Jeffrey Strain

The reason why you aren’t a millionaire (or on your way to becoming one) is really quite simple. You probably assume it’s because you aren’t earning enough money, but the truth is that for most people, whether or not you become a millionaire has very little to do with the amount of money you make. It’s the way that you treat money in your daily life.

Here are 10 possible reasons you aren’t a millionaire:

10. You Care What Your Neighbors Think
If you’re competing against them and their material possessions, you’re wasting your hard-earned money on toys to impress them instead of building your wealth.

9. You Aren’t Patient
Until the era of credit cards, it was difficult to spend more than you had. That is not the case today. If you have credit card debt because you couldn’t wait until you had enough money to purchase something in cash, you are making others wealthy while keeping yourself in debt.

8. You Have Bad Habits
Whether it’s smoking, drinking, gambling or some other bad habit, the habit is using up a lot of money that could go toward building wealth. Most people don’t realize that the cost of their bad habits extends far beyond the immediate cost. Take smoking, for example: It costs a lot more than the pack of cigarettes purchased. It also negatively affects your wealth in the form of higher insurance rates and decreased value of your home.

7. You Have No Goals
It’s difficult to build wealth if you haven’t taken the time to know what you want. If you haven’t set wealth goals, you aren’t likely to attain them. You need to do more than state, “I want to be a millionaire.” You need to take the time to set saving and investing goals on a yearly basis and come up with a plan for how to achieve those goals.

6. You Haven’t Prepared
Bad things happen to the best of people from time to time, and if you haven’t prepared for such a thing to happen to you through insurance, any wealth that you might have built can be gone in an instant.

Read the rest of this entry »

Greece was branded with the world’s lowest credit rating by Standard & Poor’s, which said the nation is “increasingly likely” to face a debt restructuring and the first sovereign default in the euro area’s history.

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement yesterday. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

Greece’s government, which plans to sell 1.25 billion euros ($ 1.8 billion) of 26-week Treasury bills today, said that the downgrade overlooked “intense” talks between European officials to address the nation’s financing needs. Credit- default swaps on Greece, Ireland andPortugal surged to records yesterday on concern governments’ struggles to resolve the turmoil will threaten their ability to pay their debts.

“Greece will default — it’s a question of when, rather than if,” said Vincent Truglia, Managing Director at New York- based Granite Springs Asset Management LLP in New York and a former head of the sovereign risk unit at Moody’s. “It’s a basic solvency issue rather than a liquidity issue. Only a debt writedown will do.”

Swaps on Greece jumped 47 basis points to an all-time high of 1,610 as of 5:30 p.m. yesterday in London after the S&P downgrade, according to CMA. Contracts on Ireland soared 27 basis points to 740, Portugal climbed 22 to 764 and the Markit iTraxx SovX Western EuropeIndex of swaps on 15 governments jumped 7 basis points to 218, approaching the record 221.75 set Jan. 10.

Greek Bonds

The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was at 1,402 basis points yesterday, close to a record.

No other sovereign nation is graded as low as CCC by S&P, a spokesman said by e-mail. Moody’s cut its rating on Greece to Caa1 on June 1, leaving only Ecuador as a worse sovereign risk.

“The ratings agencies are now playing catch-up with the market,” saidGianluca Salford, a fixed-income strategist at JP Morgan in London. “The market is pricing in a very high probability that there will be a credit event around Greece. The agencies are just catching up to the negativity that’s already priced in by the market, not the other way around.”

The downgrade comes as the European Central Bank and Germany battle over how to bail out Greece again and whether officials should push creditors to share some of the costs. ECB President Jean-Claude Trichet said yesterday that his advice to European governments is to “avoid what would be a compulsory concept” and “avoid whatever would trigger” a default.

ECB’s Hope

“The ECB wants governments to come to the aid of Greece and at the moment that doesn’t seem to be the case,” said Orlando Green, a fixed income strategist at Credit Agricole Corporate & Investment Bank in London. “We do think there’s a chance Greece will see some sort of adjustment of its debt profile. That’s what the politicians are looking to do, effectively adjust their debt situation without wrecking havoc, which could easily have a contagion effect.”

S&P said it has a negative outlook on Greece’s debt.

“Our negative outlook indicates that a downgrade to ‘SD’ could occur if Greece undertakes one or more debt restructurings or maturity extensions on terms that constitute distressed debt exchanges as defined by our criteria,” S&P said. SD is a “selective default.” A restructuring would likely “result in one or more defaults under our criteria,” it said.

Recovery Rating

S&P said that its recovery rating on Greece’s debt is ‘4,’ indicating it estimates bondholders would recover 30 percent to 50 percent of their investment.

A “financing gap has emerged in part because Greece’s access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize,” the report said.

Greece’s finance ministry said in a statement that S&P’s decision “ignores” the “intense consultations” to resolve the nation’s crisis taking place between officials at the European Commission, European Central Bank and International Monetary Fund.

“The decision by Standard and Poor’s also neglects the determined efforts of the Greek government to avoid at any costs any possible violation of Greece’s contractual obligations, and the strong desire of the Greek people to plan for their future within the euro zone,” the statement said.

Granite Springs’s Truglia said that European officials should prepare for the fallout from a Greek default.

“What Europe’s governments should do now is look at the knock-on effects that will have for other markets and pressure that will exert on banking system,” he said. “But the problem is that governments always leave it too late.”

The high rate of inflation most of us believe is waiting not too far down the road will be an earthquake for investment markets. The likely winners (gold, silver, precious metals stocks) and the likely losers (long-term bonds and most stocks) aren’t too hard to identify. But separating the sheep from the goats is only one element for financial success in an environment of rapidly rising consumer prices. Higher rates of price inflation will bring greater volatility to all financial markets. The higher you expect inflation and hence gold to go, the more volatility you should expect to see for assets of every type. Even if in fact the dollar is on the road to perdition, there will be detours and backtracking along the way. Inflation doesn’t operate smoothly; it is a disrupter for both the economy and for the political system. From time to time over the next five to ten years, the Federal Reserve will come to see inflation as its most urgent problem. And every time that happens, the Fed will slow the creation of fresh dollars or even put up a big INTERMISSION sign and stop printing altogether for a while. Such seizures of monetary virtue won’t last long, but while they do last, they will hammer most investment markets, including the market for the yellow stuff and for stocks of companies that produce or look for it. You could be absolutely correct about where the dollar is headed in the long run and still have a scary ride. 2008 was just a preview of the downdrafts you will need to survive. There will be even uglier smash-ups, and you don’t want to be among the hard-money investors who get carried off on a stretcher. To avoid being one of them, you’ll need to include cash as a constant, permanent element of your portfolio. Cash is a courage booster. Having a substantial cash reserve makes it easier to hold on to your other investments when they are getting battered and you are tempted to bail out. And cash gives you the wherewithal to buy on dips – and on the big dumps.

The Twins

Of course, cash will be the asset whose value is shrinking. But the rate at which the purchasing power of your cash declines will depend very much on how you hold it. Interest rates on money market instruments, such as Treasury bills and large CDs, track the rate of inflation fairly closely. By creating money fast enough, the Federal Reserve can keep rates on money market instruments one or two percentage points below the inflation rate, but not indefinitely. And any such effort to suppress short-term interest rates succeeds at the cost of producing even higher inflation later. Similarly, the Fed can keep money market rates one or two points above the inflation rate for a while, with the likely eventual result of a slowing in inflation. But over long periods, the average yield on money market instruments about matches the average rate of inflation. Given that money market yields travel the same path as inflation rates, holding cash doesn’t seem to be terribly painful. The loss in purchasing power about gets made up for by the yield. That’s a nice thought – until you think about taxes. Even though the yield is merely replacing the purchasing power being lost, the yield is subject to income tax, unless you do something about it. Doing nothing about it is, in a subtle way, risky for your portfolio. When price inflation gets to, say, 10% and money market yields are near the same level, if you are in a 40% tax bracket, you’ll be losing purchasing power on your cash at a rate of 4% per year. The situation will get worse as inflation moves higher, and you’ll be tempted to cut back on cash in order to cut back on the leakage. And that will leave you dangerously ill-prepared for the next INTERMISSION sign. Logically, then, to make holding cash cheap or even free, you need to hold the cash in an environment where the yield is protected from taxes. Let’s look at the possibilities, some of which, you should be warned, may make you say “Yuk.”

Deferred Annuities

A straight annuity is a contract with an insurance company that pays you a certain amount per year for the rest of your life. A deferred annuity begins with an accumulation period, during which the contract earns interest or some other investment return. You can end the accumulation period whenever you want and then either start receiving a lifetime of payments or simply withdraw the contract’s accumulated value. Earnings in a deferred annuity are tax-deferred until they are withdrawn. So if the return on a deferred annuity tracks money market yields, then the real value of the annuity will hold approximately steady, even at high rates of inflation. Deferred annuities are now an almost forgotten topic. They were, for the first time ever, a very big topic in the high-inflation years of the 1970s and 1980s. The reason was simple – sky-high interest rates. But in more recent experience, interest rates have been so low that the advantage of tax-deferred compounding has hardly been worth the trouble. It’s when interest rates are high that tax-deferred compounding brings a big payoff. When price inflation heats up and puts money market rates on a boil, expect to see ads for deferred annuities on every financial street corner. The right annuity contract will certainly be better than leaving cash in a bank account, but it still won’t be the most attractive medium for holding cash through a period of rapid inflation. There are one, or perhaps two, limitations on an annuity’s appeal. The first is that the protection from being taxed on a fictitious return only goes so far. Even though the money inside the annuity may be holding its purchasing power (with interest continuously replacing what is being lost to inflation), eventually you’ll cash the annuity in. At that point, all the interest will be taxable. After, say, a decade of high inflation, most of what comes out of the annuity will be accumulated interest – which will be taxable as ordinary income. So you’d have a one-time loss of nearly 40% of your purchasing power, assuming you’re in a 40% tax bracket. (I know that sounds awful, but it would be a far better result than paying tax on interest income year by year during a decade of rapid inflation.) The second limitation is that, so far as I have been able to determine, no insurance company offers a program that would let you switch the value of an annuity between money investments and something related to precious metals. That may change as inflation and the public’s interest in gold picks up. But until it does, there would be no tax-efficient way to tap the purchasing power your annuity had been protecting to buy something gold-related during the downdrafts we’re trying to prepare for.

Cash Value Life Insurance

As with a deferred annuity, the earnings on a cash value life insurance policy can accumulate and compound free of current tax. But that’s where the similarity ends. Unlike the earnings on a deferred annuity, the earnings on cash value life insurance can come out of the policy tax free. The tidiest way is for you to die at just the moment that is most convenient for your financial plan. An alternative, if you don’t have such an accommodating attitude, is to borrow the earnings from the policy. You can do so tax free if the policy satisfies the “7-pay” rule: pay for the policy no more rapidly than with seven equal annual premiums. Being able to borrow from the policy tax free would allow you to tap its value whenever gold and other hard investments have had a sizeable setback. Convenient. But, depending on your circumstances, that convenience may or may not be available to you for free. Between the Internal Revenue Code’s requirements for a contract to qualify as “life insurance” and the perversely characterized “consumer protection” rules of the various states, it is not possible to buy a life insurance policy in the U.S. that does not have a face value far above the amount you’ve invested in the policy. The difference represents the insurance company’s risk – mortality risk – that you may stop breathing ahead of schedule. The insurance company, of course, will charge for that risk. There are a lot of variables, but think of the charge as amounting to something on the order of 1% per year of the capital you want to wrap inside the policy to protect the return from taxes. Whether a cash value insurance policy (a 7-pay policy, so that you can borrow tax free) is a good place to shelter cash from the winds of inflation depends in large part on whether paying for mortality risk is or is not a wasted cost for you. If you now have a reason to own term life insurance, you are paying purely for mortality risk. In that case, it would make sense for you to convert to a cash value policy that could be invested in money market instruments as a way to prepare for high inflation. There wouldn’t be any additional mortality cost, and you would get the tax advantages of life insurance. On the other hand, if you have no use for pure life insurance coverage, using a cash value policy for its tax advantages would require you to become a regular bettor in the actuarial casino, which you probably would not want to do.

Retirement Accounts

If it is available to you, by far the best way to hold cash through an inflationary storm is in an Individual Retirement Account. Without any of the costs that come with a deferred annuity or a life insurance policy, you can invest in T-bills, insured jumbo CDs and other money market instruments and in near-cash assets such as very short-term bonds. You can have a free hand to tap the cash at opportune times to purchase precious metals and precious metal stocks. The whole arrangement is protected from current taxes, and with a Roth IRA the proceeds eventually can come out tax free. You can do exactly the same with a solo 401(k) plan. And if you have a 401(k) plan that’s sponsored by your employer, you may be able to do about the same, depending on the investment options the plan allows. A retirement plan would be the ideal vehicle, but there is a size constraint. While the size of a deferred annuity or of a cash value life insurance policy is limited only by the size of your checkbook, IRAs are not so easily scalable. However, if you have a traditional IRA and would like to move a chunk of non-IRA money into it, there is a way to effectively do so. Take a close look at your traditional IRA. How much of it is building tax-deferred wealth foryou? Less than meets the eye. If you are in, say, a 40% tax bracket, then no matter how large your IRA gets to be, when it comes time to take a distribution, 40% will go to the government. Your ability to postpone that event won’t change the nature of it. In effect, the government now owns 40% of your IRA, and you own only 60%. If there is, for the sake of round numbers, $ 100,000 in your IRA, only $ 60,000 is working for you. Fortunately, there is a way to buy out the government’s share. It’s a Roth conversion. You pay the tax now, so that eventually your withdrawals will be tax free. The result: the assets you own directly decline by $ 40,000 (the money you spend to pay the tax bill on the conversion); and the amount in the IRA that is working exclusively for you increases by $ 40,000. That’s a big improvement, because the net effect is to move capital out of a tax-paying environment and into a tax-free environment where all of the earnings get reinvested. To continue the example, the effective size of your IRA increases by two-thirds ($ 40,000/$ 60,000). That’s two-thirds more money doing the happy work of tax-free compounding for your benefit. You can do the same with a solo 401(k) – effectively plump it up through a Roth conversion. The financial logic of a Roth conversion is compelling. The case is even stronger if you first restructure your IRA as an Open Opportunity IRA. The Open Opportunity structure starts out as a big idea – radically greater investment freedom – and then gets bigger. Instead of being restricted to the menu of investments allowed by your existing IRA custodian, your IRA would own a single asset – a limited liability company that you manage. Then you would roll over the investments from your existing IRA into the new IRA and then into the LLC. As Manager of the LLC, you would have the choice of keeping the existing investments or switching to real estate, gold coins, equipment leasing or almost anything else. That’s the investment freedom. In addition, by designing the LLC appropriately, significant savings on the cost of your Roth conversion may be possible.. You can learn more about the Open Opportunity IRA in “The Year of the Roth,” in the June 2010 edition of The Casey Report.

Time to Plan

Deferred annuities, cash value life insurance and retirement plans – these are the ready vehicles for protecting the purchasing power of the cash you need for portfolio safety during times of rapid inflation. They do the job by reinvesting money market yields, which tend strongly to track inflation rates, without loss to current tax. Of course, the three alternatives aren’t exclusive; you can use more than one. Which of them would be best for you depends not just on their characteristics but on your individual circumstances. Now, before CPI inflation starts making double-digit headlines, is a good time to start weighing your choices. Even if you don’t like any of the choices, any of them will be better than letting your cash rot. Contributing Editor Terry Coxon is president of Passport Financial, Inc., and for over 30 years has advised clients on legal ways to internationalize their assets to optimize tax, wealth protection and estate planning goals. [For a very limited time, you can now profit from the investment advice of both the Casey Research team and 35 big-name experts… like ShadowStats’ John Williams, James G. Rickards, Chris Whalen, Mike Maloney and many others.

We all think it’s a panacea. If you don’t have enough money saved for retirement, you’ve got a few ways to close the gap between what you have and what you need in your nest egg: Save more, invest more aggressively, and/or work longer.

Well, it turns out that working longer is indeed an option, according to the Employee Benefit Research Institute latest study. The only problem is that the latest research shows that you’ll have to work much longer than you anticipated. In fact, many Americans will have to keep on working well into their 70s and 80s to afford retirement, according to the study, titled “The Impact of Deferring Retirement Age on Retirement Income Adequacy.”

What’s more, it’s even worse for low-income workers, according Jack VanDerhei, one of the co-authors of the study. Those who earned (on average over the course of their careers) less than $ 11,700 per year, the lowest income quartile, would need to defer retirement till age 84 before 90% of those households would have just a 50% chance of affording retirement.

Those who earned between $ 11,700 and $ 31,200 will need to work till age 76 to have a 50% chance of covering basic expenses in retirement. Those who earned between $ 31,200 and $ 72,500 will need to work to age 72 to have a 50% chance and those who earned more than $ 72,500, those in the highest income quartile, catch a break; they get stop working at age 65 to have a 50/50 chance of funding their retirement.

So what can be done to make sure you have enough income in retirement? Well, the sad truth is that not working is no longer an option and working past age 65 is fast becoming a fact of life, at least for those in the lowest three income quartiles.

One bright spot, according to John Nelson, co-author of ‘What Color is Your Parachute? For Retirement’ is that working works: “For those in the lower half of the income spectrum, delaying retirement from 65 to 69 has a profound effect,” he said. “It increases retirement income adequacy by 25% to 50%! That’s a powerful incentive.”

The new normal

Now the reality about EBRI’s findings is that many Americans — who are able to continue working and whose skills are still in demand — are already working past age 65. In 2009, 17.2% of Americans age 65 and older were in the labor force, according to recent AARP Public Policy Institute report, “Family Income Sources for Older People, 2009.”

And about 14.2 million older persons (36.7% of the older population) had family incomes from earnings in 2009. The median family income from this source was $ 32,330, while the mean was nearly 1.6 times as large — $ 50,971. Read the AARP report here.

And the new normal isn’t that people are working past age 65, rather it’s this: They are also hunting for second jobs as all, according to Art Koff, founder of RetiredBrains.com. “Even those older Americans who are still working are looking for ways to make additional monies,” he said.

And many, judging from the page views at RetiredBrains.com’s website, are often exploring ways to work from home. “Those older Americans who are looking for a job, those who have already retired and those who are working but need additional income or want to start something that they can continue into their retirement years are all reading (the work-from-home) pages,” Koff said.

Making it work

To be sure, many Americans haven’t figured out how to make working later a real option, instead of just a fantasy. And for them, Nelson has this advice: “You need to pay attention to your career and your health.”

“First, for your career, do some in-depth research and planning. Second, for your body, take a health risk assessment. You may need to keep both of them in shape longer than you thought,” he said.

Work and save

Working past age 65 is certainly one way to make sure you have enough income to fund retirement expenses. But EBRI also noted that Americans who work past age 65 who continue to save for retirement in a 401(k) or some such account earmarked for retirement increase the odds of having enough income in their golden years. “One of the factors that makes a major difference in the percentage of households satisfying the retirement income adequacy thresholds at any retirement age is whether the worker is still participating in a defined contribution plan after age 65,” the co-authors of the report. “This factor results in at least a 10 percentage point difference in the majority of the retirement age/income combinations investigated.” The EBRI report can be found at this website.

A new compact

Others, meanwhile, have a different take on EBRI’s study and findings. “This report just reinforces the need for a new social compact that provides increased financial security in return for increased contribution,” said Marc Freedman, author of “The Big Shift: Navigating the New Stage Beyond Midlife and CEO of Civic Ventures.”

“We need to enable the many people who want and need to work longer, without hurting those who are not able to,” Freedman said.

Buy oil stocks, but avoid equities that are plays on natural gas and uranium. At least that’s the advice of one Sprott Asset Management fund manager. Sprott’s $ 169 million energy and natural resources fund, managed by Eric Nuttall, is bullish on oil, but cannot say the same of its feelings toward natural gas and uranium stocks.

Eric Sprott’s Sprott Asset Management, perhaps most known for its founder’s gold and silver investments, held stakes in Barrick Gold (NYSE: ABX – News), Eldorado Gold (NYSE: EGO -News), IAMGold (NYSE: IAG – News), MAG Silver (AMEX: MVG- News), Silver Wheaton (NYSE: SLW – News) and Extorre Gold Mines (AMEX: XG – News), among others at the end of the first quarter.

“Emerging economy demand (for oil) growth is outpacing the demand destruction that we are seeing in developed economies, namely United States,” Nutall said in a Friday interview withReuters. The fund manager said the price of oil this year should range between $ 95-$ 100 and that natural gas prices will remain stubbornly low until 2015 when the U.S. becomes a major natural gas exporter.

Shares of Cameco (NYSE: CCJ – News), the world’s second-largest uranium producer, have plunged by a third since the March earthquake that struck Japan led to an unprecedented nuclear fallout and unprecedented declines for nuclear stocks.

“For uranium, I think the outlook is awful. We have many countries effectively deciding to shut down all of their nuclear reactors,” said Nuttall, who is underweight on uranium stocks, according to Reuters.