Author: A.T.

A young investment banker I know went bankrupt. He had let his debts get the better of him and had gambled recklessly in the market. But he was of essentially good character and excellent financial prospects, so if only his creditors had borne with him until he got his bonus, everything would have been fine.

“Sure, sure,” said three of his creditors, who had heard it all before. They forced him into bankruptcy over $60,000. Six months later he got a $250,000 bonus and paid off all his creditors. (Except these three. When his rage at them subsides, he may pay them, too. I hope so.)

Now he wants to buy a $300,000 house in Connecticut with $100,000 down. Have you ever tried getting a mortgage after you’ve gone bankrupt? Never mind the circumstances or the size of your down payment: almost no bank will touch it.

But that’s where you or I might come in. You or I might look at this and say, bankruptcy or no, the $300,000 house supports a $200,000 first mortgage. You might not want to lend that kind of money — if you have that kind of money — at 7% for 30 years. I certainly wouldn’t. But how about lending it for two or three years, and at 12% or 14%, say, backed by a first mortgage on the house and by the borrower’s personal guarantee? With the borrower paying all closing costs? And with no prepayment allowed the first year (so you earn your good rate of interest for at least that long)? And with perhaps even a “point” or two thrown in for good measure?

If you have a spare $50,000 or $500,000, that’s the kind of mortgage you might want to make.

Such deals are widely available. There are borrowers who can offer good security but who, for whatever reason, can’t get, or don’t want to try to get, a conventional loan. Or can’t get it as fast as they need it.

To find them, start by contacting mortgage brokers in your area and letting them know you might be a source of funds. You’ll quickly establish whether they have an interest in working with you and what you might expect. A second possibility: local realtors and real estate attorneys, both of whom may frequently encounter buyers in search of mortgage money. A third: take an ad in the real estate section offering to buy existing mortgages — typically, mortgages that sellers were forced to take back in order to move their homes.

It’s crucial to be represented by a knowledgeable, reputable attorney, and to get ample security — or at least an interest rate commensurate with the risk. (If it’s a second mortgage, the going rate can be 16% or more, but it’s all the more important to ascertain the true market value of the property and to obtain other collateral, if possible, such as a mortgage on a second piece of property the borrower may own.)

You must be certain there’s title, fire and flood insurance on the property and that your mortgage is recorded properly. And you should never assume that a property appraised at $200,000 today would yield anything even close to $200,000 in the event of foreclosure. The appraisal might have been high; selling costs will typically eat up at least 6% or 7% of the proceeds; the property could have deteriorated markedly in the meantime and would have to be maintained for the months and months it took to sell it even at a fire-sale price; the bottom could have fallen out of real estate prices in this area or out of the economy as a whole.

For you to lend $30,000 as a second mortgage on a $200,000 house that already carries, say, a $120,000 first mortgage might sound conservative, but it’s not. In a foreclosure, the bank holding the first mortgage would be entitled to $120,000 plus the unpaid interest and back taxes and legal fees . . . so figure maybe $140,000 . . . the property may well have been allowed to go to pot, unpainted, landscaping turned to weeds and muck . . . and on the courthouse steps, $145,000 might be the high bid. In this example, you’d be left with $5,000 of your $30,000, if that. Or else if you thought it was being stolen at $145,000, you could buy the property yourself. In this example, you’d be the high bid at $146,000, say, meaning you’d have to pay $140,000 to the first mortgagee (who might along the way have agreed to work with you with financing), and then you try to sell the place for more. Sure, you could paint it and clean up the yard, and maybe when all was said and done, you’d somehow rescue your $30,000. But you’d be risking a ton of cash and time in order to do so . . . so when push came to shove, you might well not.

All that said, and the very real risks recounted, here is a way for careful investors to earn high interest on large chunks of cash, with some additional effort but little additional risk.

Additional points to note:

• The person who mortgages his property is the mortgagor. You, who lend to him, are the mortgagee. I was so excited when I finally got that straight!

• When the loan matures, in a year or two or three, you may have the opportunity to renew it on similarly favorable terms. The borrower now has an added incentive to stick with you: by doing so, even at an above-market rate, he saves what may be thousands of dollars in a new set of processing fees, points and closing costs. And he saves the hassle.

• The interest you earn is fully subject to income tax.

• If you’d rather not deal with the borrower directly, your lawyer can serve as your trustee, disbursing the loan and collecting the monthly payments.

• Always, always, always, always be prepared for the possibility you might one day have to foreclose on the property, as unlikely as that may seem today. Considering all the costs — financial and emotional — is it something you could do?

Tomorrow: Polonius Speaks

"Lately, I’ve been seeing infomercials that promise big profits from buying ‘government-backed’ tax lien certificates at auction. It smells pretty fishy, but what’s the real story on this?" — Geoff Wisner

I wonder if there’s something inherent in the economics of infomercials that makes all their products a disappointment. I’m not saying there is, just wondering why I’ve never personally encountered happy, successful people with rock-hard stomachs who owe it all to an infomercial. There are presumably hundreds of thousands of such people out there, given the volume of business the successful infomercials do. But the only ones I tend to meet are on TV, on the infomercials themselves.

Funny.

Anyway, however much they’re charging for the tax-lien books or tapes, perhaps I can save it for you with this column.

The basic idea is to earn a safe 10% or 12% or 14% or even more by participating in auctions that some counties hold to collect back property taxes. You pay the tax for the delinquent property owner, and then if for some crazy reason the owner fails to pay you back in a couple of years, you get his property! So you’re virtually guaranteed a nice return on small chunks of dough, or else — "worst case" — you get the property for the price of a couple of years’ taxes.

I did this myself in Dade County, Florida, a decade ago. Worked fine. But I do know that if they’re doing infomercials on it, there’s going to be a lot more competition at the auctions, driving down the return you can earn from doing this. (In effect, the lowest interest rate wins the auction. "I’ll accept an 18% return!" shouts the first bidder. "I’ll take 16%!" counters the second — and before you know it, some annoying soul in the back row has won the bidding by agreeing to accept 9.8%.")

I also know that in some localities — perhaps even in Dade County by now — there are far more pitfalls than there were the year I did it and wrote a column about it for Time. So if you look into this, be careful. (Don’t, for example, buy the tax certificate on some former gas station only to find out that, as the new owner a couple of years from now, you’re liable for some million-dollar environmental cleanup.) But basically, though it’s labor intensive — it tends to be a lot of odd little $1,844 and $2,329 investments, each of which you have to keep track of — I expect this can still make sense in some parts of the country.

The key thing to do, and I doubt the infomercial product can do it for you, is to check out the current rules of the game in your locality. (I suppose you could drive to neighboring counties and states as well, if you really get into this.) Ask your local real estate agent how it works and what can go wrong. Ask the county clerk or whoever runs the auctions. Find out when the auction is held and what you’d need by way of cash and cashier’s checks, etc. to participate. The research is less about the properties on which tax liens will be auctioned — what property isn’t worth two years’ taxes? — but the overall rules of the game. In some areas it’s not as clean and simple as it was in Dade, where you really could be sure you’d get either your interest or the property — free and clear — without further legal expense or contingencies, and without ever having actually to meet or deal with the delinquent taxpayer. (In Dade, the delinquent taxpayer would pay the county, which passed the money on to you.)

Perhaps the best way to research it is to find some friendly soul in the tax collector’s office (and/or some friendly real estate or bankruptcy lawyer) and ask what would happen if you couldn’t pay your property taxes. Would the state ultimately put your debt up for auction? After how long? What if you repaid it? What if you didn’t? What recourse would you have to get it back? What if you didn’t vacate the property? What if you declared bankruptcy? In other words, learn how it works from the other side of the transaction: the guy whose delinquent tax bill you’d be paying.

Of course, the other way to learn about this is go to this year’s auction just to scout it out, asking questions of anyone who’ll talk. Some may paint a rosy picture, but others may want to discourage your competition and thus emphasize the pitfalls.

Some of the people at these auctions will be real estate professionals and real estate lawyers. You might want to work a deal with one of them to serve as your agent at these auctions. Don’t you bother to go each year. Let him go with your $25,000 or $50,000 and a power of attorney (or whatever), and bid for you, for a fee. He’s got to be there anyway; if he can pick up some extra dough for the day, why not?

Needless to say, you’d want to be very careful in making such an arrangement, especially if the chunk of money you were entrusting were significant to you.

For the most part, you get what you pay for in the financial marketplace, if you’re careful — but not more. The reason these things pay more than money market interest is that, at the very least, they require more effort. You’re being paid for lending your money, yes, but also for your time going to the auction, for arranging for the certified checks and the paperwork, and for having your money frozen for a while and not knowing exactly when you’ll get your money back.

So it’s not a free lunch, but it could be worth looking into. All the information you need on this should be available without charge.

I know I am not what you would call an authority on golf, having played only once in my life (and wasn’t that a triumph). And I know that a lot of you get really steamed when the talk in this space strays from matters financial. But golf being as popular as it is, I just feel a responsibility to warn you it is not as benign a pursuit as one might imagine.

Last time I forwarded to you a report on the health hazards (what kills weeds may kill golfers, too). Well, naturally enough, there is also the danger of the errant golf ball. On the local news, I recently saw an incident — all caught on tape, which they played — where some pro hit a ball that conked not one but two spectators, with a ricochet. No one was permanently damaged, thankfully, but both were knocked to the ground (and breathing in, therefore, all the more toxic herbicide).

This reminded me of the time my Aunt Gussie neglected to cry “fore” and drove a ball into my dad’s fore-head. Although this occurred before I was born, it was legend in our family. Aunt Gussie was never our favorite, and I suspect this may be one of the reasons why.

According to The Injury Fact Book, notes faithful reader Kenneth Shirriff, golf resulted in an estimated 18,800 emergency room visits in 1980 and 28 deaths from 1973 to 1980. And though these statistics are old, I know of nothing to suggest the sport has become any safer.

The point is, you can do a lot of damage if you hit that little pockmarked missile wrong — and get yourself into a real pickle, a la the young newlyweds and the genie that I told you about in August.

Golf at your peril.

One of the best books you can read about investing is Burton Malkiel’s A Random Walk Down Wall Street, which I have long recommended.

The random walk theory holds that the movement of individual stock prices, or the market as a whole, is largely random, because everything that can be known about which way stocks are headed is already reflected in their price. The market is “efficient.” It evaluates every known fact, hope and worry, and unless you know stuff no one else knows (and why would you?), you have no edge.

I don’t entirely buy that, because it makes market players out to be more coldly rational than I think we actually are. Sometimes things go to irrational extremes.

Even Malkiel doesn’t entirely buy it. If I remember right, he describes himself as “a random walker with a crutch;” i.e., the market is very hard to beat, but not impossible.

Of course, in any given year lots of people will beat it, just as on any given day, there will be some big winners at Las Vegas, even at the slots. But over time, the people who beat the market one year very often underperform it the next year.

Anyway, one of you, Ken Powell, took my recommendation to read this book and reports as follows:

I thought it was an excellent book. I did think, however, that Malkiel rather blithely dismissed the performance of the Peter Lynches and Warren Buffetts of the world. The flip side is that the value investors of the world tend to dismiss efficient-market theory, which is equally crazy. In a sense, they’re relying on the relative efficiency of the market to raise the price of the stock they bought to where it reflects its “true” value. They count on exploiting isolated inefficiencies of the market AND the ultimate overall efficiency of the market.

So, after a fair amount of reading, I think Burton Malkiel has it mostly right, but Benjamin Graham/Warren Buffett also have it mostly right. I get much more enjoyment out of trying my hand at finding “inefficiencies” than in buying an index fund. Fortunately, I can afford to support this hobby. Anyway, thanks for pointing me to Malkiel’s book.

In the interest of full disclosure, perhaps I should tell you that Ken sent me that message in July — 1996. It can take me a while to get to these things. But in this case it surely doesn’t matter. The debate over efficient markets never dies.

The answer would seem to be: In a place like America, with big stocks, widely followed, and lots of rules on accounting and disclosure, the market is largely efficient. But even there, a big insight . . . like the way the end of the Cold War could lead to globalization and a boost for stocks like Coca-Cola, which Buffett bought just a few years ago at a tiny fraction of today’s price . . . well, was that luck? Or does it help to be really smart and common sensical? My guess is that it helps. But common sense also suggests that most amateurs are not likely to beat the pros, working at it full time — not least because most pros don’t manage to beat the averages either.

Yesterday I described how it was possible you might have found yourself among the 5.9 billion people on the planet who missed Beyond Wall Street, the eight-part PBS documentary I got to host with my friend and colleague Jane Bryant Quinn.

Today, to make your pain all the more exquisite, the sadist in me sketches out what you missed. Each of the eight half hours focused on a single star:

1. Foster Friess, whom I interviewed at his huge log cabin in Jackson, Wyoming, elected Jesus Christ chairman of his board some years ago, and is as sunny and positive a presence as I’ve ever encountered. But we didn’t select him for this or because he has a pet pig named Wilbur to whom he turns occasionally for 450 pounds of porcine investment advice. Rather, in overseeing upward of $10 billion, Foster embodies a style of investing that shouldn’t work but does, jumping from one stock to another in hope of catching huge updrafts in growth stocks just before they occur — and kicking out the winners as soon as a more promising prospect comes along, never mind the taxes.

2. John Neff, whom I met at his home outside Philadelphia. He’s my kind of investor, stubbornly buying the stuff others don’t want — like Citicorp, once upon a time — knowing that one day the cycle will likely turn and they’ll want it again. I had long “known” Neff from his annual appearances in Barron’s roundtable. He racked up a famous record at the helm of the Windsor Fund, from which he not long ago retired.

3. Barr Rosenberg does it all by computer. Except the one part you might expect to be done by computer — the actual trading. At his Orinda, California, firm, that’s done by humans. But the computer decides what to buy or sell, and the level of intelligence that goes into its software, along with the billions of bits of data that stream into it every day from around the world, are awesome. When I playfully reached down to one of the cables and asked “what would happen if I unplugged this?” Barr’s composure held — but barely. Brilliant, contemplative, unexpected (he raises chickens but, being Buddhist, will not kill them), he begs the question: can a computer beat the market? (Answer: his hasn’t, lately. Then again, neither has mine.)

4. Bill Sharpe showed me a replica of his 1990 Nobel Prize, the real one being in a safe deposit someplace, and drove me around his Palo Alto neighborhood in a 1965 Citroen Deux Chevaux — and I actually got paid for this. It was Sharpe who pointed out that beating the market is only an achievement when the risk you took to do it is factored into the equation. And he wrote the equation. How does he invest much of his own money? Index funds.

5. Mark Mobius is our man in Thailand. And Singapore. And 40 other emerging markets we didn’t follow him to. It’s a big world out there, and drifting down Bangkok’s Chao Praya River at midnight, and then visiting a factory that very likely makes the black nylon fabric in the umbrella that keeps you dry, I learned a good bit about it. This was before Asia collapsed. Take baht, Mark. And baht! And baht, and baht and baht!

6. Bill Gross manages $90 billion or so in bonds, which has to be really boring until you realize that he somehow manages to squeeze an extra 1% return out of his portfolio year after year — an extra $900 million. But the image that impressed me even more, as we looked from his Laguna Beach living room out over the Pacific, was of a 53-year-old man determined to live to 100, getting it into his mind to run from Carmel to the Golden Gate Bridge — five back-to-back marathons over five successive days. On the last day of this run, his kidney ruptured. Blood was running down his leg. But he hadn’t reached the bridge, so he kept running. Only when he finished did he allow the ambulance to whisk him away.

7. Gary Brinson, in Chicago, showed me a graph (although my eye did keep wandering to the Monet) which demonstrated something both interesting and important. Even though foreign stocks — Japanese stocks, say — are riskier than U.S. stocks, you can actually reduce the risk of your own portfolio, at the same time as you juice up your expected return a bit, by adding them to your mix. And this is a guy who oversees $120 billion, or, we calculated, roughly one quarter of one percent of all the investable assets in the world. So listen up.

8. Peter Bernstein, it turned out, went to my high school way back when, had known my dad shortly after World War II, and now here we were in a helicopter off Santa Barbara flying to oil rig Irene to talk about risk. He’d recently published a whole book on the subject, Against the Gods: The Remarkable Story of Risk, a bestseller. As we landed on the rig in a stiff wind, hundreds of feet above the rough sea and the sharks below — well, I think there were sharks — the setting seemed right. Although a long-time horizon helps to reduce the risks, investing is anything but a smooth ride.

What I learned from these eight: First, there is more than one way to skin a cat. No single investment style is the “right” one. Second, each of these people had consistently done his homework, putting far more time and effort and passion into this than you or I would ever be likely to. Third, when we invest, these folks, and others like them, are our competition.

*

The lion’s share of the work on our TV series was done not by Jane or me but by a terrifically talented writer/director/producer named Eugene Shirley. Join us next fall, when we hope again to take you . . . beyond Wall Street.

Paul Kroger: “What happened to the PBS series you referred to in your visit to Louise months ago?”

It wasn’t Louise, it was Irene — an oil rig off the Santa Barbara coast — and the eight-part series, Beyond Wall Street, which I co-host with Jane Bryant Quinn, has finished running in many cities.

One of the glories of public television is that shows air at different times on different days in different cities, so you have to be very intelligent to know when anything’s on — which is how PBS sifts out the riffraff. No one has any idea when anything is on except Wall Street Week, Fridays at 8:30 p.m. In New York, we were on right after Wall Street Week. In Los Angeles, where everyone is asleep by ten, we were on Sundays at midnight. In Chicago, Saturdays at 7 a.m. (“I’ve got an idea, honey! Let’s set the alarm for 6:30 after a hard week’s work so we can bolt out of bed and have breakfast in front of the TV watching guys talk about p/e ratios!”) My favorite was Seattle, where I went to the local affiliate to tape an interview for my book tour. (OK, OK, if you insist, click here to solve all your last-minute holiday shopping problems.) The host explained that my interview would be half the show. Next week he’d be taping Jane Bryant Quinn for the other half — did I know her? “Know her,” I replied, “I’m crazy about her — and we co-host a PBS series that airs on your station.”

Now, I’m not saying I’d expect the average Seattleite to know our show was on. The average Seattleite has $18 million in Microsoft stock options and spends most of his or her time buying pro sports franchises. Or else building airplanes or brewing cappuccino. But this was the host of a local PBS show . . . indeed, their show about money.

“You have a PBS series?” he asked with warm interest. “What’s it called?”

A series of phone calls was required to ascertain that the show was indeed on his station, Sundays at 1 p.m., and had been airing for several weeks.

But I’m not complaining. I had the best of all possible worlds. I can legitimately say I co-hosted a PBS series without having to worry that anyone actually saw me.

There’s some talk of a new round of shows for the fall. But with luck, if it happens, no one will know about that either.

Tomorrow: What You Missed

A lot of divided opinion on last month’s “felony dumping.” I post some of that feedback here for what it says about the specific issues, but also as a reminder of how differently people can react to the same story.

Basically, two of my employees were arrested for dumping garbage we had collected from around the neighborhood, as we’d been doing every Monday for two years. It was something we’d worked out informally with the local “Neighborhood Enhancement Team.” We thought we were being good citizens, cleaning up the neighborhood. The officer thought he was apprehending some people committing a crime and used his discretion not just to issue a ticket, as he could have, but to handcuff them and take them to jail. For this, he got some criticism later from people in his department, which made him angry. A few days later, he spotted one of the two guys driving the same truck — which he absolutely should not have been doing, because he had not purchased the insurance needed to regain his suspended driver’s license. The officer pulled him over on the pretext of a cracked windshield and arrested both him and his boss, Sal. Again, he used his discretion not just to issue a ticket, as he could have, but to handcuff them and take them both to jail — the driver, for driving with a suspended license; Sal, for allowing him to (although Sal denies authorizing this).

Sal was advised by people who know the Miami police that he had basically two options: apologize to the officer and assume a very passive role in any future encounters or else move to another city.

Of course, you’re welcome to click on the hyperlink above to read the fuller story, but that’s the essence of it — from our point of view. Obviously, the arresting officer (AO, as I called him), has a different perspective. In that sense, without giving him his say, this exercise is not fair. Still, here’s some of your feedback:

There is a third choice. The third choice is to sue the city and the cop for harassment, entrapment, and federal violation of Sal’s civil rights. The cop cannot target a citizen and do what amounts to an unauthorized stakeout in order to get even, even if he does ‘find’ a violation of the law. There might be an equal protection issue as well if it can be proven that the cop does not normally make it a practice to arrest this type of violator, but did so for an improper reason (i.e. – personal vengeance).

I’m a lawyer who was arrested during my divorce by a cop who knew my wife, and I’ve sued the county for false arrest and false imprisonment, as well as civil rights violations, in Federal Court. I think cops get away with far too much in our society. Good luck.

— R.E.

Your article about your employees and their problems, especially about driving without a valid license, in my opinion, does not belong here on Ameritrade’s home page. The law says you don’t drive without a valid license — that’s all there is to it. It appears your employee has little respect for the law and society. A previous DUI, driving without a valid license. Yes, DUI is a serious offense — you lose your license and you don’t drive again under no [sic] circumstances until you get it back. So what are you trying to accomplish by blasting the AO? I come here for stock trading and maybe some professional insight into the market place, not to read about your personal problem with an AO for doing what he should be doing.

— J.L.

I was a police officer for 15 years in a city close to Denver. I now work for the Denver Police Dept as a civilian. This officer you write about is the type that gives all police officers the bad name. Do not submit to him, do not apologize, as this will validate his actions. He does not deserve to wear the badge. Very little difference between him and the thugs on the street. You know you can make a complaint to Internal Affairs, or failing that, sue for harassment. This also sounds like something the local media may take up. Hope the best for your people in this situation. My email is ———-. Give this to the cop also if he wants to swap words back and forth.

— C.B.

Of course your friend should know better about driving with a suspended license and I suspect that the occasion on which he was caught wasn’t the only time he’s done so since his license was suspended, no? He needs to behave himself. He’s not above the law. Nevertheless, “Officer Holiday” isn’t above the law either and in Florida there’s the Public Records Act and information on this police officer, as is the case with all arresting officers, is a matter of public record and I think his name should have been published in your article, for all to know, and for him/her and all such “Public Servants” who think they are something special, to know that their actions don’t go unnoticed and I’ll bet that more of such “public recognition” will help keep the likes of such as “Officer Holiday” from taking it out on the public they are supposed to be servicing.

— J.T.H.

Unfortunately it seems to have happened to you; the worst curse of all. The curse of believing your own press clippings. No doubt you thought that your recent article about the incident involving your employees and the police department would show support for your employee and present an opportunity to tell everyone what a blessing you and your company are to the public. Well, I’ve got news for you; it didn’t come across that way. What the article says is that laws don’t matter if they happen to involve your objectives, and worse, that you have forgotten the thought that “virtue is its own reward.” With a lowered opinion of you, Sincerely . . .

— L.J.L.

Why in the world would Sal submit to these dictatorial actions by this cop if what you have related is true. This juvenile delinquent police officer should be reported to his internal affairs officers, the mayor, the town council and whatever authorities exist. My son is a police officer and I am all too familiar with this type of treatment for bad guys. I have had to inform him from time to time that you do not do in the good guys who are out there supporting police officers. Do not let this little dictator get away with his attitude. Go to his superiors and report his behavior. Harassment is not a normal way of life and he will continue his actions until Sal moves to stop him.

— C.M.

I will agree with you that the officer may not have acted in the best public relations by arresting your people. However, as a police officer I know that any volunteer agency, even under contract with our department, has no authority to give permission to anyone to violate any law or ordinance, no matter how small. In our community the proper procedure would have been to go to the Town Council, Mayor, etc and get a variance (permission to do this). Kind of like a building permit. I would have towed the vehicle as being illegal. Two equipment violations [the cracked windshield and the piece of tape on the brake light]. As far as your driver being suspended and driving: If he knew he was suspended, never mind the excuses or how far he drove. The only thing to do is DO NOT DRIVE. This was only good police work. If I have someone I think is committing a criminal act, I am not doing my job if I do not observe for this and take action. Everything else in your article is just a smoke screen. Since you seem to support criminal activity, I will not be doing business with you in the future.

–D.A.Y.

Well. That settles that.

From Nick: “A topic I would like to see discussed is how to apply savings and tax-deferred savings (IRA, 401(k), etc.) at the time of retirement. Assume you plan to retire at 60, expect to live to 90 and intend to leave no money to heirs. If you estimate you will require $100,000 at age 60 and inflation is 4% how much will you need to carry you through your 30 years if your pot of gold earns 7%? How much must you withdraw from tax deferred accounts once you are retired? Assume no Social Security or pensions.”

Well, there are several questions there and I can give only an incomplete answer, but here are a few points to note:

• You’re assuming your money will earn a real rate of 3% (7% growth minus 4% inflation). My trusty calculator tells me that you’d need to set aside just under $2 million at 60 (or any other age) for it to throw off $100,000 a year for 30 years.

• Needless to say, an awful lot depends on your assumptions. Figuring that, under the shelter of retirement plans, you’ll be able to outstrip inflation by 3% is, I think, sensible. You certainly might do better, but there’s no guarantee you’ll do even that well.

• What will you do at 90, when the money’s all gone? To solve this problem, you can either withdraw less than $100,000 each year to make your money stretch further (lowering it to $80,000 stretches the payout from 30 to 45 years; lowering it to $60,000 would make it eternal, based on your assumptions, because you’d be withdrawing just 3% a year) . . . or you can set aside even more than $2 million . . . or you can assume you’ll outstrip inflation by more than 3% . . . or you can buy an annuity from a life insurance company and let it worry about the possibility you’ll live forever.

• The problem with annuities is that insurance companies assume people who buy them will live long lives — you don’t get a lot of terminal patients buying annuities — and so they don’t pay out as much on your $2 million as you might like; i.e., the life insurer isn’t doing this entirely as a favor. People who really do live unusually long make out fine with annuities; those around average make out only so-so; and those who die young are — for this side of a life insurer’s business — the best possible customers. (At 60, you can easily find annuities that pay more than $100,000 a year for life on $2 million — but will it be an inflation-adjusted $100,000? That’s what we’re talking about here: $100,000 a year in 1997 purchasing power.)

• With a Roth IRA, you could withdraw the money over 30 years (or any other number of years) just as you envision. But with a traditional retirement plan, you are required to withdraw certain minimums each year, based on your age when you begin. If I read the table right, you’d be expected at 60 to base your withdrawal amounts on a 24-year payout schedule. (Longer if married, and there are a couple of ways of figuring this — I’m just trying to give you the flavor of it. The personnel department that administers your 401(k), or the financial institution that administers your IRA or Keogh, probably has a pamphlet with the details.)

• The actual dollar amounts would not be a flat $100,000 a year. To keep up with inflation, given your assumption, you’d withdraw $104,000 the second year — even as your $2 million had not shrunk by $100,000 but (earning 7%) had actually grown by $40,000. By the final year, your withdrawal would be about $325,000 — which, if there’d actually been 4% inflation along the way, would be the equivalent of $100,000 when you started 30 years earlier.

• Assuming you have some savings outside a retirement plan, you will want to use it first, letting your tax-sheltered money grow as long as possible. Knowing this, the IRS imposes a stiff penalty on those who under-withdraw the minimums from their retirement plans. (Again: the exception will be the new Roth IRA, starting January 1, 1998, withdrawals from which will have no minimums.)

In 460-odd daily comments, I have yet to write one about music. Anyone who has heard me whistle will know why.

But one family of eleven I know — two parents, nine kids — told me recently how, when Saturday morning came around, Dad would put on his John Philip Sousa recordings, crank up the volume . . . and soon everyone would be marching around, cleaning up the house as if they were invading Normandy. For variation, he’d sometimes put on bagpipe music, which worked equally well.

Anyone who’s taken an aerobics class can tell you the effect music has on mood and energy. Or look what it did to Laurel and Hardy’s wooden soldiers when the boogie-men were about to overrun Toyland!

(If you have somehow failed to see Babes in Toyland, the 1934 classic known also as March of the Wooden Soldiers, in which Santa ordered 600 one-foot soldiers but they accidentally made 100 six-foot soldiers and . . . well, gather the kids round the TV Christmas Eve — it’s almost always on around Christmas — and enjoy.)

Feeling a little overwhelmed by the holidays? Grab yourself a tape of Rocky and come roaring back.

I tell you this now, rather than later in the month, so you have time to acquire the proper music. Removing and putting away the Christmas tree ornaments a drag? Just remember John Philip Sousa, and it will be done in no time.

THE 35% BRACKET

From Jim Maloney: “In writing about the Roth IRA, you discuss the situation of currently being in a 35% tax bracket. You say, ‘In that case, taking the deduction now would save $700 on your taxes today (35% of the $2,000 contribution).’ I think I’m missing something. If you are currently being taxed at the 35% tax rate aren’t you, in all likelihood, making too much to take advantage of the IRA tax deduction?”

Yes, but only if you are covered by a retirement plan at work. If not, there’s no limit on how much you can earn and still take the IRA deduction with a traditional IRA. (It used to be that having either spouse covered by a plan at work disqualified you. But I believe that starting in 1998, spouses’ IRAs have become “delinked.”)

Note also that there is no 35% federal tax bracket as such. The relevant number here is your combined marginal tax rate, including state income tax. I was just using it as an example.

NAMING CHARITIES THE BENEFICIARY OF YOUR IRA

From Bill Jones: “If you plan on leaving money in your will to charity, a far better thing than to give appreciated securities is to give deductible IRAs. The charity avoids ALL taxes, and those gifts do not count for estate taxes. This is the simplest, cheapest, and most efficient estate planning available.”

As I have written before, if you have an IRA and plan to leave money to charity when you die, the best way, as Bill and I agree, is simply to designate the charity or charities as beneficiaries of a percentage of your IRA (or even the whole thing). But what if you want to be charitable before you die — perhaps even this month? That was what I was writing about in listing the reasons to keep your most speculative investments outside an IRA. If one of them hits big, you can use it, instead of cash, to do your giving. (Meanwhile, those that lose big outside an IRA provide a tax loss.)

The one new twist to consider is that with a Roth IRA, since withdrawals are already free of tax, there’s no special advantage to designating a charity the beneficiary; i.e., if charities are the beneficiaries of your IRA, there’s less reason to move from a traditional IRA to a Roth IRA and incur the tax to do so.

There’s still some reason, to be sure: With any luck, you’ll be withdrawing cash from your IRA for many years before the charities get to celebrate your demise. Better to withdraw that cash tax-free from a Roth IRA than taxably from a traditional one. But the case becomes a little less compelling — and, as we’ve discussed, wasn’t in all situations that compelling to begin with. (For help deciding whether it makes sense for you to transfer your IRA to a new Roth IRA, click here.)

So this is a very good time to think about whether you do plan to leave some money to charity . . . and, if so, whether you might not want to do it simply by naming that charity/those charities as beneficiary/ies of the IRA.

NOT SO HARD EARNING 7% OUTSIDE AN IRA — VARIABLE ANNUITIES

His comment on charitable giving was really just an afterthought. Here’s what really got Bill Jones writing in:

You missed a key point in your discussion of a Roth IRA. In your example, you assumed 9% tax-free growth within the IRA but indicated it would “not be easy” to make your $700 tax saving (from the traditional-IRA deduction) grow outside the IRA at 7% after taxes.

It is actually very easy. Consider this: Put the $700 tax rebate in EXACTLY THE SAME 9% investment as the IRA, but within a Vanguard variable annuity. The effect is that you only earn 8.5% (because the annuity charges a 0.5% annual management and expense fee). And you have to pay 15% tax at the end. But that still comes out to $25,370, which is far larger than the $16,000 you thought would “not be easy” to match.

The apparently paradoxical result is that a 9% pre-tax and pre-expense growth rate [over the 46 years in my example] is equivalent to an 8.1% post-tax growth rate in a variable annuity. Odd, isn’t it!

Note that I can actually do much better; as a teacher, I qualify for TIAA’s variable annuity with an 0.2% annual charge.

Bill is right — and I’m not just saying that to curry favor with the teacher (though good teachers should be honored at every opportunity). I’d just add two thoughts.

First, as a general proposition, I’m leery of variable annuities. Those that are most heavily promoted have high sales and expense charges. And all are in effect a mechanism for transforming what would be lightly taxed long-term capital gains (if you invested outside the annuity) into more heavily taxed ordinary income when you withdraw it. Not to mention that you lose flexibility once you take the plunge — it can be hard or expensive to switch managers.

Second, if tax rates at withdrawal turned out to be higher than 15%, as they certainly might — no one can know — then our 24-year-old is hit with a double whammy. The taxes turn out to be steeper than planned on both the traditional IRA withdrawals and from the annuity whose growth was meant to make up for those taxes.

Still, Bill’s math is right and his perspective, valuable. And if one does choose the traditional IRA . . . and does lock up one’s $700 tax-saving from a $2,000 deductible IRA contribution in a variable annuity (as per this example) . . . at least one is likely to avoid the other pitfall I referred to: squandering that $700 someplace along the way.