Stewardship Rights and Two Unsung Heroes of the North Bay Fires














The fires are out, most of the ash and soot is being washed away by the rains, and except for the unluckiest of us, life in Santa Rosa is getting back to normal.

But not for me. For me there were too many important lessons to be learned and the tuition too expensive for me not to pay attention. You see, even though my house survived, the fires have permanently destroyed many of the illusions I had about safety, “property rights” and even about the basic nature of who we are (and can be) as humans

On the Sunday afternoon before the fires I went for a walk with my friend Sheila and we had a fascinating, albeit highly theoretical, discussion about reframing “property rights” as “stewardship rights”. Her view was that the frighteningly fast descent of our species might be slowed down a bit if we could make that conceptual shift when it comes to the earth and all the resources we are in the process of wrecking and rendering useless for future generations. She was totally convincing and with that perspective in mind, I headed off to my men’s book club that evening where we, a group of well-intentioned late middle aged rich white guys, sat around discussing “Evicted”, a heartbreaking book about how impossibly difficult it is becoming for the bottom 10% of America to keep a roof over their heads. To varying degrees we shared our collective and individual shame about having so much, and even more importantly, about how we are contributing to the problem through our current and intended investments in rental real estate.

That night I went to bed with a feeling of deep unease about my contribution to the mess we are in and the even deeper feeling that a few “mea culpa’s” with fellow perpetrators sharing white wine in a comfortable house in San Francisco would not make the situation any better. Nevertheless I slept too well and got up ready to drive up north to take care of some maintenance on our property that is situated just outside of Santa Rosa on the way to Hood Mountain. It is both a second home and an investment, and despite all the talk of the night before, I wasn’t feeling the least bit guilty as I began to pack.

However, as soon as I turned on my computer to check the news, it was clear that I was going nowhere that day. For the next few hours I tried to get as much information as I could on what was going on. We have 8.5 acres and two houses there – a magical place with a year round creek, about 50 fruit trees and an acre of grapes. It’s a sanctuary in the truest sense of the word and to know that it might suddenly cease to exist (or at least be transformed beyond all recognition) hit me hard and in unexpected places. Around noon I got a text from the tenant of the house we rent out who said that he, his partner and their cat had evacuated and were in Sebastapol. This is a tenant with whom I had been fighting with for a while (over noise and boundaries between his space and ours). I hadn’t spoken to him in a month, but when I heard from him, I was truly glad he was safe, and he was glad that I was glad. For a moment, we were not landlord and tenant, but rather just two human beings caught in the chaos of life. It felt painful, but good.

The rest of the afternoon I spent obsessively tracking the progress of the flames and witnessing the horrifying destruction in north Santa Rosa where I used to go for supplies and groceries. Throughout the day I received many texts and e-mails from friends and colleagues who knew about our place and how in peril it was. It was wonderful to know how many people cared, but it was when I got the only phone call of the day that I really learned what I needed to learn. It came from Jorge, a man who until that phone call I would not have called either a friend or a colleague.

Jorge is a day laborer who has done a lot of work for me and my neighbors at the property. I got introduced to him a few years ago by the retired teamster (and Trump voter) who lives across the creek. He introduced him to me as “George, a helluva worker and a helluva good guy”. Since then Jorge has done a number of jobs for me and we have even worked together on some particularly dirty two man jobs where no other workers were available. I’m ashamed to say that in all that time, I’ve learned very little about Jorge’s life. I know he came here from Mexico almost 30 years ago and has worked on properties throughout the area for almost all of that time. I also know that he has a wife and a 7 year old son born here in the US and that in order to be close to his jobs and to make ends meet, Jorge rented a tiny place in North Santa Rosa, while his wife works with her cousins 6 months of the year picking strawberries in Watsonville; 12 hours a day 6 days a week. Through pure random luck (actually to celebrate his son’s birthday), Jorge had driven down on to Watsonville on Friday so the family could celebrate together. It was there that he learned about the fire that had consumed his neighborhood in Santa Rosa and was threatening the houses of many of the property owners that he had worked for over the years.

He called me because he wanted to know if I was ok and had escaped the fire. In fact he had spent the day calling everyone he knew to check on them. From him I learned about the 90 year old couple next door (ok as they were picked up by their son), and others who were not so lucky. The one person he couldn’t reach was our neighbor Mark who, we both speculated, was still at his property ready to fight the fire and defend his property all by himself. It would be almost 2 weeks before I found out the full story of what happened to him and some of my other neighbors during the event, but for the moment I was just completely absorbed in what Jorge was telling me. It almost brought tears to my eyes to listen to this man, who, even though he didn’t know me well and though he had likely lost most of the few possessions he had, was reaching out with open hearted compassion and interest to find out what was happening to me and my family, wanting to pass on any bits of information that he knew that might in some way help me deal with my problems. But beyond his selflessness, the thing that struck me right to the core was how much joy and gratitude he was exuding. He was with his family and they were safe. It was all he needed for himself, and now he was showing me the best of what we can be as human beings. He was a beam of bright light on a very dark day.

Over the next few days the news got worse, then better, and then much worse. Over 20 separate fires had broken out across the North Bay and two of the major ones (the Tubbs and Nuns Fires) began converging on our property, kept away only by the fickle wind and the almost superhuman efforts of the Cal Fire crews. The roads throughout the area were closed and rumors began circulating that looting of evacuated but still standing houses had begun. As my cell phone continuously beeped with emergency updates from the Sonoma County sheriff, I thought that maybe this really is our future; little pockets of hell springing up all around the country eventually converging and combining into one final conflagration, but against all reason, knowing there are people like Jorge and the firemen putting their lives on the line for the rest of us, I couldn’t help but feel some hope.

For over a week the battles raged with ground gained and lost, and unlike wars of the past, it was possible to follow the flames by satellite and internet. Just when it seemed that the worst was over, that Cal Fire was gaining the upper hand on the two main fires threatening our houses, a new fire broke out near the Oakmont retirement community just 2 miles down the road from our place. Things now looked very bad. The fires raced up the hills just to the south of us and Hood Mountain itself was on fire. The flames were now coming down the hillside toward the Creek where one of our houses is situated and on whose banks we have spent countless summer hours enjoying its coolness and winter nights listening to the roaring water just outside our bedroom window.

And then suddenly it was over. Just 500 yards from the properties on the other side of the creek, the fires were stopped. It took another day for Cal Fire to secure the line and two days of rain to douse the hotspots and cleanse the air sufficiently to allow property owners to return to their homes. And so on Saturday October 21, I prepared myself to drive up to Santa Rosa to see first hand what had become of our second home.




Almost exactly two weeks after the fires began, I returned to Santa Rosa to see what remained. As soon as I got off the highway and headed east toward our property, I got my first shock. The Sonoma County fairgrounds, a normally empty and expansive network of fields and barns had become a refugee camp, with wandering homeless, tents, medical stations as well as police and military vehicles strewn as far as the eye could see. All along the road back to my property were signs and flowers, mostly thanking the firefighters and other first responders, but also some expressing gratitude or grief – for what was lost and for what still remained.

At the corner of our street was this sign, typical of the sentiment welcoming me back home
















My relief and gratitude were tempered somewhat, however, when I turned onto the road and saw that on the back of the sign was another message that had been left by my neighbors who had evacuated several days earlier.













I drove up the road and saw that while our houses had survived, they were not untouched. In fact Cal Fire had used our property as a back up staging area, prepared to fight the fire from the steps of our house if it had gotten as far as the creek running past the property. Even though the battle had been won, the firemen had clearly left in haste; leaving axes, firehoses and much debris as well as broken fences, gates and doors in their wake. As I surveyed the scene I was filled with an undigestible mix of deep gratitude for the brave men and women who saved our property, dread at how close the fires had come, discouragement at the amount of effort it was going to take to clean up the mess and just a tinge of survivor’s guilt when I compared my problems to the vast scale of the destruction throughout the City that will take years to recover from. It was a truly disorienting moment.

To ground myself, I walked across the creek to visit Mark who I found helping one of his tenants rewire another tenant’s pick-up truck. As I mentioned, Mark is the retired teamster Trump voter who is my closest neighbor. He has a similarly sized property to ours, only his is crowded with a motley collection of structures, vehicles, dogs and tenants inhabiting it. He himself lives with his wife in a small apartment attached to the back of a 2000 square foot Quonset Hut filled to the brim with tools (power and otherwise) used appliances, and semi-serious construction equipment. He is a unique individual in more ways than one and among other things is our resident historian having been married for 55 years to the granddaughter of one of the original residents who settled the area.

The history of Mark’s property as well as that of most of the neighbors up the hill towards Hood Mountain is full of intrigue, quirky characters and real Wild West drama. To this day Mark feels that he was cheated out of his fair share of the 500 acre plot up the hill that his wife’s grandfather owned and in whose house she lived as a child. It’s a story I’ve heard at least a dozen times, but one that seems to change in detail with each retelling. The only constant is that at some point there was a rigged property auction held by a crooked judge after the old man died and in the ensuing court battle Mark and his wife only came away with the 6 acres by the Creek that they still live on.

Knowing Mark, and having it now confirmed that he never evacuated when the fires came,  I was anxious to hear his story. I was fully expecting to hear a harrowing tale of what he witnessed punctuated by his justification for refusing to follow the order to evacuate and a rant about how no government authority could tell him to leave the property that he fought so hard to get and keep over so many years.

But instead I was surprised by what he had to tell me, and like Jorge, I realized that Mark was not at all the man I had thought he was.

It seems that Mark knew all too well the risk he was taking but he didn’t hesitate for a moment in deciding to stay. Because in addition to knowing the risk, he also knew that by staying he could make a real difference – not just in saving his own property, but in helping the firefighters  save his neighbors’ homes and to help them stay safe as possible while doing so. So he acted; immediately and with purpose. He first made sure that his wife, his tenants and all their pets were safely evacuated, shuttling some himself down to the local Safeway where buses were available to take them out of harm’s way. Then he went back to the property and welcomed Cal Fire equipment and volunteers (some of whom had come in from distant states and were completely unfamiliar with the geography) to his home and proceeded to serve as guide, host and advisor for the next few days.

When I listened to his account of what happened, I was immediately struck that the narrative did not have the usual bluster, humor or “us vs them” quality that I had come to expect from his stories. Rather it was a story of a band of warriors who had fought and defeated a fearsome and lethal enemy, of an army that he felt honored to be a part of. He had a quiet pride about the fact that his extensive knowledge of the terrain as well as the resources he had built on the property – the multiple outlets to his well and water storage tanks, the generator that provided electricity, the food supplies he had stocked for just such an eventuality all had proven invaluable. He was too old now to be on the frontlines, with the chainsaws and the hoses, but he had acted with the same selfless sense of duty and love for the land and its inhabitants, and now he was basking in the glow of having successfully defended the homefront.

So in the end, what are “property rights” and how do you get them? Is it a recorded deed in some County Clerk’s office? Is it something that you buy with money or obtain with power or blood? Or is it something more elemental, and something that you have to earn, defend, and then deserve? I really don’t know the answer anymore.

When I think about the love of the land and his neighbors that both Jorge and Mark showed me in the last month it makes me reexamine my own relationship to that beautiful 8.5 acres that I used to think of as “mine” and the community which it is a part of. My family feels that our place is “too much work”, that the area will never be the same, and what we should do is sell our property to someone else who will be a better “steward” of the land. I am not at all sure they are wrong, but whatever we do, we will do it with heart and a recognition that a place is much more than a spot on a map or a Title and a bank account.


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.

Holistic Financial Health (cont.) – Present Value and Leaving a Legacy

I ended my last post noting that when we consider the future and determine our personal rate of discount we should not limit ourselves to the “rest of our life”. In fact, if you are like most people you care a lot (though maybe not quite as much) about what happens after you leave this world. Except for the very wealthy, very few of us (and even fewer financial planners) really take a hard look at what this implies for how we should manage our financial life both before and after we retire.

As a practical matter, when it comes to financial decisions, what this means is that  not only should you consider those scenarios where you don’t exhaust all your assets, but you should also think about other financial steps that you can take to leave something behind. In addition to your house there are two other mechanisms for leaving a legacy that are worth mentioning now and will be explored more deeply in future posts. The first is Life Insurance which many financial planners will likely suggest should be part of your financial strategy. As powerful and effective as it can be (for protecting your family while working, for generating retirement income, and for leaving a legacy) Life Insurance products are very complex, and purchasing policies as well as managing them well can be a daunting task.

The second and less well known vehicle that can be used to both generate retirement income and leave a legacy is a Charitable Gift Annuity (“CGA”), which even though considered a “Planed Gift” by the philanthropic community, can also be considered as a (not so traditional) retirement planning tool. Steve Vernon as well as many others have explained how effective annuities in general can be in ensuring your financial health. See for example Steve’s post at  .

With respect to Charitable Gift Annuities, this link,   can give you some basic information on how CGA’s actually work, but for now just know that CGA’s operate like any other annuity that you might buy from an insurance company except that instead of allowing a big corporation to make money on your purchase, the “profits” on a CGA go to the Charity that you got it from. You can obtain a CGA from almost any large not-for-profit organization, University or Charity. I purchased one from my old school, but many people get them from large Charities whose mission they believe in.

In order to get a CGA you must first make sure the Charity of your choice has a CGA program. To find out, just call them up and ask for their “Planned Giving “ department. After you transfer funds to the organization you have chosen, they will provide you (based on a legally binding contract) a guaranteed stream of payments starting either now or at some specified date in the future and those payments will continue for the rest of your life. The only difference between this and an annuity purchased from an insurance company is that in addition to the guaranteed lifetime income you get, you also receive an immediate tax deduction for the Present Value of what the Charity expects to recover from the transfer after you die and all of the annuity payments had been made.

In essence, obtaining a CGA allows you to provide yourself guaranteed retirement income, leave a legacy and get an immediate tax deduction for the profits that otherwise would have gone to an insurance company had you bought a more “traditional” annuity. To my mind a CGA is a great way to invest your retirement savings in a vehicle that can play an integral role in your decumulation strategy while at the same time benefiting a cause you believe in.

Of course it is not quite that simple (e.g. CGA’s can be expensive and tricky to obtain), and we will delve into more of the details in a future post. If you can’t wait, you can always read Chapter 12 of “What’s Your Future Worth?” and get the full story of my CGA purchase and take on the world of Planned Giving. In that chapter, as well as throughout the book, the message is the same – ask the experts for help in imagining the future and evaluating what might occur (steps 2 and 3 of the Present Value process), but don’t ever let others set your personal rate of discount (step 4)  by telling you how much (or little) value to place on what you get/give today vs what comes your way tomorrow or even in the distant future when you are gone but the world is still spinning and those you care about are still  around.

That is what holistic financial health is all about.

More on Holistic Financial Health – Present Value and the Rest of Your Life

In my last  post I talked about how important it is to use  your personal rate of discount and to think “holistically” about your financial life. In particular, I spoke about how critical this is during your working years when you are accumulating assets of all kinds and incurring both near term and long term liabilities. That need to consider your whole balance sheet does not end when you stop working and consider the rest of your life, and in this post we will talk about that (looming and long) period of your life

While what I said in the last post about holistic financial health might be considered idiosyncratic and contrary to mainstream financial planning, there is one financial expert who, when it comes to the “decumulation” phase of life, has been advocating the holistic approach for nearly a decade. His name is Steve Vernon, and those who read “What’s Your Future Worth?” may remember him as the actuary who wrote 5 excellent books on planning for retirement and started a consulting firm called, appropriately enough, “Rest of Life Communications” ( ). To my mind there is no one better than Steve in helping you think through the challenge of converting all that you have accumulated into income that you can live on.

I had dinner with Steve last week, and I got the opportunity to hear about the fascinating current research projects he is involved in, but mostly our conversation focused on the more general problem of how to help people manage their financial world, both during their working years when income (generally) exceeds outgo as well as afterward when the reverse is true. Steve and I are very much on the same page when it comes to taking a holistic approach to financial decision making and if you want to get his take on the big picture of how to approach the problem, you should check out this article ) as well as this post  where he lays out most of the possible ways to generate retirement income and this example where Steve explains one of his “retirement income generating strategies” .

As extraordinary and on target as Steve is, there are a couple of areas/techniques that Steve generally passes over but I believe should also be considered when you think about your entire financial life and your objectives. It is those areas I would like to briefly describe now, and in future posts I will expand a bit and provide a more complete explanation of why I think they are so important.

Perhaps the most important area that I think needs to be integrated more tightly into a holistic view of financial health is the real estate most of us own. I spoke last time about considering both the value of your house and the mortgage you pay as a key part of your personal balance sheet, but the value of your house goes well beyond being just a (usually) good financial investment and a place to live. Your house can also be used, to use Steve’s term, as another “retirement income generator”. I alluded to this point last time when I introduced the concept of a “reverse mortgage” which is essentially a home equity loan with no need for repayment until you sell or move out of your house. The availability and the effectiveness of this income generator is growing and becoming better known, and in the coming weeks I will devote an entire post to reverse mortgages and the role that they can play in your decumulation strategy, but for now I would just direct you to two links that can provide you with some basic knowledge on the subject. The first is which is an excellent discussion of reverse mortgages and the use of home equity in general put out by a group with no financial interest in having you buy anything. The second is  which is a paper published by Barry Sacks (an expert in the field) that pretty clearly demonstrates the benefits of incorporating a reverse mortgage into your decumulation strategy. In the future we will discuss both of these pieces in greater detail.

As described in the links, contrary to popular myth, taking out a reverse mortgage does not mean that your children will be deprived of their legacy. Beyond that, and implied in much of what passes for financial planning these days, is the notion that the ideal “decumulation” strategy will result in an exact match of your income and your life expectancy, i.e. that if you die without having spent all your assets (except for the house) you will not have gotten the “most” out of your retirement. I disagree, and think that for most of us, our planning horizon does extend beyond our lifetime and includes a concern for both the loved ones we leave behind and the world that they will live in. In fact, to truly take a present value approach to managing your financial life you need to imagine that part of the future (when you are gone but others that you care about are still around) and consider how much value you place on it vs the current time frame and the mid-term future that comprises your retirement years. In terms of the ideas in “What’s Your Future Worth?” this means that when considering your decumulation strategy, you need to make sure you don’t skip step 2 (imagining the future) and step 4 (developing your personal rate of discount) all the while considering a time horizon that extends beyond your death.

Next time we will delve more deeply into this notion and talk about 2 or 3 other financial products that you should consider as well as part of your holistic approach to ensuring your financial health for the rest of your life and beyond.


On Holistic Financial Health and Why Your Financial Planner’s Advice is Usually Wrong

Having successfully infuriated a significant percentage of a key group of potential buyers of my book (e.g. actuaries), I’ve decided to antagonize a few more by sharing some thoughts on why most Financial Planners (including some of the most sophisticated ones out there) generally get it wrong; and not just a little wrong, but fundamentally and seriously wrong.

I am not addressing the obvious problems with Financial Planners who are also marketing particular products (e.g. insurance, stocks, annuities etc) and who therefore provide advice that may be tainted with self-interest. Rather I am talking about the ones you can trust, i.e. the ones who are sincerely trying to give you advice that will help you make better financial decisions

I believe that even the (relatively few) independent fee-based advisors that meet the above criteria are likely to fail you for 3 main reasons. The first is due to their general reluctance to take account of (or even acknowledge) the importance of personal rates of discount. This was the subject of my previous post (the one that got actuaries so upset) and a subject on which I have probably said more than enough (at least for now). The second reason is the (to my mind) unreasonable confidence that Planners (and the experts that they rely on ) have in their ability to predict the future. I will address this aspect of financial planning in much more detail in the future, but before I get to that issue, I want to discuss yet another issue that is even more important than the first two.

Specifically, I want to talk about something you don’t have to be an actuary to appreciate and may actually seem obvious – and that is the failure of almost every Financial Planner I know to approach financial decision making from a holistic perspective, taking into account your entire balance sheet including all of your assets and liabilities as well as your future income and expense streams (much of which is uncertain and related to aspects of your life that Financial Planners may not have access to). Don’t get me wrong, a good Financial Planner will likely ask you for all the information that theoretically could go into the development of that holistic balance sheet, but almost none of them put it all together to help you look at the big picture. I would propose that the failure to do so can render the advice they give almost meaningless.

I say this because, in my experience, even though there are two sides to every balance sheet, it is the asset side that advisors spend almost all of their time on. To my mind the liability side of an individual’s financial world is just as important, and how you manage your liabilities (debt and the Present Value of future expenses) is not only related to your ability to manage your assets (i.e. save and invest) but can actually have a bigger impact on your financial health than the asset allocation strategies that are often the core of what your advisor is concerned with.

But it’s worse than that, not only do advisors typically only focus on assets and income, but they also tend to ignore the single biggest asset that most individuals have, and that is the equity they have in their house. The rest of this post will talk about some of the considerations you should think about regarding your assets and liabilities (including debt and home equity) while you are working and “accumulating” assets (and liabilities), and next time we will talk about how the value of your house as well as your debt can and should be integrated into your overall approach to managing and maintaining your financial health after you stop working and enter the “decumulation” phase of life.


Saving for Retirement – Looking at Debt and Real Estate from a New Perspective

Almost all Financial Planners pay some attention to an individual’s credit card debt, and some have even made a career out of telling people to “pay it off and tear it up”. It’s pretty hard to argue with this statement as, in concept, the advice makes sense. After all much of that debt likely arose from “over-consuming” and with interest rates on credit cards generally in the low to mid double digits, a level that is higher than most people’s personal rates of discount, the argument for using current income to pay off that debt and not accumulating more is pretty compelling. But I think just focusing on credit card debt misses the bigger picture.

There are all kinds of debt, and A LOT of it. When Financial Planners (and more than a few retirement consultants) say “get rid of credit card debt and start saving for retirement” what they are really saying is (with the exception of your Visa and Mastercard balances) “ignore your liabilities and increase your assets”. But does that make sense? Well let’s look at some numbers

The reality is that personal debt (i.e. student loans, auto loans, outstanding mortgage debt and credit card balances) is consuming the attention of most people and for good reason. In the aggregate, the amount of debt on individual balance sheets is greater than retirement savings assets and for many people it is much greater. To put it in context, total 401(k) assets in 2013 were about $4.5 trillion. The amount of outstanding student loan debt in that year was over $1 trillion while outstanding mortgage debt was $7.4 trillion and when credit card and auto loans are added in the total amount of debt burdening individuals is close to $10 trillion, an amount that is significantly more than all the retirement savings that individuals have set aside for their retirement years.

But let’s look a little more closely at some of that debt. Other than credit cards, most of that $10 trillion in debt is being used by people to obtain tangible assets (e.g. a house, a car or an education) that will generate some benefit (often but not always monetary) in the future. I would argue that not only were some of those decisions correct from a Present Value perspective (taking due regard of the personal rates of discount of those making the decisions ), but going forward it might actually make sense for many people to take on more debt rather than blindly following the conventional wisdom espoused by the financial planning community and the media in general to “increase your 401(k) contributions and save more for retirement”. This could very likely be the case if the choice is between an increased 401(k) contribution (particularly if there is no Company match involved) and buying a house with its inevitably higher (than rent) mortgage payments, but it could also be true when other types of loans are considered. For example, even the purchase of a new car, with the attendant increase in flexibility and/or reliability of the transportation might expand your ability and options for future income (and pleasure) sufficiently to make the purchase make sense. Investing in your education (where you might have to take out student and other loans ) to pay the tuition and make up for lack of current income is another prime example.

In fact, I believe that taking on debt and foregoing a long term benefit ( e.g. the ability to retire at an early age) for a current asset (e.g. a car) and a future short/medium benefit is the right choice far more often than most financial planners would like to admit, and this is particularly true when the individual honestly and clearly factors in his/her personal rate of discount into the consideration.

Before we talk about incorporating your real estate and debt into your short and long term investment strategy there is another aspect of debt that is well worth considering and that is how high the “quality” of your debt is. It turns out that individual debt is “rated “ just like the corporate and municipal bonds that you can invest your assets in For example, just as (low rated) corporate “junk” bonds yield a high interest rate and may have a place in your investment portfolio, the interest rate that you will pay on a lot of the debt that you take out is based on your credit rating (i.e FICO score). Therefore, one way to minimize the cost of your debt and enhance your financial wellness is to improve your FICO score. The factors and behaviors affecting an individual’s credit rating are complex, but by no means intractable, and just like exercise and good eating habits promote physical well-being, a “fiscal fitness” programs can enhance your financial health as well.


Putting It All Together

You may be saying that even if the above is true, once I have improved my FICO score and taken on the amount and kind of debt that makes sense for me, shouldn’t my focus on an ongoing basis still be on saving for retirement and investing those assets wisely? I would suggest that while savings and investing those savings for retirement are certainly worthwhile (I am an actuary after all), I believe that your debt and the value of your house (something that many people don’t think of as a “retirement savings” vehicle) should also play an integral part in the development of your overall asset allocation and the investment strategy that you employ. This is part of what I mean when I say that you should take a holistic approach to financial health.

Before considering overall investment strategy, the first and most important thing is to understand your debt as an “investment”. Even though it is a liability, from an investment perspective, you should think of it as another “asset class”, only in this case it is one that acts like a “negative bond”. Just like regular bonds that reside in your 401(k) account, your debt has a “yield” (the interest rate it costs) and a “duration” (when it needs to be paid off). And just like the very sophisticated “bond management” and asset allocation strategies that your Financial Planner may have discussed with you, I would argue that managing your debt to minimize its cost and the “mismatch” it might have with your assets and future cash flow is a worthwhile exercise that can have a big impact on your financial health.

I would also argue from a theoretical (and practical) perspective that you should consider your debt (as well as your home equity) as part of your total portfolio of “investable funds” when developing a long term asset allocation strategy. Doing so might, for example, cause you to significantly increase your traditional bond holding (to offset the “negative bonds” you already own) and/or stay away from any real estate investments beyond your primary residence (to maintain diversification). Here is where an expert who understands (and can explain) concepts like asset diversification as well as “yield curve”, fixed and variable interest rates, pre-payment penalties, etc can help you truly optimize the long term future outlook of your entire financial world.

In my next post we will shift our attention to how to maintain financial health throughout the “decumulation” phase of life. This is a very challenging problem that many of the best actuarial minds in the country are thinking about. In that post, I will try and give you a sense of the “state of the art” and share a few thoughts on how important a holistic approach is here as well. I will also discuss some of the many new financial tools being developed to aid you in that effort and give my views on some of the more exciting of them, including “longevity insurance”, Charitable Gift Annuities, and reverse mortgages that can be used to convert your home equity into a stream of income that can play a critical role in making sure that your financial health remains intact as least as long as your physical health endures.


In Defense of Personal Rates of Discount

As more and more people react to what I’ve written,  it seems that  by far the most controversial aspect (particularly among actuaries) of “What’s Your Future Worth?” has been the notion of a “personal rate of discount” and the proposition that each individual (rather than an expert) should decide how the relative value of amounts that will be received in the future versus those that are received (or paid) in the present is determined. The challenges to the concept have been less about whether or not we all have personal rates of discount (research in behavioral economics over the last 30 years on “time preference” has demonstrated this compellingly) but rather whether we should rely on our own internal time preferences to make important life decisions.

The argument goes as follows. Over the millennia, our biological evolution has produced within us what seem like “programming bugs”. Many of these bugs  have served us well when we roamed the Savannah and needed to avoid starving or being eaten by saber-toothed tigers, but they do not serve us so well in the modern world. Undoubtedly this is true when it comes to our difficulties in evaluating the likelihood of various future scenarios; both on an individual basis (e.g. our risk of getting in an accident, suffering imminent death, disability, or loss of job etc.) and on a more macro-economic basis (e.g. the likelihood of a stock market crash, changes in inflation/interest rates, etc.). Those who take issue with “personal rates of discount” argue that we also are “programmed” to overvalue the present (perhaps because primitive man’s future was so fraught with risk and danger) and therefore a key role of actuaries (and other financial planners ) is to “deprogram” individuals with our expertise and therefore enable individuals to make better decisions that will lead to better outcomes and less regret.

I have two answers to this. The first is that I see a fundamental difference between the objective evaluation of real world risks (like the probability that the plane you are flying on will crash or that you will have a heart attack and die in the next year) and a determination of what is basically an internal set of feelings about the way you live your life. I think it is highly presumptuous for anyone to tell me what I will or will not regret 30 years from now. How many stories have we all heard of people at the end of their life regretting all the “rational” financial decisions they made instead of taking that trip around the world, spending more time with loved ones, and generally experiencing life in the moment? It’s not an easy thing, but I don’t think such tradeoffs between the now and the later should ever be outsourced.

While the above answer might be sufficient for those more philosophically inclined, I also think there is another reason not to rely on outside advice in weighing the present versus the future. Specifically, I think that the ability of actuaries and others to choose the right discount rate even when personal feelings are not at issue is by no means perfect. In fact, in my view, the notion that for a specific question, there is always a “correct” discount rate to be used, even when it’s big companies making important decisions with large sums of money at stake, is an illusion.

Another actuary once confided in me that in his view “Present Value is just a bed time story we tell our clients when they can’t fall asleep at night.” While I wouldn’t go that far, the following cautionary story about how even actuaries can get confused when setting discount rates, illustrates the point in detail.


Jeremy Gold and some “Inconvenient Truths” about discount rates

 “A million dollars of Stocks is worth the same as a million dollars of Bonds, and no amount of actuarial magic will change that “

Jeremy Gold  FSA , PhD to a standing room only crowd of actuaries

“Please tell me you are not going to make Jeremy Gold the hero of your book.”

James Kenney FSA  upon hearing that I might want to tell Jeremy’s story


It was 2003 when I first heard Jeremy Gold speak. I had been working in a small boutique consulting firm and was only vaguely aware of the stir being caused by this actuary who had gone and gotten a Ph.D. in Finance, only to return to tell the world, and the actuarial profession in particular, that the way we had been doing our actuarial valuations, determining contributions  and most especially the Pension Expense for Company Income Statements, was not only wrong, but had been fundamentally flawed for decades and that disaster would ensue  if changes were not made to both the accounting rules, and the investment strategies that companies used to allocate Pension assets. Needless to say most actuaries took issue with what Jeremy was saying.

The debate finally reached my awareness when I received notice that the annual Society of Actuaries meeting that year would be almost entirely devoted to what was being referred to as “The Great Controversy”. The fact that the meeting was being held in Vancouver, a city I had never been to but one that always intrigued me, was enough to convince me to devote 3 days to finding out what all the fuss was about.

Now, actuarial conferences do not have a reputation for being particularly exciting, but the atmosphere in the room for Jeremy’s session was almost electric. By being early I was able to get a seat relatively close to the podium, but many of the late arrivals were relegated to standing in the back and along the side walls. By this time, Jeremy Gold was a notorious figure among actuaries, and many were just aching to engage him in public debate.  Jeremy was tall and lanky and had a head of curly hair and intense dark eyes. He stood at the podium leaning forward staring at the audience with a look of defiance and anticipation. To me, he looked like a middleweight boxer standing in the middle of the ring just daring his opponent to come out of his corner and start fighting.

He began speaking and what he had to say was deceptively simple. He started by explaining how actuaries had historically performed their pension valuations. In particular, he described how the contributions were based on Present Values calculated using a discount rate that essentially was “equal to the ’expected’ annual investment return on a balanced portfolio of stocks and bonds”.  On the other hand, Present Values for company financial accounting purposes utilized a discount rate that was based on corporate AA bond rates (typically 2-3% higher than US Treasury “risk free” rates), but that the expected return on that balanced portfolio (typically another 2% higher than the corporate bond rate) was also directly incorporated into the annual pension accounting calculation as a credit, offsetting the rest of pension expense.

This was all basic information that every actuary in the room knew and used every day. But what came next was not. Jeremy first asked us to consider whether there was any risk associated with the benefits that were promised by the pension plan. Now, by law, all assets in Trust can be used for no other purpose than to pay benefits, and in the unlikely event that the company goes bankrupt and the assets have fallen below the level of the liabilities, the benefits (except for amounts payable to the very highest paid employees) will still get paid because there is a government sponsored program (the Pension Benefit Guarantee Corporation also known as the “PBGC”) that is funded by company paid premiums and provides insurance against such an event. So, except at the margins (ie for benefits higher than the PBGC guaranteed amounts, or in the event the PBGC and/or the US Government defaults on its obligations), pension benefits are fully secure. So why, Jeremy asked, are we as actuaries using a discount rate that is based on AA corporate bond rates that have a material risk of default?

As he quite reasonably pointed out, if long term US Treasury rates are 4% and corporate bond rates are 6%, the 2% difference represents value that the market places on the default risk (including the probability that the bond will actually default). As a result, Jeremy said, rather than overstating pension liabilities (as many actuaries were whispering to their clients) the use of AA Bond rates (in this example 6%) as a discount rate was creating financial statements that grossly understated the pension liabilities of our clients’ pension plans.

Jeremy’s point was that from a theoretical perspective any cash flow should be discounted using a rate obtainable from “a security (or portfolio that) has cash flows that match the liability in amount, timing, and probability of payment”. In this case, with assets in Trust and PBGC guarantees backing up residual underfunding, the obvious security to look at would be returns on US Treasuries, which were as close to risk free as any investment could be.

At that Jeremy stopped and let the implications of what he just said sink in. Many in the audience were aware of this line of attack on standard actuarial practice and presumably were just waiting for the Q&A to unleash their rebuttal, but most of us were not. And the more we considered it, the more we realized that if Jeremy’s point was valid, the consequences were significant, if not game changing. First, virtually all Pension Plans in America would become seriously, if not catastrophically underfunded. The mathematics of Present Value dictates that for every 1% that the discount rate drops, the Present Value of accrued benefits for a typical pension plan will go up by 10%-15%. If, we as actuaries had been complaining about having to value plans using the FASB rules requiring a discount rate as low as nominal bond yields and if these rates that were 2% higher than appropriate (and for many plans in many years the spread between “risk free” and actual rate used was much higher), the typical pension plan, rather than being 80%-90% funded as actuaries and accountants had been presenting to the world (with actuaries secretly saying the plans are even better funded), the average plan would be more like 50% funded, a truly concerning level.

Beyond the embarrassment and impact on the profession’s credibility,revising valuations along the lines Jeremy was suggesting would mean that the health of the US pension system was seriously impaired and had been for decades despite the actuarial profession’s representations to the contrary. How the financial markets (let alone companies’ employees, unions and Boards of Directors) would react would be anybody’s guess, but clearly it would be ugly, and the actuarial profession would not only be in the “blast zone”, we would be sitting at Ground Zero. And then there would be the question of how the Government/PBGC would react to the news that the value of their potential guarantees had suddenly tripled (ie. 15% underfunding becoming 45% underfunding). Would PBGC premiums (about which companies already incessantly complained) triple as well? Would the program be curtailed? The government itself would likely be highly conflicted as significantly higher pension liability would ultimately have to translate into higher employer contributions and less tax revenue (Companies get a tax deduction for pension contributions). Finally, given the fact that companies consider pension benefits a portion of employee compensation and if this component of pay suddenly became 2 or 3 times as expensive as previously thought it would be a pretty good bet that many, if not most, would cut or eliminate these programs entirely. And of course, the last not so minor point, was that if many pension plans were terminated, there would be far fewer actuaries that needed to be employed. It would not be an exaggeration to say that to many in the audience, this vision was apocalyptic.

But Jeremy was far from done. Having just cast serious doubt on our profession’s competence as well as its valuation of a few trillion dollars of pension liabilities (at the time there was about $6 trillion in total private and public pension assets and liabilities in the US, and that number has actually grown substantially since then), he now turned his attention to the assets that were backing these plans. In particular, he took dead aim at the investment strategy most companies took with respect to such assets and how those strategies were not only dangerously misguided, but had been put in place in large part because of the actuarial advice received regarding the impact those strategies had on the calculation of pension expense.

Technically as actuaries we were not responsible for the investment of the assets, but we are often asked to opine about basic asset allocation strategy and so many of us had to rely on portfolio theory to make those recommendations and to do so we used highly sophisticated stochastic projection models that generated the potential outcomes (in terms of pension costs) of each possible investment strategy. For the typical pension plan, the ideal asset allocation always seemed to come out to about 60% stocks/40% bonds. I’m over simplifying a bit, but having been involved in dozens and dozens of large pension plans over the years, prior to 2003 I had rarely seen a plan whose stock allocation was less than 50% or higher than 70% and almost all hovered right around 60%.

Jeremy was saying that not only was this 60/40 allocation wrong it was radically wrong. Over the next 20 minutes he laid out a clear and compelling case for the proposition that virtually all US pension plans should have their assets 100% in US Treasury Bonds.

The centerpiece of his argument was elegant and powerful. It started with a proposition that was very difficult to take issue with; that the value of $1,000,000 worth of stocks was identical to $1,000,000 invested in US Treasury bonds. Despite this, he said, we as actuaries were assuming different annual expected returns on each investment. For this to be the case, the market must believe that any higher expected return available on stocks (or corporate Bonds) would be offset by the risk associated with the investment. And yet by crediting the expected return as an offset to pension expense with no accounting of this extra risk taken on, we were not only distorting the “true” annual cost of the pension, but also were providing strong incentives to our clients to maximize the riskiness of their pension investments. Taking on additional risk in such an opaque way was, in Jeremy’s view, enabling company management to put their enterprises at risk without the stockholders (or the PBGC) being made aware or being party to such a decision

The argument seemed airtight, and yet the implications were even more far reaching than his discussion of what discount rate to use. As noted, there was, at the time, about $6 trillion in pension assets. Probably more than $3 trillion of that was invested in stocks with the remainder mostly in corporate bonds. Now the value of all the publicly traded stocks on the major exchanges in the US was about $13 trillion at the time. While no one could know for sure, it seemed almost certain that the impact on the various markets of the sudden transfer of 25% of invested assets from the stock market to the Treasury bond market would likely be cataclysmic. The shift in immediate demand would almost certainly send stock prices plummeting, bond prices soaring and interest rates plunging. The fallout was frightening to consider, as it would not just be the pension system that collapsed if Jeremy’s recommendations were followed. It was one thing to cast doubt on the professional competence of a few thousand actuaries and to disrupt the mix of benefits that employees received from the companies they worked for. But it was quite another thing to potentially knock out one of the pillars holding up the US Stock market and potentially the economy as a whole. Jeremy was messing with some powerful forces and there was a palpable sense of foreboding that now filled the room.

After dropping his two bombshells on the audience, Jeremy spent the rest of the hour filling in the gaps and addressing potential objections to his thesis, meticulously and systematically dismantling each one until all that seemed left of the standard actuarial model was a pile of smoking rubble. When he finished you could hear a pin drop. With a look of eager anticipation, he said that he would be happy to answer any questions that the audience might have.

Not surprisingly they came at him fast and furiously. Many were not questions at all, but simply prepared rebuttals and challenges for the propositions he had presented. They were sharp, focused and only marginally civil in their trajectory. Like a 19th century gunslinger standing in the town square taking on all the local deputies and concerned citizens intent on maintaining the status quo, Jeremy barely moved as he fired back. He dispatched most of the attacks methodically, and with deadly accuracy. He was nicked by a couple of sharpshooters, but the wounds were superficial. Some pointed out that the portion of benefits not guaranteed by the PBGC were far from risk free. Others noted that in a typical pension plan the payment of benefits would extend far beyond the longest duration of any bond available in the market place rendering his T-Bond investment strategy somewhat impractical. But through it all no one was able to discredit his central premise.

Gradually the tenor of the questions started to change. Rather than attack directly, actuaries started asking practical questions about how Jeremy planned to get us all out of this fix. They started to appeal to him as an actuary, asking what should the profession do and what would he, as a representative of it, propose? He was, after all, one of us, and as such would presumably be just as unhappy as any of us in seeing the demise of the actuarial credential. Jeremy, however, was implacable. A crusader for the Truth, I suspect he viewed himself less as an Old West outlaw and more like Martin Luther out to reform the Catholic Church.

Finally, someone from the audience stood up and wondered aloud about what exactly would happen to the security of all these promised benefits if financial statements were revised, the market crashed and more than a few of the public companies who not only were providing the pensions but whose stock made up the crashing market started to go bankrupt. And in that event, were these pension benefits really so secure after all? For the first time, since the session began, Jeremy hesitated and finally allowed that if, at the end of the day, pension benefits were not as secure as we have all been led to believe then “well maybe in that circumstance using some sort of corporate bond rate to discount liabilities might be appropriate”. And on that somewhat uncertain note, the session ended.



 Whether or not it was a self-fulfilling prophecy we will never know, but subsequent events have shown Jeremy (at least in my opinion) to have been more right than wrong. PBGC premiums have just about tripled since 2003 and the cost of Pension Plans has been recognized as significantly higher than previously thought. Over the last 12 years huge numbers of plans have also been frozen, closed or terminated and the investment of assets  in those Pension Plans that still exist has shifted significantly towards bonds contributing (I believe) to the forces that have pushed interest rates to unprecedentedly low levels. Perhaps coincidentally, the stock market also crashed and we all suffered through a global financial crisis in 2008-9 from which we are now just recovering.

Finally Pension benefits are now recognized not to be the “rock solid guarantee” they once were as some Public Plans have gone broke and recent legislation now allows certain types of Plans to reduce benefits for existing retirees if the Plan is sufficiently distressed.

The above notwithstanding, my point in taking so much space to tell Jeremy’s story is not to say that he was right or wrong about how actuaries should calculate the Present Value of Pension Liabilities or to invest the assets, but rather to demonstrate that the question of how to discount any future event is not 100% clear and actuaries do not necessarily have any special insight into the future that means their opinion should be taken as Gospel. If actuaries themselves can’t decide whether future pension benefits ( a well defined question and something that we are the experts at) should be discounted at 4%, 6% or 8%, why should we believe that there is a “right” discount rate to use when it comes to each of us making important decisions today that will have consequences in our each unique future? I said it before and I will say it again. Don’t let an actuary tell you how to discount your future. By all means ask your friendly actuary to help you frame the issues and evaluate the likelihood of future scenarios, but then think carefully, think long, and know that using your personal rate of discount is the only way you will be able to make decisions that you will not regret.

Fatherhood, Present Value and How to Raise a Book

This post as well as the expanded and refreshed pages of the rest of this site is being published on Father’s Day and instead of the long and somewhat technical post I was planning on Personal Rates of Discount, I have decided to talk instead about Fatherhood and how it and Present Value are intimately connected. Specifically, it seems to me that one of the essential aspects of fatherhood is the need to advise and guide children in making good life choices affecting their future and in many cases having to make those decisions for our sons and daughters before they are old enough to make their own way in the world.

And if we use Present Value to make those decisions, all that we are really doing is making decisions in a way that takes into account not just the present moment, but all the possible future moments that might exist as well. We all agree that taking the Now into account is something that is best done holistically, completely and deeply. Well, my view is that you should have the same respect for those future moments as well, and Present Value is simply a really good technique and approach to help you be as complete, deep and thorough as possible in the consideration of those future moments.

Obviously, what I am saying can be equally said of motherhood, but I would suggest that genetics, culture and maybe even biology means that different decisions will be guided or made by fathers versus those made by mothers. I will leave it to others to debate whether one set of choices is more or less concerned about the future and therefore more amenable to Present Value thinking

While today is a day for me to honor my father and the difficult Present Value decisions he made that are still benefiting me, I also want to discuss fatherhood in a much more generalized way and acknowledge all the other “fathers” in my life.

Almost all of us have people in our lives, maybe a favorite teacher in school or a mentor at work, from whom we have received the kind of guidance, support, protection, advice and role modeling that one hopes to get from a father. I am no different, and many of the actuaries who I worked for and whose stories I tell in “What’s Your Future Worth?” were very much father figures for me. These days I am also probably viewed as kind of a “father” to some of the younger people who I work with and/or interact with in other contexts. For quite a while I have gradually been losing my own “fathers” to retirement and worse while at the same time picking up more “sons” and “daughters” along the way. This is the natural way of things I guess, but every once in a while you get surprised

It’s been a long time since I acquired a new “father”, but a little over a year ago, that’s just what happened, though in this case it was more than a single person, rather it was a whole company that adopted me. If authors “give birth” to their books, then the question naturally arises “who is the baby’s father?” For my book the answer is very clear – it was my publisher, Berrett-Kohler.

Berrett-Koehler is a unique publishing company and its mission and values reflect this. They are driven by a desire to publish books that will “help create a world that works for all”. They take that mission seriously and I was surprised and grateful when the Company decided that my ideas and the manuscript that eventually became “What’s Your Future Worth?” could be part of that mission. Part of my surprise was due to the fact that I didn’t even know in any explicit way how my ideas could actually improve the world. Rather I just thought it a shame that the powerful concept of Present Value was understood and being used by such a small group of people (i.e. actuaries) and in such a narrow way. To BK’s credit, my editor Steve saw beyond that and throughout the editing process kept encouraging me to keep paring down and focusing the message in a way so that in the end people could actually use the concept to improve their lives as well as that of the companies they work for and the communities in which they live.

Beyond helping me produce a better and more useful book than I had originally written, I am also grateful to have been taken in by BK because they have a unique philosophy when it comes to relating to the authors that they publish. Specifically they not only treat their authors more as partners and collaborators (vs vendors from whom they are purchasing “content” or worse as customers to whom they are selling “publishing services”), but they actively seek to tap into their authors’ knowledge and expertise, to learn from them, and to incorporate that knowledge into their own company. It no longer surprises me when someone from BK asks me how I would suggest incorporating Present Value into a specific decision that they or BK itself is facing. I have seen them do the same with the ideas of many other of their authors and I truly believe that is one of the key aspects of their business model that allows them to stay ahead of their competition and thrive in an incredibly difficult business that is undergoing dramatic and lightening fast change.

The irony is that while BK may have decided to publish my book because they saw the value of incorporating Present Value thinking into their business model, the fact is that they had been using Present Value well before they ever read my manuscript; manifested in how they choose and relate to their authors, in how they manage and reward their employees and in how the company sets its overall course and strategy. In the end, I expect that I have learned far more from my association with BK than they have from me.

So for all you authors out there hoping and dreaming that one day your book will help make the world a better place, seriously consider Berrett-Koehler as a potential father for your baby ( They will provide great pre-natal care, make sure that the birth is natural and will feed and clothe your child well until he or she is ready to walk, run and maybe fly on their own.

Memories, Dream Recording and the Present Value of “Stuff”

In my last post, I talked about my son’s consideration of the colleges he might want to go to. That is a decision that he will have to face largely by himself. However, the fact that he will be leaving my wife and me with an “empty nest” has brought us a whole new set of decisions to face, one of which I want to talk about today.

Whatever we decide to do after Adam leaves home, it will almost certainly entail moving to a smaller space. The process of deciding where to live and what to do with the “rest of our life” is obviously another type of Present Value decision and one that I will write about again in future posts, but given that we know that whatever path we choose to take, we will have less space for all of our accumulated possessions, there is really no reason to wait on an important related decision – i.e. what do we do with all our “stuff”?

The “Dream Recorder”

And so, this weekend we started in on our storage shed; the one in the backyard which over the years has become the repository for almost everything that we don’t use, but can’t bear to part with – old toys, photos, school papers, artwork (both Adam’s and ours), comic books, baseball cards, an array of almost useful tools and a vast store of memorabilia filled with magic, associations and significance.

As I started bringing everything out, examining and sorting it into categories (definitely toss, definitely keep and several categories in between) I came across one of Adam’s early creations – the “dream recorder”. He built it when he was 5 years old out of scrap wood, nails and magic markers. Primitive as it is the resemblance to a VCR is unmistakable and, as he had explained to me more than 10 years earlier, that is what it was supposed to be, only instead of plugging it into the TV or a video camera, you plugged it into your head before you went to sleep and after setting the dials appropriately your dreams were recorded and available for playback anytime you wished. This one, despite its bulk, was an unquestionable “keeper”. I didn’t even think about using Present Value; the “Dream Recorder’s” importance and “value” (to me, to Adam, now and in the future) was simply too high to consider the small incremental space savings that we would gain by discarding it. If nothing else, its continued presence in our lives reminds me of just how valuable our dreams and our memories really are.

But what about the rest of the stuff? How would we decide what to keep, sell, give away or discard? And in making those decisions, when should we use Present Value and when should we just go with our first basic instinct? I don’t have space to go into the details of each and every decision, but I do want to talk about one example that may be familiar to those of you who can still remember Ed Sullivan, mini-skirts, and the “British Invasion”.

Albums – The soundtrack to growing up

Unlike baseball cards and old coins, records take up a lot of space. They are also a funny kind of collectible. Of course they bring back all sorts of memories, and many of them have significant investment value, but they also (at least theoretically) can still be played and enjoyed for what they were intended to provide – music to listen to and enjoy. So deciding what to do with our record collection of 500 LP’s as well as the decent turntable that was carefully stored alongside them was a decision that was both complicated and would be of some spatial significance.

Beyond the obvious problem of placing a value on the future pleasure we would get from seeing these albums years from now and recalling the teenage good times associated with them, the really hard part of using Present Value for this decision was steps 2 and 3—imagining possible futures and evaluating their likelihood. As I thought more about it, I realized that to justify the expense, hassle and psychic burden of carrying around a couple hundred pounds of vinyl taking up several cubic feet of space for the rest of our lives we would need a pretty compelling vision of how we would enjoy those records and/or a financial rationale suggesting that a “hold” strategy was better (from a Present Value perspective) than to simply realize the capital gains on some of the unquestionably “savvy” investments I had made in all that “damned noise”(as many of the wise adults around me then called it) all those years ago.

The financial part of the analysis was pretty easy. Beatle records right now are at an all-time high, the market is almost frenzied, and even the records of some of the other more “minor” artists (e.g. The Who, Jimi Hendrix, Rolling Stones etc.) in the collection have been caught up in the market rise and are worth far more than the $3.99 I paid for them (let alone their depreciated value considering the dozens of times each was played). Looking ahead, it seemed to me that if we aren’t yet at a peak, we are probably close – both artists and fans are ageing fast, and those that really want to have and play those records could easily soon be facing the same kind of “space squeeze” we were. Put another way, would I be willing to pay $50 for good quality copy of “Beatles ‘65” today as an investment? And if not, selling surely is the smart move.

But, what about our future “golden years”? We have a farm with an old house up north that we are renovating and it is there, where we hope to spend a great deal of our retirement. Wouldn’t that be the perfect spot to set up the turntable, store the records and spend many a lazy summer evening playing the songs that still make us feel young? How valuable would that be, and wouldn’t the costs of temporary storage and ultimate moving expenses be a modest price to pay for such long term and exquisite pleasure? Even with a relatively high personal rate of discount, that seems, on the face of it like a more than fair trade-off.

Except, that when I really took the time to consider it, I realized that this possible future was just a fantasy and that there was virtually no chance that we would ever find a prominent place in that house (which isn’t all that big anyway) for records, a turntable (with all its accoutrements) and such an antiquated mode of playing music. We have plenty more CD’s that we still actively listen to and with streaming audio services advancing at lightening speed, even if I did get a sudden urge to listen to Iron Butterfly’s “In-a-Gadda–Da-Vida”, Spotify or some other service would be able to deliver it to me with a quick click (or maybe even a voice command). In short, this particular future should be evaluated as having a VERY small probability of being realized.

It was a sad realization, made even sadder by the fact that having the fantasy itself was a source of pleasure, and that as soon as I understood that it wasn’t going to happen, even that modest (and near term) benefit of holding on to the records disappeared. And so this weekend, the best of the lot goes up on E-Bay and those that don’t sell there, could soon be available at your local used record store.

It was an important lesson albeit not a pleasant one to absorb. Specifically, just like (even unrecorded) dreams and memories, fantasies have value too, but more often than we’d like, it makes sense, at least from a Present Value perspective, to face reality and let them go.