Yesterday the FTC and 35 state attorneys general announced a settlement with one of the major players in the ID theft business, LifeLock, in which the company agreed to pay $12M and stop its hitherto deceptive advertising.

I am willing to admit that when I entitled a post The Death of LifeLock last June I jumped the gun a little. Still, the outlook for the company continues to deteriorate. Yes, for a company of its size, a back-of-the-envelope has annual revenue at $180M, forking over $12M is not the end of the world. But it’s a noticeable hit. And the restrictions on advertizing may just be the beginning of the end.

LifeLock is all about advertising: TV, radio, magazines, billboards, direct mail, and even on-line. And it is not known for subtlety. In fact, what it is universally known for is a campaign based around its CEO disclosing his social security number. Media outlets ranging from The New York Times to Wired started their stories on yesterday’s announcement by identifying the company by that stunt. Of course, both stories also mentioned that somebody used the CEO’s SSN to get a fraudulent payday loan in 2007.

LifeLock’s pitch is that if you send them money you will no longer have to lose sleep over the looming specter of ID theft. As quoted by the FTC, its ad copy has included such reassuring items as:

• “By now you’ve heard about individuals whose identities have been stolen by identity thieves . . . LifeLock protects against this ever happening to you. Guaranteed.”
• “Please know that we are the first company to prevent identity theft from occurring.”
• “Do you ever worry about identity theft? If so, it’s time you got to know LifeLock. We work to stop identity theft before it happens.”

The FTC’s release did not get down to details as to what LifeLock will be allowed to say in the future, but any reasonable person would have to assume that it included the above as examples of what would no longer be allowed. The first two clearly exaggerate LifeLock’s effectiveness. Nothing is guaranteed or simply "prevented." But the third one only claims that the company will "work to stop identity theft." If the company won’t be allowed to even claim to be attempting to stop ID theft, then what can it say?

It is possible that from the FTC’s point of view, the answer to that question may be nothing at all. From reading the complaint and based on some of the quotes in the media, it is fairly clear that the FTC and the state attorneys general think LifeLock is a borderline criminal scam that might as well just go out of business.

I agree with that sentiment, but the FTC is ignoring half of the ad campaign, and it my view it is the more damaging half. LifeLock doesn’t just offer a guarantee that it cannot make good on that ID theft will not happen to you. It works hard to hype up the danger of ID theft until you are willing to pay $10 not to worry about it. (See my discussion of LifeLock’s frightening numbers here.)

Unfortunately, the FTC is on the side of the ID theft scare mongers. Far from knocking LifeLock for exaggerating the danger, they complain that the company was deceptive in focusing on ID theft involving new accounts being opened, which makes up, according to the FTC’s definition, only about a fifth of ID theft incidents.

Except that for most people, that is exactly the sort of thing they are worried about. Most folks wouldn’t consider a teenager who borrows mom’s Visa to buy a pair of earrings at the mall to have committed ID theft. But the FTC does, and it uses this broad definition to pump up the numbers. Even then, it counted only 318,000 occurrences in 2008, which works out to about 1 in 1000 Americans.

Add to these rather long odds the fact that in the vast majority of cases the damage to the person whose ID was stolen is trivial, and you realize that LifeLock is not merely selling something that does not work as promised, they are selling something that you probably would not need if it did work.

So far, it’s a story that could be called poignantly mundane. But add in a few more facts and it transforms into a personal finance parable that will be repeated, and probably distorted, for some time to come.

In 1935 Groner bought three shares of her employer’s stock. From that day on, she reinvested the dividends and never sold a share. She past passed away this January, having reached 100. Her estate, including what is now a $7 million position in Abbott, was left to her alma mater, Lake Forest College.

Had she left the fortune to relatives (it’s not clear she had any) the secrecy of her millionairedom would likely have been preserved. But a bequest of that size to the college is news, and in Chicago this has become a well known story. The Chicago Sun-Times discussed it. So did the Chicago Tribune, which actually went so far as to file it under “Happy News.” (Here’s hoping my obituary doesn’t wind up there.)

The Weekly World News picked up the story. As did, on the same day, The Huffington Post and Wallet Pop. Then just yesterday The Wall Street Journal’s peculiar Wealth Report blog wrote about it.

My crystal ball tells me we will  be hearing about Grace Groner for a long time. To the Automatic Millionaire Mind Next Door crowd, she is an irresistible example of how a pittance saved when young can, when invested on a strict buy-and-hold basis, turn into a great fortune when old.

In a fairly pointless effort to temper this, let me point out a few things about the story.

To begin with, the single investment in 1935 left perfectly untouched and growing to $7 million in 2010 is implausibly tidy. In the 40 years from when she bought the shares to when she left Abbott she never thought either to sell some of what she had nor to buy any more?

On the other hand, in the last decades of her life, how did she manage to reinvest all those dividends? I calculate that in 2009 she got $205K in quarterly checks, which would work out to a federal income tax bill of $31K. It is very hard to believe that a woman of otherwise modest means would, or could, scrimp enough to reinvest the entire $205K. Indeed, news reports say that in her later years she gave money to charity, including $180K to Lake Forest College.

But for the sake of argument, let’s accept the Immaculate Reinvestment Theory. Groner bought three shares in 1935 for $180. That may sound like next to nothing now, but in 1935 it was real money, probably about a month’s take home pay for her.  Saving that four years out of college and at the height of the Great Depression was not a matter of skipping lattes.

Then there is the observation, made in a few of the linked articles above, that Groner did a lousy job of portfolio management. The mythmakers will say that you can’t argue with success, but by any objective measure her allocation of assets was foolish.

Investing in the stock of your employer, as traditional as it may be, is generally a bad idea. Because you work there, you will be worse off if the company does poorly. There is no need to double down by buying the stock too. As the Sun-Times points out, many employees of Enron, GM, and Bear Stearns did this and wound up both unemployed and broke.

Yahoo Finance only has stock data for Abbott going back to 1983. Using that I can back out that Groner had about $193K in Abbott stock then. (This assuming perfect reinvestment from 1983 to 2010. Since I don’t think that happened, I think she actually had considerably more.) In 1983 Groner was 74 years old. Does anybody believe that it is a good idea for a 74-year-old to have substantially all her assets in stocks, never mind in a single stock?

It should be clear that Groner wound up with a small fortune in spite of some unwise decisions largely because of luck. Abbott turned out to be a good basket for all her eggs. Assuming $180 to $7M in 75 years is correct, that is 15.13% annualized return, nicely ahead of the 10.63% from the S&P over the same period. Then again, 10.63% ain’t too bad. As unlucky as it was to graduate from college in 1931, 1935 was a great year to make long term stock investments.

But more than anything else, Groner was fortunate to have lived so long. Had she had the modesty to leave us in 1989 at age 80, roughly her life expectancy when she retired, the Abbott stock would have been worth a still impressive but not newsworthy $636K. Since she made it to triple digits, her wealth had the rare chance to further compound and she became the stuff of legend.

The advocates of becoming rich from frugality will point to Grace Groner as an example of an ordinary person who became rich from modest living. If she can do it, anybody can. That is true. All you have to do is take inappropriate risks, get lucky, and live a very very long time.

Laundry continues to be a fertile area for frugality. Keeping Kingdom First carried a guest post that thoughtfully reminded us to make sure our dirty laundry is really dirty. But the author may go too far when she advises that you ask yourself "If I was paying someone to wash my laundry, would I want to pay to have this item washed?" Obviously, if a frugalist were paying somebody else to wash their clothes they would do it themselves to save money.

SavingAdvice.com brought us instructions on how to make our own dryer sheets. Finally, a way to save money on these household miracles with a thousand thrifty uses.

SavingAdvice.com had a very good month, also sharing a useful guest post on the many advantages of dental tourism, that is, flying to Mexico for a root canal. It was written by the president of Pan American Dental Tours, so he must know what he is talking about. And SA had a third post advising that we Get Politically Active to Save Money. The author shared her experiences saving money by campaigning to save her local library and keeping the county from raising her taxes. After all, what could be more  frugal than lobbying for free services and tax breaks?

Of course, there was a major holiday in February, and many blogs helped out with tips on how to make your Valentine’s day a frugal one. Most of the suggestions were fairly commonplace: celebrate it on the 15th, make dinner at home, give your special someone a "certificate" for "services", and so on. One blog that did break new ground was Almost Frugal, which suggested Google AdWords as a budget gift for your special someone. "Target the keywords your partner search the most, write some ads and you are set."

For year-round savings, Quirky Momma explains that you do not need to buy a newspaper to clip coupons. Just bring your scissors to the library. They won’t mind.

More than a few blogs mentioned it was a good time to buy a Toyota. But PersonalFinanceAnalyst went further, spreading the secrets of really saving money with Cars for Under 500 Dollars: How to Find Them. The author does mention that it takes skill both to find such a car and to operate it safely, as it may be missing such things as second gear. "A novice driver will probably end up in an accident."

Continuing on the car theme, and adding to the growing science of Frugal Thermodynamics, The Simple Dollar had a list of tips to save on your daily commute, including that you should only use the A/C or heater long enough to get the temperature in the car where you want it, then switch it off. After a while, "If you find the temperature getting uncomfortable again, just flip the A/C or heat back on." Of course, if you have one of those fancy over $500 cars, it might be equipped with a high-tech device known as a thermostat.

(Speaking of which, I am no engineer, but I’ve noticed that car engines tend to get hot after running for a little while. Couldn’t somebody rig up a car heater that used engine heat to warm the passengers? Wouldn’t this be practically free, or at least a lot cheaper than heating the inside of the car with electricity, or forced hot water, or however it is done now? Again, I don’t know much about this….)

Wise Bread rounds out this month’s survey of what is new in the frugalosphere with a post suggesting we reduce the number of birthdays we celebrate. They suggest 1-10, 13, 16, 18, 19, 20, 21, 30, 40, 50, 60, 70, 80, 90, and every one after that. I am not sure I share their enthusiasm. Firstly, it is not clear to me that, with appropriate planning and frugal party skills, a person cannot garner enough presents to make a profit on any birthday. And if your birthday celebrations are doomed to run at a loss, why celebrate any of them?

Of course, there is the terrible problem of children’s birthdays. This is a raw deal for most parents. They are expected to have the little urchin’s friends over and feed them ice cream, cake, and soda. You get nothing out of the deal other than the mischievous joy of handing the brats back to their parents just before the sugar crash sets in. Sure, there are presents, but the damn kid gets those. Parents get nothing.

Which is why I am surprised that the entire month of February went by without a single mention of a frugal strategy I have long advocated: having kids on February 29th. It does take planning, and possibly induced labor, but it is well worth the effort. Instead of having to endure and pay for 13 birthdays (according to the Wise Bread plan) before the kid goes to college you only have to celebrate four times.

[Photo – Tudokin]

For fans of the good old USPS (there must be a few out there) it is grim reading. Mail volume is projected to decrease from 177 billion items in 2009 to just 150 billion by 2020. On its present course, the USPS is projected to lose a total of $238 billion over the next decade, a number that makes the shortfalls in Detroit seem relatively manageable.

The AP story on this was headlined Postal Service’s emerging model: Never on Saturday. The media seems to believe that delivery six days a week is a hot button of some kind. Personally, I don’t care very much. Deliver my mail three days a week if you like. Last year Gallup found 66% of Americans favor dropping Saturday to save money.

Of course, the same poll found that only 17% favored laying off postal employees, which is a problem since virtually all the savings from being closed on Saturday would be from reduced payroll. This sentiment, plus ardent lobbying from the postal employees union, means that eliminating Saturday delivery has been periodically rejected for decades. (Canada, by the way, stopped six day service in 1982.)

The USPS release obliquely suggests a list of other drastic actions they can take to narrow the budget gap, most of which will require congressional action. Translating from diplomatic euphemism, they want to close branches, reduce headcount, raise prices, and put off paying for retiree health care.

All this is based on the findings of three top-tier consulting firms paid $4.9 million by the USPS to assess the state of their business and come up with a plan for the future. The results of those studies were also released yesterday. Read them and you realize that as dismal as the picture painted by the USPS press release is, its assumptions are wildly, even implausibly, optimistic.

Going from 177 billion items in 2009 to 150 billion items in 2020 sounds realistically pessimistic until you find out that in 2007 the number was 213 billion. Part of that decline was the Great Recession, but projecting that an 8% annual decline will shrink to a 1.5% one is a bit much. Trends like these do not slow down over time, they accelerate.

BCG, the firm that came up with the volume projections, based the 150 billion number on a survey of “senders” i.e. businesses. They got a somewhat lower number from asking consumers, and a much lower number, 118 billion in 2020, based on actual experience in Europe. And all the projections were based on the rather unlikely assumption of no reduction in service and no increase in prices beyond inflation.

This is where the harsh economics of the Postal Service rears its ugly head. The USPS is a classic example of a business with fixed costs and variable revenue. If you decide to pay a bill on-line rather than mail a check, revenue for the PO is down 44 cents. But they get to save essentially nothing in costs. Even if a billion fewer bills are paid through the mail, the USPS still has to maintain the same number of offices and pay the same number of letter carriers to make the same number of stops during their day.

Granted, there is considerable fat to be trimmed, assuming the government permits it. The post office has 36,500 retail locations, a number that McKinsey deftly compares to that of McDonald’s at 13,900 and Starbucks at 11,100. Each post office serves an average of 600 customers a week. Average. Do the math.

Current law bars the USPS from closing offices “solely for economic reasons.”

It is inevitable that the price of mailing things will increase as the fixed costs of running the Postal Service are spread over fewer and fewer items. And that increase in price will further accelerate the decline in volume, leading to a downward spiral with an obvious final end. No more post office, probably sooner than you think.

If it seems inconceivable that snail mail could go the way of telegrams, imagine what would happen if an extraordinary natural disaster of some kind wiped out the PO tomorrow. The first month would be hard. You would have to sign up for electronic billing from a few places. The guy who plows my driveway would have to call around and get everybody’s email and then sign up for PayPal. We would have to get used to reading magazines on-line.

After six months all would feel normal and the mailman would be just another vanished part of our civic culture, like the iceman and the lamplighter.

Extremely selective meteor showers being rather unlikely, the USPS will not disappear overnight. But it will disappear.

But there is a popular heresy that opposes this firmly established orthodoxy. It holds that all debt is a bad idea, and paying 3X to the bank so you can save X on your taxes is loopy. Free Money Finance made this case recently. And Dave Ramsey is probably the high priest of this particular sect.

I have an instinctive contempt for orthodoxy and a sympathy for heresies of all kinds. But, alas, this is one of those cases where the conventional wisdom is spot on. Sad and boring, but true.

Mortgages are easily the cheapest way a consumer can borrow money. Even setting aside the tax effects, the raw interest rates paid on mortgages are the best deal going for most people. And once taxes are factored in, for many of us mortgages are so cheap we would be very foolish to pay them off.

To illustrate, I will do something I generally try to avoid doing, use myself as an example. Two weeks ago, after three months of hassle and bureaucratic wrangling, I succeeded in refinancing the old homestead. (The appraisal was the biggest challenge. I live in a small and eclectic neighborhood where comps are hard to find and appraisers are understandably very conservative these days.)

The reward for my efforts was a 5/1 ARM at 3.875%, no points. Thinking about that rate still makes me smirk. It is probably even money that inflation over the next five years will average more than 3.875%, meaning that the expected real cost of the loan is zero. The interest I pay will be counterbalanced by the erosion in the value of the principal.

And then there are taxes. Whether or not mortgage interest will have an impact on your tax bill is not as simple a question as you might think, or as it should be. There is the issue of the standard deduction: if your itemized deductions aren’t safely bigger than the standard deduction then the net effect of mortgage interest on your taxes could be small to zero. And at the higher end of the income spectrum all deductions "phase out."

But for me, as for many people, mortgage interest works out to be a straight-up reduction in taxable income. Best I can figure, our marginal federal income tax rate for 2011, the first full year of the new mortgage, will be 36%. So for every dollar I spend in mortgage interest, the tax bill will go down by 36 cents. Put another way, on an after-tax basis that 3.875% rate is just 2.48%.

I’ll borrow at 2.48% all day long. Seriously, I am willing to borrow as much money as is offered at that rate. I’ll take a thousand, a million, a billion, whatever. I may not be as good an investor as I think (few of us are) but I am quite certain I can get a return north of 2.48%.

And just to be clear, for me, investing the money is explicitly the point of the mortgage. I have the liquid assets to pay it off at short notice if that ever became necessary. For example, it is more than conceivable that at some future date interest rates will be much higher and the positive effect on my tax bill will be lower. In the meantime, I am quite happy to borrow this cheap money and to accept the government subsidy that makes it even cheaper.

It is important to remember that the tax deductibility of mortgage interest is a discount on something of value rather than a goal itself.  The heretics argue that paying a dollar to get 36 cents back from Uncle Sam doesn’t make sense. If that was what was going on, it wouldn’t. In fact, I’m paying the $1 as a year’s rent on about $26. I think I can put $26 to profitable use. The 36 cents is a discount, meaning I am really paying only 64 cents to rent $26. That’s a great deal, even if it is boring and conventional.

On the remote chance that the term fiduciary does not ring any bells, let me explain. Investment advisors and managers, including, for example, mutual fund companies, are fiduciaries. They are required to put their clients’ interests first, which basically means watching over client money as they would their own. Of course, there are limits to this, nobody would expect a mutual fund company to lower fees out of fiduciary responsibility, but by and large this works and consumers get what they expect from the relationship.

At the opposite end of the trust spectrum are ordinary salesmen and the ordinary profit-maximizing companies for which they work. Of course, the great majority of people and firms we do business with fall into this category. We know this and think nothing of it. When the waiter suggests dessert, nobody indignantly objects he is not putting the interests of the diners ahead of that of his employer. Ditto for the salesgirl at the mall who says you look great in those pants. Again, this system works and consumers get what they expect.

Stockbrokers, for several reasons, fall somewhere in the middle. They are not fiduciaries, but are expected to temper their own desire for profit with that of their clients. The legal requirement is that the investments they sell must be "suitable." They need not be the single most ideal investment for each client, but they do need to be at least plausibly appropriate. If this was the rule at the mall, the salesgirl could sell a middle-aged guy a pair of raspberry corduroy pants, but would be breaking the law if she sold him a pair of pink leather shorts.

It would be tempting to say that stockbrokers are held this modestly higher standard because with investing the stakes are so obviously greater than with a pair of pants. But it is not the amount of money involved that makes us expect a little more than ruthless salesmanship from stockbrokers. We expect nothing more from car salesmen and real estate brokers, for example, and they deal in large transactions too.

What makes stockbrokers different than most other salesmen is that selling what is suitable is, generally, in their own interest as well as that of the client. Unless they are incompetent or criminal, their goal is to build a long-term relationship. Successful brokers commonly keep clients for decades and even serve multiple generations of the same family.  Selling something that the buyer will soon realize was inappropriate is a poor long-term strategy, even if it is sometimes a profitable short-term one.

This is in contrast to the salesgirl pushing the leather shorts or the real estate broker extolling the virtues of a view of the interstate. Both of these people can reasonably assume that the customer is unlikely to do business with them again whatever happens, so they might as well cash in now.

So we expect stockbrokers to give advice that is at least approximately sound partially because most of them do it anyway. But there is another reason why consumers yearn to have stockbrokers held to a higher standard than other salesmen. Investments are complicated things that are difficult for non-professionals to understand and make decisions about.

Other professions that help ordinary folks navigate technical and arcane fields, such as lawyers, doctors, and accountants, are expected to put their clients interests before their own without exception. And those professions have elaborate rules that govern and help avoid conflicts of interest. But in none of those lines of work are the conflicts as common as they are with stockbrokers.

The reason for that is fairly simple. Lawyers, doctors, and accountants charge by the hour. (Well, lawyers and accountants do. How doctors get paid is a little mysterious, often even to them.) At the margin, these professions have some incentive to advise clients to do something that will result in more business, a lawyer could recommend suing somebody, for example, but in general they do not need to talk their clients into things in order to get paid.

On the other hand, under the traditional and still typical model, stockbrokers need to talk their clients into transactions in order to put food on the table. If the broker will make $1000 if the client buys a certain mutual fund, and nothing if he does not, how candid can we really expect his opinion on that fund to be?

That’s a significant and fundamental conflict of interest that can’t be legislated away by declaring stockbrokers to be fiduciaries. In fact, I think that the conflict is so large that making brokers fiduciaries would put them in an untenable position.

Paying financial advisors via commissions on transactions is widely considered to be an anachronism and there has been a slow, multi-decade movement away from it. Fee based financial planners, who generally charge like lawyers and doctors and who are often legally fiduciaries, have become relatively common in the past generation or so. And some brokerages have started offering accounts with fees based on assets under management rather than transactions.

These are encouraging trends. Perhaps in ten or twenty years most financial advisors will be fiduciaries, with incentives that are closely, if not perfectly, aligned with those of their clients.

In the meantime, we still have quite a few traditional brokers who are essentially salesmen working on commission. Although less than ideal, that ought not to be a crisis that needs fixing. We deal with people who make their living selling stuff every day. In fact, perhaps the worst thing that we could do would be to obscure the nature of that relationship. Relabeling stockbrokers without changing the underlying nature of their incentives introduces the danger that consumers will forget how the broker makes his living. Despite what he says, you may look ridiculous in those pants.

Kiyosaki in Canada

The Consumerist asked the other day Is Rich Dad Robert Kiyosaki Getting Rich Off Suckers? Excellent question. Let’s examine it logically.

1. Kiyosaki is rich.

2. What he does for a living is sell books and seminars.

3. Those books and seminars are basically worthless.

4. Purchasers of those books and seminars are therefore suckers.

5. Ergo, Kiyosaki has gotten rich off suckers.

It seems that the Canadian TV show Marketplace did an expose of Kiyosaki in January, which took a little while to get noticed South of the Border. It’s a classic bit of earnest TV journalism, complete with hidden cameras and ambush interviews.

I could only bring myself to watch about half of it. (It’s 22 minutes long and available at the last link.) It’s not that I don’t think Kiyosaki is a snake oil salesman in a fright wig, it’s just that he is so obviously a charlatan that a long investigative piece on him has a shooting fish in a barrel aspect. What’s next? 22 minutes of evidence that drivers routinely ignore speed limits?

Feeling Rich

Continuing the firm-grasp-of-the-obvious theme, the Wall Street Journal’s Wealth Report on Monday carried the headline Taxpayers Who Earn $300,000 a Year Don’t Feel Rich. How true. Perhaps Obama’s policy should be modified into raising taxes only on those who think of themselves as rich.

I wonder what percentage of Americans would pay higher taxes under that scheme. The closest I can find to an answer is a Gallup survey from 2006 in which 5% of Americans said they “have more money than they know what to do with.” Gallup also tells us that for the past few decades, around 60% of Americans have felt that wealth should be more evenly distributed than it is, and that most of those felt the government should tax the rich accordingly.

The obvious problem being that everybody has a different definition of rich, generally some multiple of their own level of wealth. We can all probably agree that the private jet and domestic staff crowd are rich, but the inconvenient truth is that there are so few of them that raising their taxes isn’t going to move the deficit needle much.

The WSJ item discusses a dentist in Boulder, Colorado who makes $320,000 a year. She attained minor celebrity when she told ABC News that she may cut back her practice so that she makes only $250,000, and thus escapes a tax increase. Yet another example of a millionaire who is bad at personal finance.

I strongly suspect that she doesn’t understand how tax brackets work. She is suggesting cutting back her hours by 22%, from 50 to 39 hours a week, let’s say, because although she is willing to work 11 hours a week for $46,900 net of federal taxes, she won’t do it for $44,800. Well, I suppose anything is possible….

December Case-Shiller

This Tuesday S&P delivered it’s update on house prices for December 2009. The national story was a duplicate of the previous month, down slightly in absolute terms and up slightly when seasonally adjusted. But there was some inspirational news in the report. Las Vegas was up 0.2%, ending a losing streak of 39 consecutive down months, totaling a loss of more than 55% of the value of the average Vegas house. If Vegas can stop going down, prosperity must be just around the corner for the rest of us.

Now, I didn’t think that this month’s update was interesting enough for a full post, so I shouldn’t criticize others for not discussing it. But I will anyway. The New York Times apparently didn’t cover it at all. [Actually, they did. I guess it's just not indexed properly.] Do a search for the C-S index on nytimes.com and you get a list of regularly spaced end-of-month articles ending with January 27, 2010. I guess they needed the space for more important stuff. Like [See also] this  front page article which told us, without citing a source, that the number of homeowners whose houses are worth less than 75% of what they owe is “projected to climb to a peak of 5.1 million by June.” I emailed the author asking where this came from. He did not reply.

At Least I Don’t Live There

Much as I enjoy griping about the various governments with jurisdiction over me, I prefer to amuse myself with stories about governments doing what they do someplace else.

From California, specifically in San Francisco, comes the story (via The Big Money) that “The California Alcoholic Beverage Control agency is cracking down on bars and restaurants that make their own “infused” drinks, such as limoncellos.” And they say that California is ungovernable.

And then there is France. The UK Telegraph carried an article Wednesday entitled “Anti-smoking advert with sexual innuendo shocks French.” If you are thinking that an ad with sexual innuendo that shocks French people must horrify and confuse Americans, you are right on the money. (Go ahead, follow the link. I’ll still be here when you get back. It’s SFW. Barely.) Admittedly, the anti-smoking campaign is from a private group, not the government, but still.

And we will end our world tour in New Zealand, where, Weakonomics tells us, a girl auctioned off her virginity to pay for college. (She allegedly got $30K USD.) Of course, this would not be legal in the Land of the Free. Here the girl couldn’t even get a Frisbee for filling out a credit card application. We have rules, you know.

I was hoping that the comments on the Weakonomics post would discuss the morality of the transaction or possibly even if $30K was a good price. Instead our old friend Kosmo raised a more interesting question: if it were legal in the US, would be taxed as income or capital gain?

So ’tis the season to think about, and write about, schemes and tricks to minimize your tax bill. For example, the AP ran an item the other day discussing the rather unlikely maneuver of teenagers opening Roth IRAs.

It’s an idea with some intuitive appeal. As readers of this blog know, Roths are attractive if you believe that the tax rate paid today is likely to be lower than what will be paid when the money is withdrawn from the IRA. A teenager with a tiny income, and thus a low marginal tax rate, certainly qualifies.

And there is the tremendous emotional appeal of "the magic of compounding" that miracle of mathematics that will drastically increase the IRA balance during the very long journey to retirement. Even with only 5% annual return, after 50 years $1 would grow to $11.46. Imagine how grateful your child will be when they retire and realize the foresight you had in making them save way back in 2010.

Of course, there are some complications. Although there are no lower bounds on the age of a person opening or contributing to an IRA, a newborn baby could, in principle, do it, contributions cannot exceed a person’s earned income. So the kid in question has to actually make the money himself in a job of some kind. Investment income doesn’t count. (And is in any case taxed at the parent’s rate, which takes away much of the attraction of a Roth.)

And the child has to earn the money in a real bona fide job, preferably with W-2s and/or 1099s. The youngster has to file taxes just like a grown-up and pay Social Security and Medicare taxes. You can hire your kid yourself, but you would need to be prepared to demonstrate to an IRS auditor that it was a real job that involved real work and that you paid a reasonable wage for it. (No paying Junior $5000 to wash your car once a month.) More importantly, payroll taxes would have to be paid on the child’s income, so if your only goal is to stash some cash in your child’s Roth this is a poor idea.

But many high schoolers do have real part-time jobs, as grocery baggers, waitresses, lifeguards, runway models, etc. You don’t need to force them to save this income. You can give them the money to put in an IRA, it just can’t be more than they earned.

So is this a good idea for you and your kid? My answer is possibly, but not likely.

Young people generally do not save a lot. There are those who attribute this to ignorance or foolishness, but I disagree. It is the natural life cycle of personal finance. Younger folks have significant expenses, low incomes, and an expectation that later in life they will have higher incomes. The rational thing to do under those circumstances is what most of them actually do, go into debt while young and pay it off in middle age.

Imagine a sixteen year old who earned $5000 last year. Two years from now he expects to go to college and start acquiring student loans to pay for it. Does setting aside $5000 for retirement rather than borrowing $5000 less for college make any sense? Well it could, if he expected that the interest rates on the student loans would be lower than the return he will make in the IRA. But that is not very likely.

More likely, the teenager will want to apply his savings to college.  (Actually he’ll want to apply it to a car. His parents will want to apply it to college.) And for that purpose there exist 529 plans. Like a Roth, a 529 allows after-tax contributions to grow tax free. Unlike a Roth, you can withdraw the money to pay for college. And the contribution limits are much higher. Of course, the teenager will miss out on the fifty years of compounding trick, but let’s face it, even if he was grateful, it is doubtful you will be around to be thanked.

I am not sure if I have said this unequivocally before, but I am a millionaire. So, using the level of scientific inquiry typical of Smart Money and its ilk, let’s validate their secrets using this sample of one.

1. “You may think I’m rich, but I don’t.”

The "I don’t" part is basically true, but I’m not so sure about the "you may think I’m rich" part. When you get down to it, a million dollars ain’t really that much money. Something like 1 in 16 US households has a net worth north of a million. Equating millionaire with rich made sense a hundred years ago, but today I think the lifestyle most would associate with rich would start at around $10 million in net worth.

2. “I shop at Wal-Mart . . .”

Basically true, but I’m more of a Target guy. And I live in an under-Wal-Marted part of the country. That said, if you’ve never been to Wal-Mart at 5am on Black Friday you’ve never really seen America.

3. “. . . but I didn’t get rich by skimping on lattes.”

Well, duh. (See my clever discussion of lattes here.)

4. “I have a concierge for everything.”

Is this a joke? They are talking about a paid agent who will score you tickets and dinner reservations. I have never used such a service, have never considered it, and frankly wouldn’t know where to find it if I wanted it. As far as I know, nobody I know has ever used such a thing.

5. “You don’t get rich by being nice.”

This one doesn’t feel right to me, but it is so vague it is hard to mark it down as false. Certainly, guys like Warren Buffet made their fortunes by buying stock from some people for less than it was worth and then selling it to others for more than it was worth, and that is not very nice, is it? But in my experience, being a charming guy people don’t mind spending time with will get you pretty far in life. I, on the other hand, am unemployed.

6. “Taxes are for little people.”

The person who said this went to jail for tax evasion. In fact, much as they may resent what they pay, the little people account for just a small slice of federal income tax revenues. As SmartMoney concedes, 1% of taxpayers account for 40% of taxes, and the top 10% pay 70% of the total. Moreover, contrary to popular assumptions, this has been getting more skewed (i.e. progressive) over time. In 1980 the top 1% paid only 20% of taxes. (See interesting chart here.)

7. “I was a B student.”

True. I my GPA was only slightly above a B. But it was at Harvard. That’s brand equity on my resume that has been paying dividends for 20+ years. Where you went to college means less here than it does in just about any other developed nation, but it still counts for a lot. Maybe too much.

8. “Like my Ferrari? It’s a rental.”

Again, this one is so alien to me it sounds like a joke. I used to know one guy who had a Ferrari. He drove it very occasionally on perfect summer days, but mostly just enjoyed having it in the garage. Renting something like that might be a fun splurge, but it is probably a poor investment. Assets such as exotic cars, fine art, and high-end jewelry don’t depreciate much, so owning is relatively cheap.

9. “Turns out money can buy happiness.”

It hasn’t for me. Not yet, anyway. Perhaps I need just a little more of the stuff. Entirely too thoughtful discussion of this here.

10. “You worry about the Joneses — I worry about keeping up with the Trumps.”

The Trumps? Seriously? On what planet is Donald Trump an attractive role model for anything other than implausibly successful self-promotion?

Of course, there is truth to this in that no matter how successful you are, the grass is always greener on the lawn next door. That’s just human nature. And it folds back into the point made above in item #1. Being a middle aged millionaire in America feels common and ordinary because it is common and ordinary. Just being above average does not fill a person with a serene feeling of success. Until you get to the true wealth stratosphere of the billionaires,  there will always be plenty of people around you who are more successful.

Final score: 3 true (2, 3, 7) 2 kinda true (1, 10) 2 dubious (5, 9) and 3 off-the-wall-wrong (4, 6, 8).

[Photo – William Helsen]