30
Jul
Posted in Future of Wealth by Roger, the Amateur Financier |
Ah, retirement. The (long-term) goal of just about everyone currently working, the time when we can call it a lifetime and relax, enjoying the fruits of our labors. Reaching sixty-five, getting a gold watch, going to Florida and spending the rest of your days in the sun, enjoying life as you live off a fat pension, generous Social Security payments (particularly if you use appropriate Social Security strategies to maximize the amount of income you receive) and the gravy of any personal savings or investments, to spend however you want.
Of course, that whole paradigm is changing rapidly. (Not that it existed for very long; Social Security dates back only to the Great Depression, and pensions haven’t existed for much longer.) First, people are living much longer than they did in the past, and are much healthier and more active on reaching retirement age. Pension plans originated with railroad workers, as a way to compensate workers who spent decades in physically demanding jobs who, when they reached retirement age (IF they reached retirement age), would be unable to do any work to support themselves. Social Security developed much in the same way, as a way to support those too old and infirm to provide themselves with income through their own labor.
But the days of most people working hard on the rail yard (or farm, or in factories) are largely behind us; many, if not most, workers do white collar work now, and balancing budgets and attending meetings doesn’t leave your body as physically drained as decades of physical labor. There’s also been a great change in life spans over the decades; when Social Security was enacted, it was designed to cover only the exceptionally long lived, and then, only for the few years they had left on Earth. Now, living to seventy (or even longer) is the norm, and spending decades in retirement is common.
Next, ‘three-legged stool’ model of retirement, based on pensions, Social Security, and personal savings, is rapidly collapsing. Pensions are becoming a relic of the past (neither of the two permanent jobs I’ve held since graduating offered any sort of pension to their rank and file, not that I stayed in either position anywhere near long enough to earn a pension). Social Security faces some trouble in the near future, as outgo will soon match, than exceed, the current tax revenue devoted to it; solutions to solve this problem exist, but usually amount to increasing the Social Security tax or cutting down benefits. This leaves a large, and only likely to increase, amount of retirement funding responsibility on personal savings.
A train, in honor of the first pension recipients
On the plus side, there are a large and ever increasing number of ways to save and invest for retirement. The last big change is that funding retirement is increasingly in the hands of the retiring individuals. This has its downsides; now, everyone from waiters to lawyers, doctors to plumbers, blue collar workers to white collar pencil-pushers has to be knowledgeable about investing, if they ever hope to quit their day job. On the plus side, this increasing dependence on your own actions makes it possible to control when you’ll retire; save aggressively, and you can retire early, save very little (or nothing at all), and find yourself working to the normal retirement age or longer.
The Future of Retirement
So, what does the future hold for retirement? We’re probably going to see a much larger range of retirement ages. Many people will find upon reaching the normal retirement age, that Social Security is not nearly adequate to maintain the lifestyle to which they are accustomed and their savings aren’t enough to bridge the gap. Many baby boomers who aren’t going to receive pensions (as well as members of Generations X and Y, if they don’t start saving and investing more for retirement) will find themselves forced to work longer to make up the difference. On the other hand, those who start early, save aggressively, and live reasonable lifestyles will be able to retire much earlier, in their fifties, forties, or possibly even their thirties. The end result is a wide range of expected retirement ages, from ‘middle age’ to well into your golden years.
Partially due to these early retirees, the concept of retirement is going to be reconsidered. No longer will it consist of going to Florida (or Arizona, or any of the other retirement meccas), living in a ‘retirement village’ with a bunch of other seniors, and whiling away the days with shuffleboard and Mah Jong. Instead, retirement is going to look different for different people; while a few may like the retirement village lifestyle (particularly when they become too infirm to care for themselves), other possibilities will exist. Many retirees use the opportunity to see the world, take up new hobbies, or fulfill lifelong dreams. As aggressive savings and opportunities for alternate ‘side’ income become more common, there’s likely to be a rise of the retired (or at least, working from home) people who live normal lifestyles, except for not going to work every morning.
Finally, there’s probably going to be a rise in ‘mini-retirements‘ or sabbaticals spread throughout the average lifetime. Rising savings rates and increasingly common alternative income sources (from blogging to real estate investing) combine with the fact that most people will switch jobs many times throughout their lives (often with a break in between as they attempt to find a new position) will make taking off for several months to a year or two during the ‘normal’ working years a more attractive prospect.
Where do you think the future of retirement will take us? Will it be mostly the same as what we see now, or will it be nearly unrecognizable to the average twentieth century retiree? Does anyone else really like the concpet of mini-retirements?
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28
Jul
Posted in Future of Wealth by Roger, the Amateur Financier |
One of the (arguably) biggest changes brought about by the rise of the Internet is the spread of entrepreneurial assets and opportunities. It’s now possible to start a business from the comfort of your pajamas (as I’m doing while writing this article), work with employees, contractors, or other business contacts from around the world, and build a sizable company presence, all from behind your computer.
At the same time, many of the services needed to run a company are increasingly available through independent agents. Where at one time you would need in-house groups for legal, marketing, or sales work, it’s increasingly possible to find outside firms that will provide such services, making you a client rather than them your employees.
Smaller, Faster, and More Agile
Welcome to the new business model, where just about anyone can become a business owner. Barriers to entry are decreasing (particularly when it comes to online businesses; as long as you have a personal computer, or even just access to one, you can become a business owner), supporting services are easier and cheaper to access, and groups, magazines, and online resources are helping the confused would-be business owner to get the information he or she needs to run their company. These are just some of the reasons that over 99% of current companies qualify as small businesses.
This process is only going to continue in the future. Besides the ever increasing technology base continuing to lower the bar on what can be done via the Internet, there’s the tendency for companies to beget companies to provide needed services. As more small companies look to incorporate or deal with other legal matters, legal groups catering to small companies arise. As small businesses develop the need to increase their sales force, sales companies arise or other selling opportunities develop (just look at the rise of affiliate marketing online). Increasingly, the key services required to start or grow a business are available without having to devote part of your business itself to running them.
It’s even becoming easier to outsource manufacturing and other primary business activities (so called contract manufacturing). Soon, it could be possible to have a business that produces something (let’s call it widgets), creates a legal structure to support it, and sells it, all in different countries. And it need not be a globe bestriding megacorporation in order to do so.
Dividing and Conquering
That brings us to the large companies, the ones who are big enough to have multiple departments handling a variety of different functions. If the writers of Future Wealth
are correct, they’re going to be under increasing pressure to split their businesses into component pieces. So, the legal team from Ford might be separated into its own law company, providing legal services to a variety of other corporations (which may or may not include Ford itself, depending on Ford’s needs).
Increasingly, businesses will bring in outside corporations to fulfill the functions that the business needs. By doing so, they can focus more of their energies on their main money-making activities. If it’s possible to get legal, marketing, sales, or even janitorial services less expensively from outside corporations than from internal divisions, why not opt for the former option, and allow the division in your company that provides the service to go its separate way, succeeding or failing on its own merits.
The Future of Corporations
So, what does the future look like if these trends hold? First, the nature of corporations will change greatly. Instead of mammoth organizations designed to provide all the corporations needs, there will be smaller ‘business units’ that focus on one aspect of the business’s overall mission (or a small number of related functions). Most companies will stick with a relatively small number of these business units, to save on complexity and the inevitable layers of management that come from having disparate groups all operating under one roof.
Second, those corporations that do grow large and take on many different business units will be less likely to feel compelled to build a ‘whole’ business out of the parts. If there is an economic advantage to having your own legal department (either one that you acquired or one that you built from scratch), companies will do so, but otherwise, why not hire an outside firm? On the other hand, if there is an advantage to acquiring another business or business unit, regardless of its current purpose, why not acquire it? As long as adding it to your empire doesn’t unduly increase the difficulty in managing your company, there’s little downside in doing so.
Finally, there’s going to be an ever-increasing market for services marketed toward other companies. While there may have been a need in the past to have at least some utility to the average consumer in the products that your company made, it’s increasingly possible to market your services entirely to other companies. As more companies try to streamline their businesses, it’s more and more possible to make good by marketing your services to cover the functions that they need, but don’t want (or can’t) provide themselves.
None of these changes are new, really; corporate raiders have been breaking up companies into component parts to find some that are profitable since the eighties, outsourcing was big in the nineties (and continues to be), and business to business transactions have been important pretty much since businesses began. The difference now is the increasing trend toward these traits for all companies, at all levels, from huge companies to lowly start ups. Who benefits the most from these trends will remain to be seen.
Note: as always, I’m not a professional, and these are just my opinions on the future of the corporate structure. If you need to know more about where the future will lay, a consulting company is a better source of guidance (as well as a good example of a specialized business unit like the ones discussed in this article).
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26
Jul
Posted in Future of Wealth by Roger, the Amateur Financier |
(This is the first in a series of posts where I’m looking at the possible changes we’ll see in investing and other financial pursuits in the not too distant future. It’s inspired by reading (well, listening to the audiobook version of) Future Wealth, an interesting book about possible changes we could see in the how wealth is considered in the future. I’ll look at some of the ideas raised, starting with the idea of people ‘going public’.)
There are plenty of investments out there, a fact to which my Investing 101 posts will readily attest. Stocks, bonds, and mutual funds, among numerous others, are all available for the individual or corporate investor to add to their portfolio. As a result, you can invest in corporations, investment firms, even government debt.
But for most of history, you couldn’t invest in individuals. There was no way to buy stock in Thomas Edison, or get a bond backed by the earning power of Andrew Carnegie. Sure, it was possible to invest in the companies that they founded, but the men themselves (or rather, their financial activities and money making potential) were not up for bid. The same goes for all there employees; from the highest ranking vice president to the lowest man on the assembly line, the only way to profit from their productivity was indirectly, via the companies they supported. But lately, that’s all been changing.
The Market for People
Yes, lately it’s become possible to invest in individuals, in much the same way as you do in companies. While it’s still not nearly as common (or as easy) to buy bonds backed by the earning power of an individual rather than a company, there’s an increasing ability to invest in your fellow people directly. In general, there’s two possible ways such an investment could be structured:
1) Bond-Like: The more popular method, where investors loan money to the ‘bond’ issuers. The loan recipients have the obligation to repay the loan with whatever interest and other agreements are put into place, but have no obligation to share a portion of their future earnings, from activities made possible by the invested money or other, unrelated endeavors. The first, and probably one of the more famous, example is ‘Bowie Bonds‘, a bond issue backed by the musical catalog of David Bowie prior to 1990. The purchaser of such bonds would get interest generated by the proceeds of those songs in various forms, but had no claim on Bowie’s future income from other sources.
More recently, and much more widespread, are personal loans made through websites like Prosper and Lending Club. If you are an investor in such services, like myself, you’ll buy portions of another person’s loan, and receive regular payments in return (which cover both interest and principle). As with corporate bonds, that’s all you’re entitled to receive; you have no claims on the future earnings of the person, even if your investment made it all possible.
2) Stock-Like: If you do want to have the upside potential when investing in other people, you need to have more of a stock-like investment, trading your money for partial ownership of the person (or at least, of their future income; owning people is largely illegal, and entirely immoral, in modern times). There aren’t too many people who have done arrangements like this, but one woman who is trying to trade her future income for money now is Kjerstin Erickson, who is offering six percent of her future lifetime income in exchange for $600,000. The upside possibilities are impressive; by getting in at the start of her entrepreneurial career, if Ms. Erickson manages to become a billionaire, her investor (or investors) could wind up with $60 million, for example.
Of course, that’s fair from a guarantee, as any number of would-be billionaires can tell you. If Ms. Erickson doesn’t earn at least $10 million over the course of her lifetime, the investors won’t even recover all of the initial investment, let alone any profit. If she chooses a low paying profession (she’s currently working at a non-profit) or happens to die *knock on wood*, the prospects for recovering the investment look even worse. Things aren’t all cheers and roses for Ms. Erickson in this situation, either; besides the inevitable sense that she should do something with the money (or otherwise take more risks in her financial life), there’s the fact that her earnings will be decreased throughout the rest of her life. Presumably, she’s considered these facts and decided it was a trade worth making, but allowing others to invest in you might not be for everyone.
Where We’ll Go From Here
So, since our focus is on the future, what does the future hold for investing in people? Well, as mentioned, bond-style investing in people seems to be here to stay, with companies like Lending Club making it a fairly big business already. Peer to Peer Lending, as it is otherwise known, is still not considered as vital a portion of your investing portfolio as, say, stocks, but do represent a useful way to diversify your holdings.
Stock-style investing, though, is rather unproven. Depending on what happens with Ms. Erickson’s bid for investors (along with those of Saul Garlick and Jon Gosier, who are offering three percent of their future earnings in exchange for $300,000), this may be a viable way for up and comers to raise funds. Of course, as mentioned, future entrepreneurs might have to accept more modest levels of income and/or offer a higher portion of their future income for such arrangement to take place.
From there, it’s possible to open up secondary markets in human investments, buying and selling contracts for future income streams in individuals. Perhaps in the future, you’ll be buying and selling ‘people’, or at least, portions of their income, more often than companies. Or perhaps mutual funds will develop that allow you to invest in recently graduated business majors or biochemists. Or maybe college will be funded entirely by selling shares of your future income to interested investors (maybe that will cause incoming freshmen to spend more time studying).
The future is hard to see for certain, but there is a good chance that it will involve investing in people.
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23
Jul
Posted in work by Roger, the Amateur Financier |
I was reading through some of the newest comments I’ve gotten for my ‘Unemployment and Motivation‘ post (still one that attracts the most attention, thanks in no small part to MSN featuring it in a story), and something that was left in the comments made me think. (Yes, I do read and attempt to respond to all the comments I receive, even if it takes me a while.) A reader who called him- or herself DW left a message about going abroad to find employment opportunities, since all the jobs seem to have been outsourced from the US.
That got me thinking. There does seem to be an increasing number of people who are going abroad to make their fortune, or at least are considering doing so. (Austin of Foreigner’s Finances has been living that dream since before he started blogging, to cite just one example, and he seems to enjoy his life greatly.) Add to that the fact that people have been coming to the United States to find a way of making a living since before there even was a United States, and going to a foreign country to work and live has a rather long history.
Plus, this could be the view out your window
Which brings us to the question I raised in the title of this post: Should you outsource yourself? Is it worth going to a foreign country in order to find employment? Do the pros of going abroad outweigh the cons? Well, let’s look a bit closer:
Let’s Go Abroad! – Pros
-Exposure to a Foreign Culture: One of the biggest reasons we go to foreign countries, whether to work or simply to visit, is the opportunity to experience a new and different culture. While you might get a superficial idea of what a country is like from a two week visit, working in a foreign country for a year, a semester, or even a month will allow you dive deeper, getting a better feel for the country and immersing yourself deeper in the culture.
-Building Connections Around the World: In the same vein, working abroad allows you the opportunity to meet and get to know people in cultures and parts of the world to which you’d otherwise never have exposure. While visiting gives you opportunity to see the sights, take some photos, and maybe grab some souvenirs, living and working in a foreign country presents the opportunity to dive deeper into the culture and form connections with the people there. If you’re hoping to have a collection of friends from all over the globe, there are few ways to do so more effectively than spending some time working abroad.
-Money, Money, Money: Let’s be honest, one of the biggest reasons to work abroad is the same as the main reason we work, period: Money. Just like working at home, working abroad is the opportunity to earn money. But because you are working in a foreign country, which uses a foreign currency, you have exchange rates and different costs of living thrown into the mix, as well. If you move to a country with a lower cost of living, where your dollar (or pound, or Euro, depending on where you are reading this) can stretch further, your savings may be enough to provide you with a higher standard of living abroad, or last longer than you thought in said country. In a similar manner, a strong exchange rate for the foreign currency you are making could lead to higher levels of wealth when (or if) you go back to your home country. Think of it as similar to Forex investing; profiting off the differences in exchange rates, and the changes in said rates over time.
Let’s Stay Home! – Cons
-The Language Barrier: This may or may not be a problem, depending on where exactly you do (and what language(s) you speak), but it could end up being a doozy. Particularly if you’re an American, you may not have any skill speaking in a foreign language, and if you move to a non-English speaking country, there will inevitably an adjustment period as you try to learn the language and otherwise get acclimated to your new situation. Even when you learn enough to communicate with the citizens of your new country of work, you’re still likely to have an accent and get funny looks from the natives, even if you could otherwise pass for one. Speaking of which…
-Distrust and Isolation from the Natives: Let’s be completely honest here: not every country is warm and welcoming of foreigners who want to work in their borders. In the US, you can see this in the reactions that immigrant workers get when trying to cross the borders to find a job. Yes, there are countries that will welcome you, even encourage you to come and work in their borders (to go back to Austin, he’s working as an English teacher in Japan, a position I’ve been led to understand the Japanese highly encourage Americans to take), but in many places, you could find yourself mistrusted, or even feared, by your new country mates.
-Homesickness: Unless you have no friends or family that you’re leaving behind, you’re liable to miss your home at one point or another. While the numerous advances in communication and travel technology make it much easier to stay in contact, even across the globe, there’s still no way to work in one country and still climb into bed with your significant other in a country hundreds, even thousands, of miles away (although, the first person who invents such a method will find themselves with a LOT of orders from eager business travelers, among others). Depending on your personal life, this fact alone could destroy any hope of living abroad; at the very least, it is something you should consider.
Should You Seek Your Fortune Abroad?
As you can probably guess, there’s no hard and fast answer to whether it is better for someone go abroad in order to make money. I think, thanks to improvements in communications and transportation technology, as well as the increasing mobility of people throughout the world, that it’s easier than ever before to go abroad, whether for a short period or for the rest of your life, to find work, and to live in a foreign country. (Even one where you don’t speak the language) But whether that’s the right choice for you is up to you and your loved ones.
Would you consider working abroad? If you have worked abroad, would you recommend it to others? (I’m looking at you, Austin!) Do you think that advances in technology make it easier to work abroad nowadays?
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