Ready for Retirement? Hope is Not a Strategy

Published: Fri, 04/13/12

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In This Issue:

Breaking News from Dick Young on the Koch Brothers/Cato Battle By Richard C. Young
Funding Your Neighbor’s Pension By E.J. Smith
An F for Indiana The Editors
Raytheon Small Tactical Munition (STM) The Editors
Ready for Retirement? Hope is Not a Strategy By E.J. Smith
45 Medical Procedures You Should Question The Editors

Exclusively Online:
VIDEO: US Attorney General Eric Holder’s Ballot to Vote Offered to Total Stranger The Editors
VIDEO: Ayn Rand & the Prophecy of Atlas Shrugged – Documentary Movie Trailer The Editors

Young Investments Client Letter: Sign up to get the letter mailed directly to you by clicking here.

Client Letter: The Search for Yield
With yields of less than 1%, high-grade short corporates have become less appealing. To offset the lower yield, we are seeking areas of the lower-rated (BBB and below) corporate bond market. We have an especially favorable view of high-yield bonds. With a shortage of yield in the bond market and rising risk appetite, a 6-7% yield from high-yield debt looks attractive. To gain exposure to high-yield bonds, we recently began purchasing— Find out what fund we’re buying by clicking here!

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Breaking News from Dick Young on the Koch Brothers/Cato Battle

Linked here is this morning’s NRO post from Cato’s Gene Healy and Jerry Taylor regarding serious flaws in the Koch brothers’ public attack on the Cato Institute. Cited within is a declaration attributed to David Koch outlining a need for a truly “independent” board, followed by a list of Koch-proposed directors. Referring to this crowd as independent is preposterous. Also included is commentary from David Koch regarding what Mr. Koch refers to as Cato’s subpar performance. Mr. Healy and Mr. Taylor refute this by referencing how the independent University of Pennsylvania ranks Cato’s performance. Cato ranks ahead of Heritage Foundation, American Enterprise Institute and Hoover Institute.

I have been in the business of economic and monetary research for nearly five decades. My independent view of the above is that Cato Institute indeed stands above the other three mentioned. As to Cato not being as effective as it could be, perhaps if either David or Charles Koch were to have attended the recent packed-to-walls Cato summit meetings in Naples and Palm Beach, they might revise their thinking. In Palm Beach I spent time with CEO Ed Crane and chairman Bob Levy and attended lengthy and excellent presentations by both Mr. Healy and Mr. Taylor. In fact I participated in every Cato policy session and workshop I could fit in. Years ago, I traveled the globe speaking at sizable investment seminars. None of the seminars I spoke at were anywhere near the caliber of the summits offered by Cato Institute.

No matter how and rich and successful they may be, I think the path the Koch brothers are on regarding the Cato Institute is just plain nuts. In this regard I have recently increased my personal annual financial support to the Ed Crane/Bob Levy-led Cato Institute by 50%. I am independent of the Cato Institute, as I am of the Republican and Democratic parties. My sole interest is obtaining economic and monetary information that allows me to formulate global investment policy on behalf of my family investment management firm. To this end, Cato Institute delivers the goods in spades.

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Funding Your Neighbor’s Pension

The key to understanding the public pension mess is the expected rate of return—a guarantee at the local and municipal level of 8% or higher.

How many of you in the private sector are earning 8% risk free? The five-year Treasury, for example, yields a shade over 1%.

Here’s the public pension trick—the higher the expected future return, the less needs to be saved today. Cities and towns have overpromised and overspent. The hope is that the stock market will come to the rescue.

Think about this from the private-sector viewpoint. Let’s say you retire with a $1-million portfolio. You draw 4% a year, a reasonable draw. That’s 1% per quarter. If you can maintain the balance every quarter, then you draw $40,000 in a year.

Let’s say you retire from the public sector. Using an expected rate of return of 8%, the payout is still $40,000, as in my example above. But the amount that needs to be invested is much lower. Only $500,000 has to be invested, rather than $1 million.

That’s how states and municipalities get away with saving about half of what they should. The assumptions they use for future returns are overly optimistic. The day of reckoning is pushed out beyond most politicians’ careers, and allows them to spend more on pet projects today.

The returns in Rhode Island over the past 10 years have been closer to 2%. Does the retiree make up that difference? No. Do the employees contribute more to the fund? Not much. Taxpayers are responsible for funding the gap.

Imagine how high the real liabilities of public-sector pensions are if the actual rate of return of around 2% is used? If it takes $500,000 at 8% to generate $40,000, and $1 million at 4%, then it will take $2 million at 2% to achieve the same payout. That’s four times $500,000.

Once you start using realistic expected rates of return, you see how truly ugly this pension mess is—and how underfunded these plans really are.

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An F for Indiana

There is only one Republican in Indiana that the NRA has given an F to for lack of support of the Second Amendment to the constitution. That Republican is Sen. Dick Lugar. It’s rare that the NRA takes a position in a party primary, but that’s how bad Lugar’s record on the Second Amendment is. For those who don’t remember, Lugar voted to confirm both anti-Second Amendment Supreme Court justices nominated by President Obama. The confirmation of Justices Sonia Sotomayor and Elena Kagan has hurt the Second Amendment rights of Americans. Confirmation gives the justices the opportunity to espouse their activist views on the Constitution in every case they participate in at the Supreme Court. The Senate needs new blood. After decades in the upper chamber, Dick Lugar needs to be retired by Indiana voters.

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Raytheon Small Tactical Munition (STM)

With the ability to precisely engage targets, Small Tactical Munition’s advanced warhead delivers the required effects while significantly reducing the risk of collateral damage. At only 13.5 pounds and 22 inches long, STM is the smallest air-launched weapon in the Raytheon portfolio. Designed for employment from manned and unmanned aircraft systems, STM is ideally suited for applications where weight is a critical factor, such as on unmanned aircraft, rotary-wing scout platforms and light attack aircraft.

STM enables the user to shape an attack through a simple, graphical user interface. The user can choose to guide the weapon precisely to the target using GPS coordinates, inertial navigation or laser designation. To maximize kinetic effects and lethality, the user can preselect the option to engage the target with a height-of-burst, point-of-impact or fuze-delay detonation.

STM’s light weight and high degree of maneuverability, coupled with its advanced semi-active laser seeker, enable the weapon to precisely engage moving targets.

Raytheon flight tested two STM weapons on two separate passes from a Cobra™ UAS. The GPS-INS guided the weapons to a mid-course position where the semiactive laser seeker precisely guided the weapon to the target, achieving all test objectives.

Source: Raytheon

Recent News: Raytheon Tests New Weapon Designed for Unmanned Aircraft Systems- October 22, 2010

Absent comprehensive tort reform, doctors are often forced to recommend procedures in order to protect themselves from liability claims. The cost of healthcare is skyrocketing, and the over-prescription of so many procedures is part of the problem. The issue of healthcare reform is fresh in Americans’ minds because of recent litigation in front of the Supreme Court. With the hope that Obamacare will be deemed unconstitutional, now is the time to look for alternative ways to decrease the cost of care. In 2005, Cato Chairman Bob Levy outlined the Do’s and Don’ts of Tort Reform. There is much to learn about the limits of federal tort reform efforts from Bob’s analysis and more to learn about what is incumbent upon state politicians in order to protect their constituents.

Tort litigation is an enormous business, much of which never is given a public showing. In 2006 the Mercatus Center reported estimates that “90 percent of potential tort cases are never even filed, and perhaps 90 to 95 percent of the filed cases never see the light of court. What happens to all of those cases? Most of them are settled quietly and discretely; we never get to observe the agreements or how they are reached. Thus, as perhaps 99 percent of the human behavior within the tort system occurs out of court and out of sight, it becomes difficult to measure the effects of tort reforms.” So while liberal organizations often downplay the effect of tort reform legislation on medical costs, the estimates they use don’t paint the entire picture.

There is new hope that physicians and patients are recognizing the overuse of certain procedures and are working toward finding alternatives. On its Choosing Wisely website, the ABIM Foundation has listed 45 procedures that could be overused, resulting in costing patients billions of dollars. The list was generated by nine specialty societies representing 374,000 physicians. Each society suggested five questions patients and physicians should ask. See them all by clicking here.