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Permanent Life Insurance – the Utility Player of Holistic Financial Wellness

It was 1979. I had just graduated college and was working as an actuarial student at Connecticut General Life Insurance (“CG”) when I met my first Life Insurance salesman. John Greer was not a colleague or a workshop leader assigned to teach me the actuarial intricacies of any particular CG product. Rather he was a Northwestern Mutual Life sales agent barely out of college himself attempting to sell me (a single 23 year old guy) permanent life insurance! How he came up with the idea to infiltrate another insurance company (CG had its own line of policies) in order to sell insurance to actuarial students, I will never know, but clearly John ( was, and still is an “out of the box” thinker who is well worth knowing.

The fact is that John closed that sale and I went on, over the next 20 years, to buy 4 more policies from him, all of which I still own today. This may say something about John and his ability to sell, but I think, even more importantly, it says something about the power and versatility of what is perhaps one of the actuarial profession’s greatest inventions and an important contribution to Society. I’m talking about the humble Life Insurance Policy. The concept of life insurance goes back to Roman times, but the life insurance policy as we know it today was created by UK actuaries at the Equitable Life Assurance Society in 1762, (a company that flourished for over 200 years until it was undone in the early 2000’s by straying into the dangerous waters of guaranteeing the seemingly safe interest rate of 7% on almost $10 billion of annuity liability).

Despite being owned by vast numbers of individuals and organizations, Life Insurance is almost certainly the least understood  of the “standard” financial instruments that individuals and organizations (private, public and not-for-profit) use in the financial management of their enterprises. More importantly, it can also be a critical component of any individual’s plan to achieve holistic financial wellness. The reason for this is simple. Over time a life insurance policy can perform many different interrelated functions that will help ensure your financial wellness. These include capital accumulation, tax minimization, family protection, estate planning and even cash flow management. It may not be the best at any particular function, but like a great utility player on a baseball team, life insurance can be used for different roles at different times in your life and is always a good resource to have on your bench when a particular need arises. In short, Life Insurance is like Ken Zobrist of the Chicago Cubs; maybe not a candidate for MVP, but a valuable player nonetheless who richly deserves a spot on your roster.

The history of life insurance and the twists and turns of how its various uses evolved is in and of itself a fascinating story but well beyond the scope of this piece. Today, there are many different types of life insurance, with three of the most important being Guaranteed Renewable Term (“GRT”), Variable Universal Life (“VUL”), and Whole Life. In future posts I will talk about GRT and VUL, both of which can be used by organizations as well as individuals for financial management, but today I want to talk about Whole Life as, in my view, it has been subject to a great deal of unfair criticism and yet is one of the most important tools available to ensure your holistic financial wellness.

Whole Life is what I bought from John as a 23 year old, and for a young person just starting out in the world it can be one of the smartest purchases you will ever make. For almost 40 years, I paid a small premium every month into a vehicle that provided me with both insurance protection and a tax sheltered investment. Some of my premium went to paying for a death benefit (the “cost of insurance”), but the vast majority went to the “Cash Value” which was an investment account that received guaranteed interest and accumulated tax free. Initially the death benefit was very modest ($20,000 if I remember right) but with the additional policies I purchased in the ensuing years, the death benefit ultimately grew to almost $1million. Thankfully it never got paid. Even though I survived, and in some sense a portion of my premiums were “wasted”, the presence of that protection gave my wife and son the significant comfort of knowing that in the event of my untimely demise they would be taken care of. That comfort (and the steps that my wife did not have to take as a result) contributed to our family’s financial wellness and should not be underestimated. Furthermore, because I was so young when I bought the policy, the cost of insurance was very modest and continued that way for the life of the policy. In fact, even after considering that cost of insurance, the Cash Value accumulated at a compound tax free annual rate of almost 6% and as of last year that “forced savings account” was worth more than $400,000.

But my policies were even more valuable than that. As my financial life got more complicated and I moved from city to city, bought and sold houses, got married, divorced and married again, there were times when I needed cash, sometimes a lot more cash than I had readily available. And so several times I was able to borrow (essentially from myself) amounts I needed from the policy and pay myself back over a period of time and at a rate that was completely within my control. In short, the Cash Value provided a “buffer” that allowed me to get over the “liquidity bumps” that we all face as we make our way through life.

Recently, because I am about to retire, I converted my policies into “reduced paid up status”. As a result, two more extraordinary features of my policies have come into focus each of which will be extremely valuable to me in the years ahead. First, about one half of my $400,000 cash value is considered “cost basis” that I can withdraw and spend any time I want and never pay tax on it. It is a powerful source of emergency savings that I can tap into should an unforeseen contingency arise. Second, and even more importantly, I now have a guaranteed death benefit of $800,000 that will go to my wife (or other beneficiary if she dies first) tax free.  If I were to try and buy such a benefit today it would be extremely expensive and maybe not even available without undergoing a full medical exam. This is not only valuable in and of itself, but that $800,000 death benefit will allow us to withdraw more from our 401(k) savings than otherwise, because we know that we only have to use that money while I am alive and that after I am gone the life insurance will take care of the rest. That is what holistic financial wellness is all about.

Holistic Financial Wellness – More on Debt, Real Estate and Long Term Savings

Last month I talked about my father’s aversion to debt and how he integrated it into a coherent strategy for financial health. Today I want to look at another side of borrowing and talk about a friend whose abhorrence of debt and singular focus on that component of his balance sheet led him and his family into a situation where the lack of debt has created challenges that will be very difficult for him and his family to overcome.

Yaron is a very smart man. Son of Holocaust survivors he emigrated from Israel in his mid-30’s after a short but successful career as a logistics officer in the Israeli army. Shortly after coming to America he fell in love with Sarah, a Harvard educated emergency room physician who grew up poor but had recently been hired by a large Bay area Hospital system and whose future earnings prospects were very bright.

In short order they got married and had two equally bright sons both of which Yaron quite willingly agreed to take care of while Sarah focused on securing their financial future. In addition to his child rearing duties, Yaron also took on the task of making the strategic financial decisions in their lives. Now as I mentioned, Yaron was a logistics officer in his prior life and as such was very good at deciding on “critical paths” and taking “first things first”. To him, the first and most critical task facing their new family was to get rid of the almost $100,000 of student debt that Sarah had taken on in order to become a doctor.

Of course there were other looming financial issues in their lives as well. Specifically, there was housing and schools to consider, college tuition to save for and even further down the road retirement security to think about. Unfortunately, like many of us, Yaron prioritized these issues in terms of the timing of the expense (student loans first, then housing and schools, followed by college savings and finally retirement security). Not only that, but even more importantly, he failed to think about the connections between the issues and consider his financial situation holistically.

And so, he and Sarah spent almost all of their modest savings and the extra disposable income from Sarah’s practice on paying off the student debt that seemed to be a dreadful burden (both financially and psychologically) to them. After 5 years of disciplined budgeting they finally paid off the loan just as their oldest son was about to enter Kindergarten. In a perfect world, they would have purchased a home in a nice neighborhood, but despite being debt free, they did not have enough for a down payment and instead had to evaluate the trade offs between high rents in a good school district or paying for a private school education. Having done extensive research on school districts, test scores etc, Yaron and Sarah made the thoroughly rational (in isolation) decision to rent a small house in the section of town that had the very best public school system in the region and then being situated there, to save up for a down payment on a house in the same neighborhood (which of course had the highest house prices in the area).

Everything might have worked out, except the future is far more uncertain and unpredictable than we think. When they began paying off the loans it was the late 90’s and Yaron’s assumptions as to what would happen to both the residential real estate market and the price of a college education were way off. In the next 10 years the price of houses in Northern California (as well as the amount they would need for a down payment) skyrocketed at rates not seen before or since. Tragically, by 2007 when they had finally accumulated enough to purchase a house, prices had risen well past the point of rationality and Yaron (quite rightly) decided that this was a bubble that he didn’t want to participate in. Meanwhile, as this was going on, college tuition rates were increasing at double digit rates and as Yaron thought about that looming problem it seemed that paying for the kind of University his kids aspired to was something that would be even more difficult than owning their own home. Of course these two issues are intimately related and that was one of the key points that Yaron missed. Had he bought a house and taken on more debt instead of paying off Sarah’s student loans, the leverage associated with owning an asset worth 5 times as much as the amount of up-front cash required would have allowed their home equity to grow (over the long term) at a rate far greater than the increase in the cost of college (note that this is true even if year to year house price changes are volatile). Such a strategy would then have allowed them, over time, to both pay off the student loans and refinance their house to free up enough funds to pay for college. In short, had Yaron and Sarah thought holistically about their situation they would have been able to achieve all of their financial goals.

Some may ask why I haven’t talked about interest rates or taxes in telling Yaron and Sarah’s story. The short answer is that it wouldn’t change my message at all. In fact, had I done so, the availability of low fixed rate mortgages and the tax subsidies inherent in home ownership would have made the case for buying a house instead of paying off their student loans even more compelling.

In retrospect there was a small window of opportunity in 2010, after the Financial Crisis of 2008/09 when Yaron and Sarah could have caught the housing market on the way back up and perhaps purchased a house whose future appreciation would have given them sufficient home equity to tap into (via a Home Equity Line Of Credit )to finance their sons’ education, but as many of us remember, those were frightening times, both for the markets and for the economy as a whole and it was far from clear where house prices were headed.

And so now in 2016 with one son graduating High School in the spring and another just two years behind, Yaron and Sarah are facing an almost impossible financial situation that could have been avoided, not by “timing” the market via a 2010 house purchase, but rather by thinking holistically from the beginning, recognizing that assets and liabilities are both varied and connected, that not all debt is bad, and that almost all the financial decisions we make in the present have future consequences that while not predictable can be imagined and prepared for.

Holistic Financial Health (cont.) – More on Reverse Mortgages

The first time I met Barry Sacks was almost 20 years ago when he was brought in to help one of my clients solve a fiendishly complex tax/legal problem that had arisen in the bargaining between my client and its major Union. Arriving a few minutes late, he was clearly excited, but not about the tax issue. After some brief hello’s he told us about the brilliant idea he had for a new invention that occurred to him on the way over to the meeting. Pulling a single credit card from his overstuffed wallet, he asked us to consider all the wasted space (“real estate” as he put it) on the card that currently was taken up by a Bank logo and a background picture. Specifically, he asked, why couldn’t all that space be used to incorporate the information that all of the other cards in his wallet contained? Just like the “universal remotes” that were then all the rage in the electronics industry, he suggested that with his innovation, we all could have a “Unicard” that could be used for all the electronic transactions that we currently conduct, from department store purchases to borrowing books from the local library. As Barry waxed eloquent about all the convenience and financial efficiencies of such an invention as well as the easily surmountable technical challenges associated with its introduction, the client and I sat there both enthralled and a little taken aback at the unexpected turn the meeting had taken.

As I got to know Barry better I found that this incident was by no means an unusual occurrence with this curious and creative polymath. With a Ph.D. in physics from MIT, Barry had started his career in academia and was well on his way to becoming a tenured professor, when he suddenly decided that tax law would be much more interesting than electromagnetism and lecturing undergraduate students. He went back to law school and very quickly became one of the leading ERISA attorneys in the Bay area. By the time we met, he was a partner at one of  San Francisco’s boutique law firms and a specialist in the complex and unusual legal issues that often arise in the pension world. Many of these problems had actuarial aspects and, as a result, over the years Barry and I got to collaborate on a number of fascinating client projects.

Despite his demanding “day job”, Barry is an unapologetic “out-of-the-box” thinker who is constantly coming up with new ideas and new approaches to old problems. He currently holds several patents (not including his idea for the “Unicard,” which in some ways has been incorporated into smartphone technology) in fields ranging from physics to financial engineering, but his current passion is Reverse Mortgages and how this obscure, much maligned and poorly understood financial vehicle can be used in creative ways to not only augment one’s retirement income, but to become an integral part of a “decumulation” strategy after retirement.

In a previous post I mentioned how considering the value of your house (and any mortgage debt) as an integral part of your personal balance sheet is a key component of a holistic approach to financial health. Digging a little deeper, let’s now look at why and how a Reverse Mortgage Credit Line can be a powerful tool to unlock and utilize that value to ensure a financially healthy retirement.

A Reverse Mortgage Credit Line is actually nothing more than a loan against the value of your home. It operates just like a traditional home equity line of credit (HELOC) with two critical distinctions. First, unlike a HELOC, when you set up a Reverse Mortgage Credit Line, the amount you can draw down is not fixed, rather it grows every year, and not just with the increase in the value of your house, but at a stated annual rate. So, for example,  if you set up a Reverse Mortgage Credit Line for $200,000 at age 65 and don’t use it until age 75, by the time you start taking cash, the amount available might be $300,000 or even more. This in itself is a valuable way to assure yourself that you will have access to funds later in your retirement should you find your other sources of retirement income drying up, but the second difference between a HELOC and a Reverse Mortgage Credit Line is even more important; that is you don’t have to pay back the Reverse Mortgage until you sell or move out of your house, and you will never have to pay back more than the residual value of your house REGARDLESS of what the real estate market does

This second difference is what turns a Reverse Mortgage Credit Line from a source of “emergency funds” into a powerful retirement income generation tool that, when part of a sophisticated and highly effective decumulation strategy, can take you from a situation of having to worry about outliving your assets to a situation where you can comfortably draw down 6%, 7% or even 8% of your savings every year and still be confident that you have very little chance of running out of money before you die.

What is the magic? This is where Barry’s work comes into play. The technical details can be found at .

In essence, what Barry discovered was that setting up a Reverse Mortgage Credit Line enables you to draw money from two sources, which can be coordinated.  That is, instead of drawing money every year from your 401(k), IRA or other retirement savings account, you draw from your retirement savings account only if the investment returns (in the prior year) on that account were positive, and draw from the Reverse Mortgage Credit Line if the account’s investment returns (in the prior year) on were negative.  This strategy allows the invested securities in the retirement savings account to better recover their values in the years following the years of negative returns than if they had been drawn on immediately following the negative returns.  It has been clearly demonstrated that if the negative investment returns occur in the early years of retirement, and the account is drawn on in the years following the years of negative returns, the likelihood of the account becoming exhausted in the later years of retirement is much greater than if the account is not drawn on immediately following the negative returns.  This coordinated strategy minimizes what is called the “sequence of returns” risk, associated with market volatility. In short, using this strategy allows you to draw on the account at a higher rate, for a longer time, than you otherwise might.

Some decisions don’t require the 5-step Present Value process and I believe that taking out a Reverse Mortgage is one of them. At first glance, the strategy above might seem like “smoke and mirrors” and that there might be hidden risks associated with the strategy (e.g. losing your house). However, as you will see in Barry’s paper, none of these potential risks are material. Try as I might, I can find no flaw or material risk in the strategy. In fact as far as I can see, unless the rules around Reverse Mortgages change in a pretty dramatic way, this is a winning strategy for holistic financial health that everyone who has a house and a 401(k) should seriously consider no matter what their personal rate of discount is.

Using Present Value to Choose a College/Career: Part 1 – Clarify the Choice

This post was supposed to go up last week, but I have been on the road for the last two weeks talking to groups and individuals about “What’s Your Future Worth?” and how to apply Present Value in many different contexts. As a result, I am just now sitting down to write.

During that time, I was fortunate enough to have had the chance to talk to an amazing variety of very smart people including doctors, entertainers, finance professionals, mathematicians, psychologists and even a few actuaries about the book and my belief that the actuarial perspective can be broadly applied to help make the world a better place. Some of that trip is documented in other parts of this site, and future blog posts will dig into some of the very good questions about the many possible uses of Present Value in the real world that were raised in those discussions, but today I want to talk about another “real world” decision that I am working on right now.

Starting Out

In addition to speaking about my book, the other reason for my long road trip was to engage in a ritual that many of you have already have been through or are contemplating in the near future – i.e. the “college campus tour”.

You see, my son Adam just had his 16th birthday and is now turning his (and our) attention to where he wants to go to college and more generally what path he wants to pursue in life. When I was his age, more than 40 years ago, it would have seemed bizarre, or at least pretty “nerdy”, to start thinking about such matters so soon, but it is a different world today and in order to even have the opportunity to follow the kinds of alternative paths that he wants to choose from, Adam needs to start thinking (and taking action) right now.

It’s a frightening and intimidating situation. For the last few months our mailbox has been peppered with offers for SAT coaching, college application consulting, and any number of other services and “opportunities” for us to “learn more” or “better prepare” our son to get into and thrive at the best possible college. Meanwhile, in the background, the media is filled with stories of how the “college industrial complex” continues to grow in size and expense, and how getting into the right school is critical to a child’s career, future economic status and basic happiness.

Human nature being what it is, the notion that this is a high-stakes game that we all MUST participate in has also produced a situation where it is now much harder to get into a good school than it used to be. The fact that this is generally due to the fact that kids are applying to more schools per student, rather than to an actual increase in students or standards does not make it any less real, and a failure to participate in the madness is not really a solution – one person’s decision to only apply to 3-4 schools will not affect any college’s ratio of applications/available slots and could seriously risk the individual’s chances at getting into any school at all.

And finally, with the increased selectivity and value (at least as described by the media) of a college education, the prices of all aspects of going to college (tuition, text books, applications, tests and prep) have gone up dramatically adding a significant economic component into the decision making process. Indicative of this is the spate of analysis on which colleges provide the highest “return on investment” (measured as future earnings of the average graduate compared to the costs of the school itself). Given that many of us feel intuitively that college should NOT be (all) about the money, it’s a confusing situation to say the least.

Using Present Value to Sort it out

And so off we went, starting in Boston and working our way down the eastern seaboard visiting towns and campuses along the way, ending up in Princeton where Adam’s grandfather went to school and where his legacy and grades just might let him consider it as a possibility.

And while Adam was gathering impressions to help him imagine his possible futures, I was thinking about the overall process and how to use Present Value to help him think through this first critical life decision that he will make (almost) all by himself.

Like most of us faced with a complex, important, noisy, and stressful situation, our first reaction was one of confusion, paralysis and a leap to the natural question of “What do we do?” instead of the more productive “What are my alternatives?” For a while we tried to ignore the situation (after all I didn’t know where to apply until I was a senior in High School), but as time went by it became clear that further delay would only make the next two years more difficult and our personal rate of discount was not high enough to make that an attractive path to pursue, and so I began to think about out how to bring the actuarial perspective to bear on this decidedly non-actuarial issue.

This space is not sufficient to fully describe how to use Present Value to choose the right school, and in any event, we ourselves have barely begun the process. However, the principles are clear and we are now well on our way through step 1 (“Clarify the Choice”), which in this case, may be the most important step in the whole process

What are the Alternatives and When do you have to Decide?

One of the first things to notice about the college application process is that it is really two different decisions that (while related) are made at different times. First you need to decide where to apply (as well as how much additional effort/cost you are willing to absorb to get in) and only then (after the applications are submitted and acceptances are received) do you get to make another decision – i.e. where to go.

I think this is an important distinction in that you can drive yourself crazy analyzing the differences between colleges, whereas the key question is where might you want to go and what would be entailed in maximizing the probability of getting accepted. To us, the really critical part of this first decision is to decide on the kind of school Adam might want to go to and what level of effort/activities he needs to pursue in the two years between now and when the acceptances will be given. The second decision of where to actually go can and should wait.

In no way am I underestimating the difficulty in making this first decision. It, in and of itself, is a hard Present Value choice. Let’s say (as is actually the case for Adam) that there are two different kinds of colleges he might want to go to ( e.g. “elite” and “fun”) and that further, within these two types there is a range of different dollar costs (e.g. “almost reasonable”, “costly” and “hideously expensive”). It will, of course be important to determine the specific schools that go into each category, but as with any decision, the important task is to imagine the consequences associated with each possible alternative and then go through the other steps of the Present Value process to actually choose among the possibilities. At the end of the day, this decision boils down to a yes/no decision on whether to apply to a (as yet unnamed) group of schools in each of the above categories.

So for Adam one of his first tasks is to imagine a path where he attends one of several “hideously expensive elite” (HEE) colleges, (including how he much he will enjoy the experience, how much he will learn, and how much he will “profit” from it post-graduation). He will then have to consider the additional extra effort he will need to put in over the next two years and the potential student loans he will be burdened by when he gets out. After he decides that (using his personal rate of discount adjusted for the possibility that he will be rejected by all of the HEE schools) this is worth it, he can then go on to determine how many (and which) of these types of schools to apply to, and much more importantly, what actions to take now (e.g study more, take SAT prep, get a part time job, join specific outside activities etc) consistent with the decision to apply to some HEE schools. The same process will go for “costly fun” schools as well as the other types.

The key conclusion here is that when you use Present Value, the important thing is to clarify and choose among the alternatives that will cause you to act differently today. Don’t make decisions today that you either might not ever face (e.g. attend Harvard vs Princeton) or decisions where you will be taking the same action regardless of the choice (e.g. applying to both Princeton and Harvard might cause you to take an SAT prep class). That will save a great deal of time and stress and make the decisions you have to make today better informed.

As the months go by and Adam’s college aspirations come into sharper focus, we will revisit how to apply the actuarial perspective to the process and discuss in more detail some of the more interesting aspects of “value”, risk, and the Present Value of the costs and benefits of a particular college career, but for now Adam’s challenge is clear; decide on which types of school he wants to apply to and take those actions that are consistent with that choice. As with Present Value in general, you need to stop, think and take one step at a time.

A Message to My Corporate Friends

As I write these words, “What’s Your Future Worth?” is about to be available for purchase. For me, this is the culmination of 3 years of writing, editing, talking, thinking and hoping. I have been advised by people who know far more about these things than me that I need to put up a new post to this blog to mark the occasion and so for the last couple of hours I have been perusing the anecdotes that were left out of the book for one that might be appropriate for the occasion.

Unfortunately I wasn’t able to find one, in part because despite all the thinking and all that I wrote about it in the book itself (step 2 of the Present Value process is “imagine the future”), this was a future that I simply couldn’t envision back when I started writing down some musings every morning; musings that ultimately became “What’s Your Future Worth?”. In fact, most of what I have written, (and will include in future blog posts) is quite specific and very much focused on different aspects of either the actuarial perspective or how to apply Present Value to make better decisions.

Today, however, I want to talk more about why I think “What’s Your Future Worth?” is a worthwhile investment of your time and your money. And while what I am about to say can be appreciated by anyone, I want to direct this post to a particular audience. Specifically I want to speak to my friends in the corporate world who are responsible not only for decisions made by their organizations as entities unto themselves, but also to those who are responsible for decisions that affect the financial well-being of the employees who work for those corporations.

Corporations get a bad name these days, and I fully understand why. Notwithstanding the snide comments that we hear every day (e.g. “Don’t be mean, after all, Corporations are people too”) there is tremendous prejudice against the motivations and ultimate agendas of corporations. I confess that I am not immune from such feelings, but I also want to say that some of my best friends are corporations. I mean that sincerely. In a very real way I feel not only close to many of the individual clients that I have worked with over the years, but also am not ashamed to say that I genuinely like some of the companies they work for. More to the point, I think most corporations have both good intentions and a dark side. It is those good intentions and that “better nature” that I think my book speaks to and for which the actuarial perspective can be extremely useful in providing the means that corporations can use to help improve the world.

At the end of the day, what is a corporation after all? The way I look at it, a corporation is a living entity whose cells are made up of human beings and one whose lifespan is a little (sometimes a lot) longer than ours. Perhaps there is no “soul” within a corporation, but as individual cells, how would we even know if there was one? What is clear, however, is that corporations make decisions and those decisions have future consequences – both for themselves as well as the people who work within them and interact with them. Despite the conventional wisdom that companies only seek “profit maximization”, I think that corporations can and do take into account much much more when they make decisions. Like people and their decisions, the future DOES matter to a corporation and the process they (should) use to evaluate the consequences of those decisions could benefit tremendously from considering Present Value.

I spoke earlier about how we can think of a corporation as a complex multi-cellular organism whose cells are individual human beings. If so, it seems self-evident to me that such an organization should do everything it can to help those cells thrive and be healthy; physically, emotionally and financially. In fact “Financial Wellness” is a buzzword these days and many firms (mine included) are seeking ways to help their employees become financially more healthy by designing compensation and benefit programs that maximize benefits (as valued by the employee) at the minimum possible cost to the employer. This is all well and good, but the fact is that the corporation will never know all they need to know about an employee’s total financial situation to make all the right decisions on their behalf. Even more importantly, the corporation will never know the hopes, dreams, plans and values of each of their employees. At the end of the day it’s the individual employee who has to make the right decision, and the best the employer can do is to design programs that empower and equip those employees to make the right choices to ensure their financial health.

“What’s Your Future Worth?” is a book that will show both corporations and the employees who make them up how to make the decisions that will lead to better futures for everyone, and I truly hope all of you choose to read it.

I am not a salesman at heart and I promise this is the last pitch you will get from me. From now on this blog will only be about Present Value, the actuarial perspective and/or how both can help make the world a better place.