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Money

After the Big Data Breach, Has Target Learned Its Lesson?

While there have been surveys that tell a different story, with at least one reporting that more than 60 percent of Target shoppers aren't too worried about their data security, the common wisdom now is that a breach can undo years of brand equity -- and that appears to be the case at Target.

After the Big Data Breach, Has Target Learned Its Lesson?

While there have been surveys that tell a different story, with at least one reporting that more than 60 percent of Target shoppers aren't too worried about their data security, the common wisdom now is that a breach can undo years of brand equity -- and that appears to be the case at Target.

Net Worth $2 Million: Pretty High On the Hog

Q. I have been informed about a group that finances receivables and sells them to investors who get a return of 5 to 7 percent. I have never heard of this type of investment. Apparently, you must be "invited" to invest. Have you heard of this? Is this type of investment risky? I am retired and always looking for a way to get a decent return. —L.A., by email

A. Always worry when you get an invitation to invest. The invitation is for people who don’t understand the size of the risk they are undertaking. The only reason receivables are offered in this way is that the borrowers don’t qualify for bank financing.

That means banks thought the risk was too high to lend, even at a premium interest rate. In spite of lapses of judgment that have been remarkably painful for all of us, it’s unwise to assume that you’re getting these rates because bankers are witless. Most of the time they know a reasonable risk when they see it.

The motivation for selling this kind of investment can usually be found in the commission structure: The salesman who contacted you is likely being paid handsomely for making a sale.

Perhaps the biggest thing you need to understand is that your investment would be almost totally illiquid — you can only get your money back, if you can get it back at all, on terms of the selling organization. If you buy a publicly traded debt instrument, like a bond or a bond mutual fund, you can sell it at any time. If you invest in a bank CD you can redeem it at any time, with a known penalty. With this investment you will be entirely at the mercy of the selling organization. That’s not a good place to be.

Most people don’t appreciate the value of liquidity until they don’t have it. If you’ve never done it, talk to someone who has tried to sell an inherited car, piece of land, or house.

Q. I am a 64-year-old single woman with no family. I think it would be wise to have some form of long-term-care insurance, if I do not buy into a Continuing Care Retirement Community. Since I am a federal employee, I got a quote from the federal provider (John Hancock) and an additional one from Massachusetts Mutual. The policies are both middle of the road in terms of coverage and cost. The total lifetime benefits available would be about $220,000.

It occurred to me that I might be able to self-insure for LTC rather than
pay insurance premiums. I have $315,000 in my federal Thrift Savings Plan account. I do not need these funds for living expenses, which will be covered by Social Security and pension benefits. I do not live lavishly. I have other investments, both IRA and non-IRA, in Vanguard Funds. My total assets are about $750,000.

Would it be a rational option to set aside the TSP account for possible
use in LTC? I can roll over this TSP account into another Vanguard Fund. —S.D., Dallas, TX

A. That’s an entirely rational approach to the problem of long term care. In fact, it is likely that the maximum value of your policy would be less than $315,000 so you really don’t need to reserve the entire account, just a portion of it. How big a portion depends on the assumptions you are willing to make.

Suppose, for instance, that the maximum payout of the policy you purchase $220,000. This would cover more than 4 years of nursing home care at the current average cost in Texas for a semi-private room, according to industry statistics. This suggests about a $200,000 reserve.

Even that figure is too high, however, because it doesn’t consider the advantage you have as a single person. When you need long-term care you will be leaving most of your regular costs of living behind and assuming a brand new set of expenses. At that point, your ongoing Social Security and pension income may still cover a significant portion of your cost of living in a nursing home. As a consequence, your reserve can be lower.

How much lower? It all depends on how the actual income and spending numbers pencil out.

Net Worth $2 Million: Pretty High On the Hog

Q. Early this year you had a column about living well with little income. We have a little more net worth than the audience you were addressing, but we are curious where you would put us in your “Wealth Scoreboard” rankings. We have a net worth of $2 million, in portfolio holdings and real estate. We’re recently retired at age 66 and 70. We have about $6,000 a month from pensions and Social Security.

Your column stated that the median net worth of the top 25 percent of Americans in our age group was $712,000. Are you able to “ballpark” where our net worth puts us percentage-wise on the wealth scale? Just curious. —T.W., Seattle, WA

A. Every three years, after the data from the Survey of Consumer Finances has been made available, I update my “Wealth Scoreboard.”

It’s also important to note that the figures from the Dallas Federal Reserve are for the median net worth in each group. That’s quite different from the threshold for each group. The $712,000 median net worth figure for the top 25 percent of those age 60-69, for instance, could also be considered the threshold for being in the top 12.5 percent. The median net worth of the top ten percent who are age 60-69 could also be considered the threshold for the top 5 percent since it is the middle of the top 10 percent, etc.

This suggests your net worth puts you ahead of about 95 percent of all people in the 60-69 age group. Don’t feel you’re that high on the hog? Most people who are well off feel the same way. The reality: The air gets thin very fast as you climb the net worth mountain.

One thing conspicuously absent from these figures is the virtual wealth people have in Social Security benefits and private pensions. An independent doctor without a pension, for instance, may have a lower standard of living in retirement than a long-time corporate employee with a pension.

Q. Would you discuss how low expense index funds operate and cover their costs? A quarter of a percent for expenses doesn't cover much oversight, research, trade costs, rent, or staff. Also, I could not find Fidelity Puritan fund mentioned in a recent column.... Is that the full name? —E.K, by email

A. The ticker for Fidelity Puritan Fund is FPURX. That is the full name of the fund. Its expense ratio is a relatively low 0.57 percent and its annual portfolio turnover rate is 229 percent according to Morningstar. Fidelity has been a low-cost provider of managed funds for decades. Those low costs haven’t hurt performance. The fund has been in the top 20 percent of its category, or better, in every time period except 15 years. Then it was in the top 23 percent.

Vanguard Balanced Index fund (Ticker: VBINX) has expenses no greater than 0.24 percent. Its Admiral shares, which require a minimum investment of $10,000, have an expense ratio of only 0.09 percent. Turnover at the fund is only 47 percent. Over the last 15 years Puritan provided an annualized return of 5.86 percent while Vanguard Balanced Index returned an annualized 5.4 percent. This managed fund beat its target index, but it’s good to remember that the index fund itself beat 70 percent of its managed competitors.

One of the reasons Vanguard funds, whether managed or index, are less expensive than other funds is that Vanguard is owned by its fund holders. It isn’t a private company making its owner(s) rich.

A typical managed fund company has a large staff of expensive MBA/CFAs to do research and provide support for portfolio managers. After that it will have still more expensive MBA/CFAs to manage the actual portfolios. Most of those payroll expenses disappear with index funds. So do the trading costs. It all adds up.

If we can have a serious discussion about whether we’re better off investing in managed funds from low-cost providers like Fidelity, American Funds and T. Rowe Price, we have to wonder what allows the truly expensive funds to exist. Answer: Marketing and hype can be more influential than real data.

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