Isolating our Nest Egg from Others

[Midpack]

Based on the exchange below from another thread (that I didn't want to hijack);

We have saved and invested diligently for most of our adult lives to achieve FI, but we are not yet retired. We realized there were others who were hardly saving at all which was going to bite them at some point. We also suspected many people were going way over their heads on home purchases and HELOCs and that there could be a bubble one day, to bite them at some point. What had not occurred to us --- that we along with all taxpayers could end up footing a substantial bill for so many people/companies going bankrupt and/or walking away from their homes - ie, the bailout that is now going on. It's bad enough that our equity holdings got creamed.

My question, when things return to somewhat normal (please start another thread if you want to debate "if"), are there ways to position our holdings for next time to minimize exposure to bailing out others? We're hoping there's something more creative than minimizing equities (AA) and taxes (no income).

Quote:

Originally Posted by samclem I find this all a little hard to swallow at this point. I think today's Joe Consumer, given easy credit, will borrow more money without a second thought.

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Originally Posted by Brewer I agree. I think the YOY Black Friday retal sales increase strongly supports this notion. All of the stuff about US consumers permanently retrenching sounds very unlikely indeed to me.

[chinaco]

Try to roll as much into your Roth as practical (given your tax situation). It should help to minimize future taxes... unless the laws change.

That is the wild card... no matter what you do the law can change regarding taxes.


Plus, we paid for the bail out twice. One time with future taxes... and right now with the massive drop in asset values.

[Midpack]

Quote:

Originally Posted by chinaco Try to roll as much into your Roth as practical (given your tax situation). It should help to minimize future taxes... unless the laws change.

Not an option for us...

[calmloki]

Not due to a cunning plan, but rather due to being in rental property for years and then trying to move to a lazier way ($$ and stocks), we have ended up with a bunch of free and clear rentals, 5 year balloon property loans, cash, and a little dab of stocks. Feels really lucky: cash if there is a depression, property (viewed as a commodity) if there is inflation, rental income giving us a monthly cash infusion and able to be adjusted up or down to keep the flow going. A few beat up stocks so we can brag or whine about the market with others, short term loans so we don't get creamed if interest rates shoot to the sky. All pure luck, and good deal, 'cause right now i'm too lazy and chicken to buy property and too skeered to cut loose more of our cash on other investments. lucky lucky lucky - not poised to make out like a robber baron hedge fund trader, but not likely to join the soup lines either. if the body just holds up for a few more years of landlording...

[FIREd]

I don't think it is realistic to expect to completely isolate your nest egg from others. Even if you could completely avoid the higher tax bite, your asset values (RE, stocks, commodities...) could still suffer as a direct result of others' reckless behavior. You could invest extra conservatively in cash, treasuries or CDs. But even then, you will likely be affected as well down the road either because of very low interest rates or souped up inflation (pick your poison) and so you will still pay for bailing out others. You could go with an annuity and hope that other people's behavior don't result in your insurer's demise, but the government will still get you on the tax side.No simple answer here.

[tangomonster]

I think this has shown how we are all in this together---and not just Americans, but the entire world.

You can run, but you can't hide!

I do agree that most people won't have learned their lesson from this. I have a 52 yo friend who works for the post office and earns $50K. Single. She bought a townhome that wasn't a McMansion by any means but ran into problems paying it (and her charge card bills). It was deemed a predatory loan (she claims she didn't understand that it was interest only) and terms have been renegotiated (no longer interest only, good interest rate.....and lower principle since the price of the home dropped since she bought it!). It seems to me that it wasn't so much a problem loan as she just didn't curtail expenses (expensive salon visits and sushi dinners!) and didn't budget adequately. But some things are being forgiven and she is coming out of this not hurting at all. She had some prior credit problems, so I am sure this will be an ongoing pattern for her.

So---be sure to budget and invest for my friend---she may need our help in just a couple more years!

[FIREd]

Quote:

Originally Posted by tangomonster I think this has shown how we are all in this together---and not just Americans, but the entire world. You can run, but you can't hide! I do agree that most people won't have learned their lesson from this. I have a 52 yo friend who works for the post office and earns $50K. Single. She bought a townhome that wasn't a McMansion by any means but ran into problems paying it (and her charge card bills). It was deemed a predatory loan (she claims she didn't understand that it was interest only) and terms have been renegotiated (no longer interest only, good interest rate.....and lower principle since the price of the home dropped since she bought it!). It seems to me that it wasn't so much a problem loan as she just didn't curtail expenses (expensive salon visits and sushi dinners!) and didn't budget adequately. But some things are being forgiven and she is coming out of this not hurting at all. She had some prior credit problems, so I am sure this will be an ongoing pattern for her. So---be sure to budget and invest for my friend---she may need our help in just a couple more years!

The sad thing is that I am starting to believe that the people who will benefit the most from the crisis will probably be the same irresponsible people who created the crisis in the first place!

[Midpack]

Quote:

Originally Posted by FIREdreamer The sad thing is that I am starting to believe that the people who will benefit the most from the crisis will probably the same irresponsible people who created the crisis in the first place!

I came to that conclusion a while ago, now I'm asking how we can protect ourselves from paying for those who could/should have known better...

[Notmuchlonger]

Quote:

Originally Posted by Midpack I came to that conclusion a while ago, now I'm asking how we can protect ourselves from paying for those who could/should have known better...

I dont think it is possible legally. My suspicion this country will keep heading in the direction of wealth redistribution. Eventually the republic will fall. I hope it doesnt happen in my lifetime. Thats my quarter cent opinion.

[Midpack]

Quote:

Originally Posted by Notmuchlonger I dont think it is possible legally. My suspicion this country will keep heading in the direction of wealth redistribution. Eventually the republic will fall. I hope it doesnt happen in my lifetime. Thats my quarter cent opinion.

As I said in another string, I never seriously considered an expat retirement, but sadly it seem to make more sense all the time...

[FIREd]

Quote:

Originally Posted by Midpack I came to that conclusion a while ago, now I'm asking how we can protect ourselves from paying for those who could/should have known better...

And as I wrote earlier, my answer is that I don't think you can completely protect yourself. Even if you move abroad, you will still be within arm's reach of the IRS (remember US citizens are taxed on their worldwide income) and that wouldn't make you less susceptible to asset depreciation.

[rjsciurus]

"Bailing out others" is primarily a financial situation, and you are requesting discussion past the obvious financial points-- which are most of the issue, I think. That takes me to the next level down-- disconnect yourself from the financial and social turmoil of bailouts and become as self-sufficient as possible. Own your house and make it as maintenance-free and energy-independent as possible. Same with vehicles. Choose your possessions carefully to maximize permanence. Live somewhere where you can easily reach resources important to you, such as essential shopping and/or social services. Take full responsibility for understanding and managing your finances, keeping away from trendy ideas and attending to "black swan" defenses (google it if unclear). Shift your time from producing income to self-sufficiency. Take care of any long-term health issues as soon as possible, and maintain your health as carefully as possible. Make sure you are familiar with and tapped into your local government and social organizations, so you have resources in case of trouble, and see problems coming.

Tedious and high-effort stuff, but if there was something easy it'd be obvious, and you wouldn't be asking, yes?

[Gumby]

Quote:

Originally Posted by rjsciurus "Bailing out others" is primarily a financial situation, and you are requesting discussion past the obvious financial points-- which are most of the issue, I think. That takes me to the next level down-- disconnect yourself from the financial and social turmoil of bailouts and become as self-sufficient as possible. Own your house and make it as maintenance-free and energy-independent as possible. Same with vehicles. Choose your possessions carefully to maximize permanence. Live somewhere where you can easily reach resources important to you, such as essential shopping and/or social services. Take full responsibility for understanding and managing your finances, keeping away from trendy ideas and attending to "black swan" defenses (google it if unclear). Shift your time from producing income to self-sufficiency. Take care of any long-term health issues as soon as possible, and maintain your health as carefully as possible. Make sure you are familiar with and tapped into your local government and social organizations, so you have resources in case of trouble, and see problems coming. Tedious and high-effort stuff, but if there was something easy it'd be obvious, and you wouldn't be asking, yes?

A very fine first post, rjsciurus. Welcome to the board. Start a thread in the "Hi I am . . ." subforum and tell us a little about yourself.

Best wishes,

Gumby

[chinaco]

Quote:

Originally Posted by FIREdreamer The sad thing is that I am starting to believe that the people who will benefit the most from the crisis will probably be the same irresponsible people who created the crisis in the first place!

That is the way I see it. And I am not sure we have a tolerable alternative.

• The financial institutions (we lost value in securities and will pay for a bail-out with taxes). Not to mention keeping interest rates low to try to stimulate the economy (this hurts investors --- retirees)
• The irresponsible consumers (many of the mortgage problems) - We will eventually have to bail them out (probably by giving the institutions guarantees/payoffs to change the terms of the loans and/or reduce principle).

One thing that needs to be fixed is loose and easy credit. Lending people money that cannot/will not pay it back on a massive scale impacts all of us. This is not just with mortgages... but also with consumer debt (credit cards).

But I am not sure how to fix it. Higher interest rates would probably help. But we will not see higher interest rates for a while because of all of the credit crack addicts out there.

[Free To Canoe]

Quote:

Originally Posted by rjsciurus ...-- disconnect yourself from the financial and social turmoil of bailouts and become as self-sufficient as possible...

This certainly has a logically appeal.

Also, if you can't beat em, join em? Become a shareholder in a predatory lending endevor whose gains will help offset the bailout consequences.

Free to canoe

[Midpack]

Quote:

Originally Posted by rjsciurus "Bailing out others" is primarily a financial situation, and you are requesting discussion past the obvious financial points-- which are most of the issue, I think. That takes me to the next level down-- disconnect yourself from the financial and social turmoil of bailouts and become as self-sufficient as possible. Own your house and make it as maintenance-free and energy-independent as possible. Same with vehicles. Choose your possessions carefully to maximize permanence. Live somewhere where you can easily reach resources important to you, such as essential shopping and/or social services. Take full responsibility for understanding and managing your finances, keeping away from trendy ideas and attending to "black swan" defenses (google it if unclear). Shift your time from producing income to self-sufficiency. Take care of any long-term health issues as soon as possible, and maintain your health as carefully as possible. Make sure you are familiar with and tapped into your local government and social organizations, so you have resources in case of trouble, and see problems coming. Tedious and high-effort stuff, but if there was something easy it'd be obvious, and you wouldn't be asking, yes?

Nice first post, and I agree. DW and I have gladly downsized our home & possessions and continue to trim our expenses - without any sense of denying ourselves. Our next home will be even smaller and we are focused on finding a place with a great "walking score," something we don't have at present address. We have no debt whatsoever, paid off our home a few years ago, our last car loan was in 1982 and we've never paid credit card interest. We also work out every other day or more so we're in good physical condition. We have a long ways to go in terms of self-sufficiency, but we're working on that too. I was looking for ways to further protect our nest egg - we can't fathom being punished for managing our finances well all our lives.

But I don't follow your last sentence, anyone know what he/she means?

[kyounge1956]

Quote:

Originally Posted by Midpack I came to that conclusion a while ago, now I'm asking how we can protect ourselves from paying for those who could/should have known better...

I strongly suspect that everyone who isn't a "bailee" will be to some extent a "bailor", and the only way to escape bailing out others will be to need bailing-out yourself.

Quote:

Originally Posted by Midpack As I said in another string, I never seriously considered an expat retirement, but sadly it seem to make more sense all the time...

Won't be any better IMO. The financial crisis is worldwide, so if you retire as an expat, you will only end up bailing out Malasians or Costa Ricans instead of (or bearing in mind what FIREdreamer wrote about the IRS, as well as) people here in the US. The only possible advantage I can see is that maybe it is less expensive to bail out someone in Costa Rica than someone in Costa Mesa, and that's only relevant if you don't have to bail in both countries.

[headingout]

There are some practical things we can do to avoid being wiped out by others foolishness (diversification for one). But try as we might to insulate ourselves from the world (and I've worked pretty hard at this at times in the past), the great truth is that we are interconnected. Our investment assets are really just a share of the world's future net worth. If our neighbors are in trouble, then we aren't entirely safe. If others are hurt, we are hurt. If others are well, we are well. This isn't "fair," in the usual sense, but it is how the world works. I would still rather be the bailor than the bailee. I have more personal choices that way, less stress, and the opportunity to be generous.