with your children.

It’s very helpful to have good relationships with successful children who can provide emotional, logistical, and maybe even financial support in your retirement years. Make sure you do all you can to nourish that relationship.

While the action steps I’ve outlined are much easier said than done, I do believe they are entirely achievable if you put in the time and effort. Take these action steps, and you and your children will live long and prosper!

Recession’s Price Tag: $2,300 a Year – Forever

Hello,

Now, maybe this will wake you from your sleep. Apparently, we have been losing $2,300.00 a year since the recession started in 2008! This means that we all have to go back to our drawing boards, that is, for those who are counting on social security to finance their retirement, and crunch those numbers again. As every expert has always recommended, you should always have a retirement package tailored-made to you needs to meet such kind of eventualities incase their happen. Losing $2,300.00 is a lot and can take you back ages, but that doesn’t mean that its too late to make amendments to your plan, that is, you can always increase or decrease your contribution depending on the amount you will require during your retirement. The following article by Linda Stern illustrates how we are losing money every year.

The so-called “Great Recession”  has taken a permanent bite out of everyone’s retirement and not just at a macro level.  Today’s workers will lose an average of $2,300 a year each in retirement benefits because of the anemic wage growth which started in 2008, according to a new study written by Urban Institute analysts and released by Boston College’s Center for Retirement Research. Younger workers and wealthier workers will lose even more.

The study came as Social Security and Medicare trustees reported that both of those programs would run out of money earlier than had been expected. Medicare will exhaust its funds in 2024, not 2029, and Social Security will run out of money in 2036, not 2037, the trustees said.  Legislators may be prompted by those findings to shore up or revise those programs, but even if they do, that would not reverse the decline projected by Urban Institute study authors Barbara A. Butrica, Richard W. Johnson and Karen E. Smith.

They said the real impact of the recession for workers was not in transitory unemployment, but was in permanently lowered future wages that would then feed into Social Security formulas in a way that would permanently lower benefits. “The reduction in wage growth affects nearly all workers — not just the relatively few who lost their jobs — and lasts for their entire post-recession career,” the report said.

Young workers will be harder hit, because the length of the careers they have ahead of them will magnify the effect of the lost wage growth, the study said. Their  income at age 70 will be almost five percent lower than it would have been, or about $3,000 per person.

But higher income workers will have the most to lose and will lose the most. Young workers in the top 20 percent of wage earners will lose an average of $7,500 a year in their 70s, the study said.

Besides losing sleep worrying about it,  is there anything future retirees can do about the new shortfall? They can be aggressive about their careers, hoping to squeeze bigger than expected raises out of their bosses, or changing jobs more frequently to climb the ladder quickly.

Or, they can try to save more on their own to make up for the loss. A rough rule of thumb is to multiply the amount you need to withdraw every year by 25 to see how much you’d need to accumulate to fund it. So, a 25-year-old who expects to need an extra $2,300 a year when he is 70 would have to build an extra $57,500 nest egg before then. In an account earning seven percent, that would mean just tucking away an extra $15 a month.

Finally, they should watch that policy space, too. That $2,300 a year could end up being a drop in the bucket once Washington starts tinkering with Social Security.

5 Retirement Mistakes to Avoid

Hello,

You are in your sixties, and you have done everything to make sure that you retire with a sizeable retirement fund, and the one thing that you promise yourself is that you are not going to make the mistakes people normally make during retirement. This is what everybody who saves for retirement dream about, but sometimes this could be our own undoing. For example, statistics shows that the average person has a life expectancy of 75 years at birth depending on sex, but that changes once you hit 65 years and your life expectancy now increases to well beyond 80 years. You can imagine what will happen if you don’t adjust your income requirement. As Larry Swedroe illustrates in the following article, there are 5 retirement mistakes that every retiree should try to avoid.

1. Overestimating Returns

Historically, the stock market has provided an annualized real rate of return of about 7 percent. So, many investors assume they’ll earn at least that much going forward. While the past is often a good guide to the future, that’s not the case when it comes to forecasting equity returns.

The real return provided by stocks comes from three sources: dividends, growth in dividends, and changes in the price-to-earnings (P/E) ratio. But the dividend yield at the end of 2009 was only about half the historical average of about 4.5 percent, which has led most economists to forecast real stock returns in the range of just 4 to 5 percent. So if you’re using 7 percent as a guide in your financial planning, you’ll likely fall short of your goal.

2. Not Realizing How Much Income You’ll Need

A study by Aon Consulting and Georgia State University found that the average person will need to replace between 80 and 90 percent of his preretirement income during retirement. Yet in a retirement confidence survey, one in 10 people said they thought they’d need less than 50 percent, and three in 10 thought they’d need between 50 and 70 percent.

Even the 80 to 90 percent figures may be conservative. Many employers are being forced to renege on promises to provide health insurance to their retirees. And given the crisis in the Medicare program, it seems likely that the share of medical costs you’ll have to bear will increase. So plan on needing 100 percent of your preretirement income.

3. Misjudging How Long You’ll Live

This is one of the most common errors people make planning for retirement. Remember, not only are people living longer these days, life expectancy increases as you age. At birth, the average life expectancy of males is 74, but a man who reaches 65 has an average life expectancy of 81. The average life expectancy at birth for females is 79, but it’s 83 for 65-year-old women.

4. Underestimating the Danger of Inflation

Once you enter retirement, the risks of inflation increase, because you can no longer count on rising wages to offset rises in your cost of living. Also, many pension plans aren’t indexed to inflation and most bonds present inflation risk.

This is why retired investors should at least consider investing in TIPS (Treasury inflation-protected securities) and I Bonds, another inflation-protected security). These bonds, unlike other bonds, also have negative correlations with equities. By owning TIPS or I Bonds, you reduce the risk of owning stocks.

5. Investing Too Conservatively in Retirement

As people enter retirement, they tend to become more conservative investors, gravitating toward safer asset classes. That’s appropriate. But too much of a good (safe) thing may not be such a good thing.

After all, there are periods when bonds perform poorly while equities provide higher returns. Also, while the real returns of nominal bonds can be eroded by inflation, equities provide some long-term protection against it.

Seeking safer investments can lead you to confuse the familiar with the safe. Since many people are more familiar with U.S. investments than international investments, they wrongly assume that international assets are more risky. Actually, adding international equities to your portfolio reduces your overall risk. So don’t be afraid of owning a low-cost international stock index fund, such as the ones recommended by Burton Malkiel in The Elements of Investing.

What’s Worse Than a Depression?

Hello,

Are we being realistic with ourselves? I thought history has shown that you can never build a successful country on debt, or going by the teachings of the great book, The Bible, you should never build your house on sand, but upon a rock. We celebrate when experts tell us that the economy is on a recovery, but for how long because all this has been made possible by the huge mountain of debt that is increasing by the second. Indeed this truly is good news for the millions of Americans who are struggling to make ends meet, but for how long. Many financial experts and economists said that we never experienced a depression, but I don’t think that its time to celebrate yet, coz there is so much work to be done. Robert Kiyosaki demonstrates in the following article a situation that could be worse than a depression.

“Is the crisis over?”

“Is the economy recovering?”

These are questions I’m often asked. People who ask such questions are praying for a “V-shaped” recovery, hoping that the worst is over and that we’re on our way to economic recovery.

Some experts say that we’re in a “U-shaped” recovery, meaning the recovery will take longer, maybe another two to three years. Others fear a “W-shaped recovery,” a double dip, which could result in another crash before full recovery. Some experts are calling for a zombie recovery similar to the Japanese economy’s 20-year stagnation.

There’s also a growing chorus of experts who are warning of our greatest fear, a depression either in the form of hyperinflation like the German Weimar Republic experienced in the 1920s, or a deflationary depression like the Great Depression. A depression would be devastating, but could there be something worse than a depression?

The answer is, “Yes.” There could be an economic collapse.

Near Miss

In 2008 my friend and author of The Dollar Crisis and The Corruption of Capitalism, Richard Duncan, called me and said, “The global credit card system almost shut down. Can you imagine what would’ve happened to the world economy if the credit card system failed? We came very close.”

Richard is not an alarmist. He’s a classically trained economist, a graduate of Vanderbilt University and Babson College, and a former advisor to both the IMF and the World Bank. He has access to information most of us don’t. He’s a reserved, clear-thinking, soft-spoken person. For over a year now, Richard’s words have been ringing in my ears.

For me, the key word is system. For something to collapse, not all systems have to shut down. In most cases, just one system is enough. For example, the human body is a system of systems. If just one system, such as the cardiovascular system, shuts down, death follows. The same is true for an automobile. If the fuel system shuts down, the car is inoperable even though the other systems may all be in good order.

Many of us go about our days in blissful ignorance that an economic collapse could happen at any moment should one of our financial systems — like the credit card system — collapse. Our global economy is much more fragile than many of us realize.

Collapse

The world is made up of systems, systems often competing against one another. For instance, BP’s latest gusher in the Gulf brought home the fragile relationship between the world’s eco and economic systems. The environmentalists say capitalism is killing our oceans, air, land, and forests. Capitalists argue that they provide food, fuel, and building materials for a growing world. Because the world is made up of systems in conflict, it’s not only uncommon (but, rather, normal) to see systems collapse.

History is full of economic collapses from the Roman Empire to Weimar Germany to, most recently, Iceland. Economic collapses most often precede the collapse of empires. In families, if the breadwinners lose their jobs, the family economy often collapses. We should not be surprised when collapses happen. Rather, we should be surprised they don’t happen more often.

As you may have already guessed, a minor collapse can create a ripple effect that may cause a domino effect of bigger crashes. This is why Greece was such a hot issue. If Greece failed, it might have taken the mighty German and French economies down. This would have caused an economic tsunami and collapsed the world economy. Jared Diamond’s Collapse is a great book for history buffs of collapses. Diamond traces the causes that led to the fall of civilizations such as the Maya, Easter Island, the Anasazi Indian tribe of Arizona and Utah, the environmental and economic collapse going on in Montana today, and more. The book reads like a murder mystery. It’s easy to read, disturbing, frightening — and hard to put down. Looking into the history of collapses, we see many parallels to today.

And, it seems to me, we know this intuitively. Our pop culture is becoming obsessed with apocalyptic stories. There are more and more movies about what would happen to our world after a collapse. The latest are 2012, The Road, and The Book of Eli. There is a new TV series titled The Colony that is created on the same theme. Even TV commercials are picking up on the post-apocalyptic world. Bridgestone tires runs a commercial about a rogue gang of dark and dangerous looking thugs stopping a car on a steep mountain road demanding, “Your Bridgestones or your life.” The driver throws out a gorgeous, sexy, long-legged young woman, turns around and drives off with the thugs screaming, “Your life, not your wife!”

Judging History

So the question becomes, if the world’s economic systems are so fragile, and if collapses are common in a world of competing systems, why are we not talking more about the possibility of collapse? Obviously our leaders don’t want us talking or thinking about that. And they try hard to frame the discussion so we don’t.
Most people would agree (including many historians) that the best way to anticipate the future is to study the past. But what if our version of history is wrong? What if our history is distorted to sell an agenda? After all, the word “history” is made up of two words: his and story.

Fed Chairman Ben Bernanke, the Princeton University scholar of the Great Depression, often says that the depression could have been averted if only the government had printed more money. That’s his story, but that’s not what history says. After the crash of 1929, FDR was elected in 1933. He immediately took the U.S. off the gold standard through the Emergency Banking Act and introduced his New Deal. This allowed him to print more money and rack up huge amounts of national debt. At first it seemed that FDR’s plan was working.

Yet in 1938 there was a “depression within the depression.” Economic output collapsed and the unemployment rate rose from 14.3% to 19%, in the face of a year-over-year decline from the peak of 24.9% in 1933. History proves Bernanke’s claim (that FDR didn’t print enough money) to be wrong. This is what Roosevelt’s Secretary of the Treasury, Henry Morgenthau, wrote in his diary in May 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong, somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot.”

World War II broke out in 1939 and many people credit that war with saving the economy. While the war did boost the recovery, it was the Bretton Woods Agreement, signed in 1944, that put the world back on the gold standard, which stabilized the global economy.

Back to the Future

In 1971 President Richard Nixon took the world off the gold standard. Here we are again on the edge of a new depression. After the last depression, America emerged as the richest creditor nation in the world. Because our homeland wasn’t bombed like the European countries, we had factories exporting products to a world rebuilding from the war.

Today leaders like Ben Bernanke want to rewrite history. They want us to believe that spending and debt are the solution. They want us to buy their version of history and continue to get deeper and deeper into debt. They want us to trust that printing more money will pull us out of our great recession.

True history speaks a different story. It speaks of collapse when a nation or empire overextends itself. The true fear should not be a depression or a double-dip recession. It should be an economic collapse. You can only tip the system so many times before it falls completely apart.

Today America is the biggest debtor nation in the world. Our factories have moved overseas. Now we’re net importers paying our bills and fighting two wars with counterfeit money as our leaders use the same accounting rules WorldCom and Enron used — and as you know, those companies no longer exist.

Think the Gulf Spill Is Bad? Wait Until the Next Disaster

Hello,

Why do we always have to wait until a financial disaster happens to voice our concerns? Take the example of the housing market, many experts had predicted the housing bubble as early as 2004, but nobody listened. The same thing happened with the tech bubble, Alan Greenspan, former Federal Reserve Chairman, had warned of the impending bust, again, we all complained when it was already too late. I know you are probably thinking that since you are an individual you can’t change the world! but you can start with yourself, and if everyone was to do this, heads would roll. The problem with most of us is that we like following the crowd, even though sometimes we don’t fully understand the implications. Right now, another financial disaster could be brewing, and not many people are paying attention, until the day hell breaks loose. The following article by Robert Kiyosaki illustrates a bomb waiting to explode, and this one will probably bring the global economy to its knees.

The world knows BP was a disaster, a monster of a disaster. BP’s disaster made Hurricane Katrina look like a rain shower.

Every time a TV news station shows oil gushing from a broken pipe — one mile below the ocean’s surface — the world gets sick. Scenes of oil-soaked pelicans struggling for life both angers and saddens us. The financial losses endured by small businesses and fishermen cannot be imagined, let alone conveyed by the media interviews. BP was a disaster with a scope beyond comprehension.

I was in England when President Barack Obama blamed and criticized BP for this tragedy. His criticism sparked the anger of the British. Politicians wanted him to tone it down, to be more careful in his choice of words. British Prime Minister David Cameron told Obama not to “go after BP for the sake of it.” Virgin’s Richard Branson said he was “kicking a company while it was on its knees.” Their concern was not for the environment or those suffering the ravages of this disaster. Their concern was for the pensioners who are counting on BP for a secure retirement.

On June 17, London’s Daily Mail ran a headline screaming, “Obama Bullies BP into £13.5bn Fund for Oil Spill Victims… but British Pensioners will Pick Up the Bill.” The British are angry with Obama for pressuring BP to suspend dividend payments and set aside $20 billion for the cleanup. Obama’s strong-arm position has not only affected British pensioners, who own 40% of BP, but American pension funds, who own 39%, as well. In other words, the economic damage of the BP disaster goes far beyond the Gulf. The damage is spreading to pensions, pensioners, and portfolios all around the world.

An Atmosphere Changed

While in London, I decided to go to dinner at Canary Wharf, ground zero for the next BP. Only a few years ago, Canary Wharf was one of the centers of the financial universe. Condo prices were sky-high, offices were packed, and high-paid bankers filled Canary Wharf with wealth and excitement. Today, Canary Wharf seems to be dying. It has lost its vibrancy. Many restaurants and offices were nearly empty and there were few lights to be seen in those once-high-priced condos.

And Canary Wharf’s ‘BP’ stands for Bomb Production. Canary Wharf is much like AIG, a factory for exotic financial products known as derivatives. The problem is that most people do not know what these murky and mysterious products are – and that includes the people who make them or buy them. It’s why Warren Buffett has called derivatives “financial weapons of mass destruction.” That is how powerful they are. During World War II, a ship exploded while loading bombs for transport at Port Chicago, California. The explosion flattened everything for miles. It is said that the ship’s anchor, which weighed tons, was found more than six miles away. Derivatives — financial bombs — have the same power if they accidentally detonate inside a bank’s balance sheet.

The subprime disaster was a result of financial bombs — derivatives — exploding in financial institutions such as AIG and Lehman Brothers, as well as banks and financial institutions throughout the world. After the bombs AIG manufactured exploded, AIG received $181 billion in taxpayer funding and immediately sent $11.9 billion to France’s Société Générale, $11.8 billion to Deutsche Bank, and $8.5 billion to Barclays Bank of Britain. U.S. taxpayer money was going to bailout banks around the world. During the last three months of 2008, AIG was losing more than $27 million an hour. That is how powerful these derivatives can be. The problem I see is this: There are many more such bombs still sitting in balance sheets all over the world.

Financial Bombs All Over the World

Military bombs are classified by weight: 500-, 750-, and 1,000-pound bombs. Financial bombs have interesting labels such as CDO (collateralized debt obligations), ABS (asset backed securities), and CDS (credit default swaps). While they sound exotic and sophisticated, when put in everyday language, a CDO is simply debt sold as an asset. And CDS, or swaps, are simply a form of insurance.

Since the insurance industry is strictly regulated, and the bomb factories producing CDS did not want to comply with insurance industry regulations, they simply called them ‘swaps,’ rather than insurance.

To make matters worse, rating agencies such as Moody’s and S&P (and even Fed Chairman Alan Greenspan) blessed these financial bombs as safe, sound, and good for you. It was almost as good as the pope blessing these products. In 2007, the subprime boom busted, and we know what happened from there.

The problem is that approximately $700 trillion of these financial time bombs are still in the system. While people watched the BP disaster in the Gulf, few people are aware of the other BP, the financial bomb production that is still going on. If this derivative market begins to collapse, we will see another BP disaster.

Can’t Clean Up the Next Disaster

Most of us know there is not enough money in the world to clean up the Gulf. The same is true with the $700 trillion derivatives market. If just 1% of the $700 trillion derivatives market goes bust, that is a $7 trillion disaster. The entire U.S. economy is only $14 trillion annually. A 10% failure, equating to $70 trillion, would probably bring down the world economy. As with the BP Gulf disaster, there is not enough money in the world to clean up the next BP disaster.

Could such a financial disaster happen? The answer is “Yes.” In fact, just as President Obama pressured BP into doing the “right thing,” he is also pressuring the financial markets to do the right thing. The president and our congressional leaders are pushing through financial reform legislation. My concern is that, if not handled delicately, it is this financial reform that will set off the derivative time bomb… the next BP.

Currently, derivatives are traded over-the-counter, also known as off-exchange trading. This means derivatives are uncontrolled, unregulated, and unsupervised. The proposed financial reform legislation is pushing to have derivatives traded through an exchange. This will bring greater transparency and control. My concern is, when this happens, the reform will reveal fraud and failures we do not yet know about today. It will be like turning on the light and watching the cockroaches (bankers) run for cover. While it is commendable that President Obama holds the rich and powerful accountable, I wonder what the price will be.

How many BPs can we afford?

The Rise of the Mega-Rich

Hello,

The last survey by Forbes magazine listed the Richest people in the world, and how their wealth changed from the previous year. The surprising thing that people failed to notice is that even though most of the individuals lost money, it cannot be compared with the rest of us. Clearly the gap between the rich and the poor is widening by the day, and the surprising fact is that its during times of financial crisis that we normally have rise of the mega rich. The question is what kind of mega rich individuals will rise from this financial crisis? The following article by Robert Kiyosaki illustrates what has happened after a financial in the past.

The first decade of the 21st century is over. Many people find themselves off to a bad start. The new century began with the Y2K scare — the threat of computers shutting down around the world. Then 9/11 came, followed by two long and expensive wars. The NASDAQ bubble and crash were followed by the real estate bubble then subprime crash, which led to the unprecedented printing of trillions of dollars in an attempt to prevent a global depression. The result is a lingering financial crisis that has expanded the gap between the haves and have-nots.

Most decades have their characters. In the 1960s, we had the hippies. By the 1970s the peace movement evolved into John Travolta and disco. In the 1980s, capitalists took center stage. Techies dominated the 1990s and suddenly geeks were cool.

The question is, what character will emerge to represent the first decade of the 21st century?  Will it be the religious terrorists flying into tall buildings or the financial terrorists stealing our wealth from inside tall buildings? Will the first decade be known for Ponzi scheme notables such as Bernie Madoff and Allen Stanford… or Social Security and mutual funds? Could it be known for odd couples such as Barack and Hillary or John and Sarah? Or will the first decade be known as the era of celebrity philandering with confessions from the likes of Tiger Woods, Elliot Spitzer, and John Edwards? (All three should get together to co-author a book entitled “Family First”.)

The Century’s Exciting Start

All in all, the first decade was an exciting start to the 21st century. What will the second decade bring? What new character will emerge if hippies, disco-ducks, techies, and philanderers are yesterday’s news?

I believe there will be two newsworthy groups to emerge between 2010 and 2020. One big group will be the Dumpies, so named because life leaves them down in the dumps. Many in this group are old hippies who flourished during the ‘60s and forgot to grow up. Not all Dumpies were hippies. Many Dumpies became Dumpies simply because, like dinosaurs, they failed to notice the weather changing. They simply followed in their parents’ footsteps, faithfully believing that all they had to do was go to school, get a job, buy a house, save money, retire on a company pension, collect Social Security, and live happily ever after at the country club. The formula worked for their parents — the WWII generation – so why shouldn’t it work for them?

The problem is, the rules of money changed. In 1971 President Nixon took the world off the gold standard and in 1974 the predecessor to the 401(k) plan emerged. Suddenly savers were losers as inflation took off, debtors were winners, and people turned to gambling with real estate and in the stock market as the guarantee of a retirement check for life disappeared.

In the coming decade, I believe we will be hearing more and more stories of Dumpies — well-educated, hard-working, successful, prosperous people who will find themselves out of time, out of money, and dependent upon government or family support in their golden years.

The New, the Young, the Prosperous

The second group you will hear more about is the new, young, global mega-rich. They are internationally minded plutocrats who are the beneficiaries of globalization and the technical revolution. They are being pushed along by the fall of communism, the spread of economic globalization, and the impact of the internet as technology makes information and communication free or almost free. Most are 40 or younger today.

This rise of the new global mega-rich is happening as established institutions are falling. The fall runs the gamut from the music business and traditional media to the Detroit automakers who find themselves obsolete, outmaneuvered, and out-priced by entrepreneurs in Silicon Valley, Mumbai, Shanghai, and even Siberia.

We live in an era of unprecedented opportunity for the smartest, most persistent, and creative among us. Whole new businesses will emerge around breakthrough products as revolutionary technologies accelerate capitalism’s creative destruction of slower industries.

In this second decade, you will see the middle class of the West being hollowed out, creating the Dumpies of the world…modern dinosaurs of the evolutionary process. Both globalization and technology will have a punishing impact on those without intellect, luck, or chutzpah to profit from the changes. Machines, technology, and cheap labor in low-wage countries have pushed down wages in the West, aggravating the financial crisis for the obsolete and ill-informed.

Unprecedented Openness

We live in an age of unprecedented openness. As stated earlier, technology has made information and communication free or almost free. There is more opportunity than ever before…yet that opportunity is largely theoretical: In America social mobility will reverse as many in the middle class become Dumpies.

Between 1997 and 2001 the gap was as follows:

1.  The top 1% earned 24% of earnings growth.
2.  The top 10% earned 49% of earnings growth.
3.  The bottom 50% earned 13% of growth.

Until 2008 none of this seemed to matter. The wonderful inventions, such as iPhones, iPods, Twitter, Google, and Facebook kept us entertained like kids at Disneyland.

At the same time, the expanding bubble of debt created a surreal environment of monetary nirvana.  You could buy what you wanted, max out your credit cards, and pay off the cards with a home equity loan, as Santa’s sleigh ride continued. Who cared if the bottom 50% were being left behind? Who cared if the top 10% earned 49% of earning’s growth? Who cared if 10% of the population got richer while 90% were left behind? We had toys, we were hip, we had designer bling from China that made us look rich, and we could buy the house of our dreams for no money down. What could be better?

As this financial crisis lingers on, the gap between the new plutocracy and the new Dumpies is becoming a pressing political issue. During the 1960s, the hippies dropped acid and dropped out.  Today, as Dumpies, the largest demographic group (a.k.a. baby boomers, approximately 75 million strong…of which I am one) may wake up and drop back in. If they do, who knows where the political process, driven by their hippie values, will go? This is why the second decade of the 21st century will be more important than the first.

Financial education is an important objective for this next decade. We cannot allow the gap to grow bigger. We must have financial education in our schools. Money will not close the gap — only financial education will. If we do nothing, who knows what creature will emerge as the mascot of the new decade?

To see the future, look to the past. Throughout history, political despots have emerged during times of economic crisis. Some famous characters are Mao, Stalin, Napoleon, and Milosevic.

In 1933, four years after the 1929 crash, two figures arose from the Depression. One was Adolf Hitler. The other was Franklin Delano Roosevelt. Many people believe Barack Obama is modeling himself after FDR. Which leads to the question: Who will play Hitler?

Finding Red Flags in Your Adviser’s Record

Hello,

The genesis of the financial crisis was the housing market, due prices reaching a point where it was becoming impossible to buy a home. It all started when getting mortgage finance was so cheap that even people with bad credit rating were getting loans! At the end, borrowers started defaulting on their loans due to raising house prices, and the result was the worst financial crisis since the great depression. The question is, why were individuals with a poor credit history being given credit in the first place? I know the financial institution and adviser were out to make a sales, but which criteria, if any, was used to evaluate clients. This was probably due to poor financial advise, and a number of ways have been developed to identify red flags in a financial adviser’s record, and the following article by Laura Rowley illustrates some of them.

An exclusive analysis conducted for Yahoo! Finance shows one in 10 financial advisers in the U.S. have been involved in at least one customer dispute. Such disputes typically involve alleged unsuitable recommendations, misrepresentation of a product or transaction, or unauthorized activity, such as making trades in an account without a client’s approval. Granted, these transgressions may not constitute fraud, but they can surely cost investors their hard-earned money.

The question is: How do you know your adviser is not among this group?

BrightScope, a firm that rates corporate 401(k) plans, this week launched BrightScope Advisor Pages in an effort to facilitate comparison among registered investment advisers (RIAs) and broker-dealers. The service aims to give consumers free, in-depth profiles of 450,000 financial advisers, with more to be added in the coming months. The site aggregates public information from the Securities and Exchange Commission (SEC) and the private non-profit Financial Industry Regulatory Authority (FINRA). (RIAs are regulated by the SEC or a state securities regulator; broker-dealers must be registered with the SEC and be members of FINRA.)

“The database is searchable from every dimension you want, and truly public in that Google will be indexing it,” says Mike Alfred, BrightScope co-founder CEO. “Up until now, if you search an adviser’s name on Google you would never find the SEC or FINRA data directly, because the format makes the data impossible to scrape.” (Spokespeople for the SEC and FINRA declined comment.)

BrightScope hasn’t populated all of the profiles on the site yet, but it will eventually include advisers’ qualifications, experience and employment history, type of clients, total assets under management, average account size and area of specialty. BrightScope will also add information about legal disputes, formal complaints, bankruptcies and terminations. The firm will make money by giving advisers the ability to add their own information to their profiles for a fee.

The heightened transparency is likely to make some financial advisers uncomfortable, and provide a higher profile for practitioners with clean records. At the same time, consumers would be wise to use the site as a starting point and double check their findings against the detailed reports available through the SEC’s Investment Adviser Public Disclosure (IAPD) site and FINRA’s BrokerCheck database.

BrightScope conducted an analysis exclusively for Yahoo! Finance of 328 financial advisory firms with at least 50 advisers. The data revealed that at 14 of those firms, one-quarter or more of advisers were involved with at least one dispute. (The analysis, which is not included on the website, is based on disclosure filings as of Dec. 31, 2010.)

“Some firms have a higher tolerance for long regulatory rap sheets, provided [the advisers] bring lots of assets with them,” says Ryan Alfred, BrightScope co-founder and president (Mike and Ryan Alfred are brothers). “Other firms say, ‘there’s no way we’ll work with this person.’”

But some advisers argue that dispute records are more nuanced than a rap sheet. David Alan Boyer, CEO of Capital Guardian Wealth Management in Belmont, N.C., says he likes the idea of more transparency, but investors need to dig into the results. Some 22 percent of his firm’s brokers have at least one dispute on record, but the firm itself has never had a claim filed against it.

“You can have a frivolous $10,000 claim against an adviser, but it’s not like going to court and proving your innocence and it goes away,” Boyer says. “It goes to arbitration, he proves his innocence, and it stays on his record. But if you see a pattern, you have a problem.”

Marshall Leeds, CEO of Summit Financial Group of Boca Raton, agrees. At Summit, 38 percent of advisers were involved in at least one dispute, according to the SEC/FINRA data as of Dec. 31, 2010. “It all depends on how long the adviser has been in business, what type of products they do and what the complaints are,” he noted. “If a firm has 10 advisers and has been in business 20 years and has 20 complaints, that’s one-quarter of a complaint a year. You have to go to BrokerCheck and know the information you are getting is right.”

Ryan Alfred conceded that some advisers have more exposure to complaints. “We agree that if you’re in business long enough, you will get these issues,” he says. “The question is: Are they chronic, and was there fraud involved?”

In addition, some dispute numbers may be skewed by repeat offenders. Wedbush Securities of Los Angeles, for example, has had 274 customer disputes among one-quarter of its 445 advisers who were on staff as of Dec. 31, 2010, according to SEC and FINRA data analyzed by BrightScope. But 51 of those disputes involve Bambi Iris Holzer, an author and popular media pundit. (FINRA’s BrokerCheck describes the disputes against Holzer in more detail.)

Steve Goldberg, Holzer’s attorney, says the disputes stem from a variable annuity product that she sold as a UBS broker in the mid-1990s. The product was marketed by Golden Select, which was later purchased by ING. “At some point there was ambiguity in the terms and ING interpreted the guarantee differently than Golden Select,” he says. “She called clients and told them. The vast majority of disputes were against UBS. FINRA data…identify her as the individual broker, but that doesn’t mean she was sued; she was the salesperson.”

But there are five pending disputes for more recent product sales by Holzer, according to BrokerCheck. Jeffrey Kaplan, an attorney for several investors involved in the recent disputes, says they relate to two high-commission investments Holzer sold: Provident and Shale Royalties, an oil and gas private placement that turned out to be a Ponzi scheme; and Highland Floating Rate Advantage Fund, a junk bond fund that lost more than half its value. A Wedbush spokesperson says Holzer left the company in late March.

“Brokers are obligated to know what they are selling and to perform the actual due diligence on it,” says Kaplan. “In the interest of caution, why would an investor choose a broker like that when there are thousands of brokers who have never had a customer complaint filed against them?”

In fact, some 25 firms in the analysis of 328 had no disputes at all. One example is Atlanta-based Ronald Blue & Co., a 30-year-old, fee-only firm that has 134 advisers and $5 billion under management. The company’s SEC filings show that planners generally recommend low-cost index funds or exchange-traded funds. “We just look for quality people and are choosy about who we hire, and that’s always been important to us,” says spokesperson Malissa Light.

Maneuvering Through the Downturn

Hello,

When the financial crisis started at the end of 2007, many people were caught unawares and continued to live their life the way they know best, SPENDING! Although the signs were all the over the economy, some simply ignored the call for a change in behavior, and the result was people being laid off their jobs without anything to fall back on. If there is one thing that we have learned from the financial crisis was that we need to change with the times, like I have always said, you have to keep pace with the economy and adjust your financial goals with the changing economic environment. The following article by Laura Rowley shows how Americans changed their spending after learning of the difficult times ahead.

A new Yahoo! Finance survey finds consumers have hunkered down and adjusted their lifestyles in anticipation of a protracted economic downturn. More than half of respondents expect the recession to last three to five years, and they are cutting back accordingly: 57% have slashed spending — on everything from dining out, travel, and clothing to gifts, electronics, and movies. The survey of 2,000 consumers was conducted in April by Yahoo! and Decipher.

Moms such as Seattle-based Melanie Apostol are leading the charge — 65% say they are spending less. The 38-year-old, who has a seventh grader and is expecting another child this month, was laid off last fall from her job at a university, following big losses in its endowment fund. Within a month, she had found another position in communications at a high-tech company, but she is on a contract basis and pays for Cobra health coverage out-of-pocket. Her husband is a mortgage broker whose business has declined with the housing bust.

“I’ve been tracking spending religiously since the beginning of the year,” says Apostol, who manages her budget on an Excel spreadsheet. Vacations, clothing, and entertainment expenses have been reduced, and, like nearly half of respondents, Apostol is driving less — “Doing ten more errands per trip to save on gas,” she says. She is also among the two-thirds of respondents who use coupons, in this case, “the entertainment coupon books where you can go to a restaurant and get one meal for free,” she says.

More than one-third of respondents said someone in their household was looking for a new job (though some of those are currently employed). Michele Mehal, 37, who works at a Pittsburgh non-profit firm, is in that boat; her spouse, 45, was laid off in February from a retail management job and is making a career change.

“Our needs are being met, but we’re not going on vacations anytime soon,” says Mehal. “We rent our home, we have no car payment — we’re able to live modestly,” although they do shoulder student loans. “I’ve never had anything easy and understand the concept of taking one step back to take two steps forward. He’s wanted a change for a while, so we’re trying to make this as positive as possible.” Her spouse is among the 16% of respondents looking into further education because of the recession (the figure is 32% among 18- to 24-year-olds).

In terms of specific financial moves, more than a third of respondents have increased efforts to pay off debt, with moms and baby boomers (age 45 to 64) even higher at 42% and 40%, respectively. About one-quarter of households surveyed have obtained an additional source of income; 25% are drawing down on their savings to pay current expenses, while just under a quarter say they’ve increased their monthly savings.

Eleven percent of those surveyed have revised their investment portfolios. Among that group, 43% reduced their contributions and made revisions to where the money is invested; for baby boomers, the figure was 59%.

Gary Correia, a CPA, was recently laid off as vice president of finance for Taylor Guitars in El Cajon, California, after 13 years with the company, during which sales grew to $67 million from $18 million. While he contributed to his 401(k) this year, he’s “taken a little bit more of conservative approach,” says Correia, 52. “My philosophy was slightly more on the risky side — I thought I had a ten-year horizon before retirement, and that stocks will always do better in ten-year time periods. I’m not sure that holds anymore.

“It may be counterintuitive, but I got tired of seeing my portfolio go down and down,” he adds. “I left the existing funds where they were and switched current deferrals to a money market account. So if I put $100 in, I may not make much in interest, but I know it will still be $100, and not $90 or $80 or $70.”

About 60% of baby boomer respondents say they’ve made changes to their future plans because of the economic downturn. Correia, for example, is among the 19% of that demographic delaying retirement. “My 401(k) went down 37%,” he says. “I had figured I could retire between 59 and 62 at the latest, but I’m thinking about working three more years.”

Fortunately, Correia and his wife saved for years to foot the bill for college for their two children. He has a son who will graduate in December and a daughter who enters college in the fall. “She selected a smaller private school not too far from home,” he says, adding that, with scholarship and grants, the expense is within their budget.

In the survey, 12% of parents age 25 to 44 are looking at lower-cost educational options. Apostol, for instance, has a daughter in a private, independent middle school that runs $1,600 a month, and is considering public high school. “Since last summer, I have looked at moving into a better school district where the public schools are in top 50 nationally,” she says. But she worries that, because her job is on a contract basis, she won’t qualify for a mortgage, even though she has a down payment saved.

Leisure time is also changing amid the recession, as Americans shift toward simpler, lower-cost activities. Consumers say they are spending more time surfing the internet (48%); playing with their kids (46%); watching television (38%), managing their financial investments (36%); playing console video games such as the Wii or Xbox (33%); reading (33%); playing sports and working out (31%); attending religious services (29%); and doing volunteer work (26%).

As for how survey respondents feel about the economic meltdown, they’re mad as hell: 80% expressed some anger, with 44% calling themselves “extremely or very angry.” More than 60% say more should be done to get the nation back on track.

“Sometimes I’m a bit angry because I know I’m going to end up paying taxes and fees and increased costs of things because of these massive billion-dollar giveaway programs,” says Correia, who has lived in the same house in San Diego since 1984, avoided debt, and saved steadily over the years. “I wish they would keep better track of the dollars. Maybe that’s the accountant in me, but when you give billions of dollars, there ought to be a methodology of where it’s going, and making sure it’s the highest and best use. There seems to be no accountability on the part of either the government or those being given the money as to exactly where the money is going.”

In Personal Finance, Choice Can Be a Tyranny

Hello,

When it comes to personal finance, sometimes a lot of people make that small errors that lead to even more financial disaster. Take the example of the credit card, we have been told time and time again that we should ensure that we pay-off the entire amount, but most people insist on paying the minimum amount. What this means is that the balance will start accumulating, and before you know it the amount has ballooned to a crazy figure, and this is how credit card companies make their money. Ok, maybe you are stashing away that extra money in a saving account, which is a good idea, but when comparing the 3% interest that you earn on your savings, against an interest rate charge of 18% on the credit card, and you always wonder why you are always losing money. Laura Rowley demonstrates in the following article why personal finance is such a tough job.

I’ve officially been writing this column for three years, and covering personal finance for two decades. What I know for certain is that making the right financial decisions has never been harder.

Obscure Options

Part of the problem comes from the creative engine of consumer products and financial services, relentlessly generating new solutions to meet new needs. They offer so many different (and frequently shifting) iterations that it’s often too time-consuming and complex to make an informed choice. Another part of the dilemma can be attributed to the corrupt underbelly of gotcha capitalism, which obscures the facts and tricks unsophisticated consumers into a host of expensive mistakes (think auto financing and subprime mortgages).

And often, the choices we must make don’t translate in a meaningful way — they don’t tell us what we need to know. For instance, my health insurance came up for renewal over the summer, with a 26 percent increase in the premium. My insurance broker provided a side-by-side comparison of other plans; we talked about hospitalization, co-pays, and the ability to see doctors outside the plan. But it’s virtually impossible to know what the policies would and would not cover if someone in my family got cancer. As a result, I defaulted to the status quo.

That’s what most consumers do, and the widespread tendency to go with the default option creates an opportunity for better decision-making, according to Richard Thaler and Cass Sunstein, the authors of “Nudge: Improving Decisions about Health, Wealth and Happiness.” Their proposal: Change the structure of the choice, and inertia will result in better outcomes — higher savings rates, improved health care, and more organ donors.

The Architecture of Choice

Thaler, a behavioral economist at the University of Chicago, and Sunstein, who teaches at the university’s law school, define a nudge as any aspect of “choice architecture” that changes people’s behavior in a predictable way, without prohibiting options or significantly altering their economic incentives.

Calling themselves paternalistic libertarians, they say a nudge must be easy and cheap to avoid — putting healthy foods at eye level in a school cafeteria vs. banning junk food, say, or making a diversified stock and bond fund the default choice for a 401(k) participant instead of a money market account.

And although the book is aimed at public policy, individuals can also nudge themselves. “We didn’t write it as a self-help book, but it can be read that way,” says Thaler.

Heuristics, Biases, and Anchors

In most decisions, people tend to rely on shortcuts and rules of thumb known as “heuristics and biases” that can skew our thinking. These were first articulated by psychologists Daniel Kahneman and Amos Tversky in the 1970s.

For example, the “availability heuristic” causes people to make skewed assessments of risk based on recent experience and memories. People who know someone who has experienced a flood are more likely to buy flood insurance for themselves, regardless of the flood risk they actually face.

“Anchoring” causes people to pay too much attention to an initial number or piece of information, and then adjust in a direction they think appropriate — often when the anchor itself is random or arbitrary.

Big Decisions, Small Decision-Making

The first step to improved choices is to lay aside rule-of-thumb thinking when faced with a big decision that is rare, complex, difficult to translate in terms that can be easily understood, and doesn’t offer immediate feedback. Invest time and money into getting independent advice, something most people don’t do, says Thaler.

“I think you can get by OK with rules of thumb in lower-stake situations, but they don’t end up working as well in high-stake situations,” he notes. “People are used to using shortcuts, and on the big decisions they don’t compensate enough. So they’ll spend as much time choosing a TV as a mortgage, though the stakes are hundreds of times bigger.”

When consumers do seek advice, he says, they tend to turn to people with conflicts of interest — a mortgage broker or stockbroker working on commission. “It’s the big-stake stuff people get the most wrong, such as mortgages and house-buying,” says Thaler. “Some economists say if it really matters, people will take the time [to research] or get expert help. But people never get expert help in those domains — at least expert help that’s unbiased.”

Choose Wealth

I asked Thaler for a few simple nudges anyone can do to boost their wealth. Here are a few:

Pay off your mortgage before your retire.

“If you look at data from early 1980s, people in their 60s nearing retirement by and large had no mortgage debt,” says Thaler. “The norm that you pay your mortgage off by time you retire has disappeared. It’s a good self-control device to pay off the mortgage, and if you refinance, don’t view it as an excuse for another vacation or some other kind of splurge. And if you do refinance, take a 15-year instead of 30-year mortgage, especially if you’re in your 40s.”

Ask your credit card company to enforce the card’s limit.

“Credit card companies don’t do that because they say people don’t want to be embarrassed by having card turned down,” Thaler explains. “But most people carry more than one credit card. If you go over the limit by $50, they’ll charge you by $50 and raise your interest rate by 300 basis points — and you could have avoided the whole thing by saying, ‘Oh, that card’s capped out, use this one.’”

Use the “mere measurement” effect to boost your goals.

Researchers have found that merely asking people about their plans affects what they do. “If you call them up and ask them if they’re going to vote, they’re more likely to vote; if you ask when they plan to vote and how they plan to get there, that works even better,” says Thaler. “Whatever your goal is, announce it, make a specific plan, and then elaborate on it.”

Beware the pitfalls of “mental accounting.”

While it’s beneficial to allocate money for specific goals to separate accounts, strict observance can lead to unproductive behavior. A 2002 study of one group of consumers found the typical household had more than $5,000 in liquid assets (typically in savings accounts earning less than 5 percent a year) and nearly $3,000 in credit card balances, carrying a typical rate of 18 percent or more.

Divest from your employer’s stock.

If you hold a lot of your employer’s stock in your retirement plan, create a nudge to sell 1 percent of the shares on a certain date of the month until you reduce your holdings to 10 percent or less. Five million Americans have more than 60 percent of their retirement savings in company stock despite the lessons of Enron and WorldCom. Thaler and Sunstein propose employers help workers with gradual divestiture, and they’re looking for a firm willing to try out the plan. If your company is interested, contact the authors at their blog.

Cutting Through the Confusion

I asked Thaler about the subprime mortgage debacle, and the fact that poor choices were often made because lenders deliberately obscured information. The situation, he says, raises “a real question about how markets work,” he says. “Some people have a naive view, that the invisible hand works when there is lots of competition. The winners will be the ones that provide the best products to people, and it can work out that way. But it can also work out that the winners are the ones that most successfully confuse people.”

The solution is not more regulation, but more disclosure that allows for a clear comparison of the choices, as the authors wrote in a recent op-ed in the Wall Street Journal. They advocate electronic, machine-readable disclosure, “so when you apply for a mortgage, you could take that file and upload it to a website that would explain what you were buying,” says Thaler. “It would allow the creation of third-party websites that would let you search better with more transparency.”

Thaler cites the example of Morningstar and Lipper — two companies that track and evaluate mutual funds, and exist only because funds are required to disclose performance, fees, and other information. “Machine-readable disclosure doesn’t sound sexy, but has the potential to change the shape of gotcha capitalism,” Thaler says.