With Christmas upon us, many readers turn to thoughts of generosity, kindness and good will. Shane in Alaska is wondering: what happens if a society is guided by greed?
Why is the destiny of a society guided by corporate greed?
— Shane L. Wasilla, Alaska
We’re not in the “greed is good” camp, but we’ve yet to see an economic system that can run entirely without it.
Greed is really just an extreme form of ambition for material wealth. If we had no incentives to reward ambition, not much would get done. State-controlled, planned economies — in which a government leader or party decides who gets rewarded for what kind of work — generated a pretty poor track record in the 20th Century.
It’s not as if American corporations are completely unrestrained. Labor laws in the U.S., for example, offer better protection for workers’ rights than in much of the developing world. Securities laws protect investors from the most egregious forms of stock market greed by unscrupulous companies that sell shares to the public. (On the other hand, the unfettered rise in CEO pay seems to have no limit.)
So the question, as we see it, is: how should greed be restrained, and who should set the restraints? In theory, we elect a government that acts on our behalf, setting limits based on an ongoing conversation with voters. In practice, the system is broken because of the way campaigns are financed. When companies and industries write their own rules, it’s a lot easier for excesses to creep into the system. The regulation of credit card rates and fees comes to mind: Congress has held hearing after hearing on abusive lending practices but has yet to create real restraints.
Even when elected officials are more responsive to voters than to contributors, Congress has a history of getting it wrong. The Alternative Minimum Tax, for example, was originally supposed to make sure the wealthiest paid their “fair share.” Because the law is flawed, it threatens to gouge tens of millions of middle income taxpayers unless Congress puts it back in its cage. In the meantime, no one has figured out how to make up the billions in lost revenues that repealing the tax will cost.
That leaves the markets as a mechanism for keeping greed in check. The recent collapse of the mortgage market, for example, was fueled by greed on the part of investors and other intermediaries who looked the other way when loans were approved that stood little chance of being repaid. On the other hand, the huge demand for loans that were unsustainable was also made possible by some home buyers who bought more house than they could afford.
Those who overreached are now paying the price with rising foreclosures and tens of billions in losses being reported by banks and other lenders. The market is “correcting” the excesses brought by greed. Unfortunately, such corrections are blunt instruments that often don’t differentiate between those who deserve to lose and those who are collateral damage.
Still, the current effort by the government to provide relief is a reminder of how difficult it is to set broad rules to govern a human behavior as complicated as greed. We all know excessive greed when we see it. But how do you write a set of rules to prevent it?
Us single people are rarely addressed in any of the retirement planning articles and need good information, too. Why do they always use a family of four but never talk about us single, no dependant people?
— Matthew T., Houston, TX
The reason for the “family of four” business is that it’s the most “average” profile available. Statistics are great, but you have to take them with a grain of salt. We have yet to meet the “average” person living in that “median-priced” home.
It’s also good to remember that retirement planning is a dynamic process. We’ve been conditioned to believe that there’s a magic number that if you save that much by the time you reach 65 you’ll be fine.
But no one can reliably come up with that number. How long will you live? How much will inflation erode the spending power of your nest egg? How big a return can you expect to get on your investments? What will happen to Social Security and Medicare?
So now matter whether you’re single or the head of a big household, the approach is still the same. Save as much as you can and see how far you get in, say, 10 years. If you’re feeling comfortable taking risks (your job is fairly secure and you don’t expect to need to tap savings), look for higher returns — without getting greedy and falling for an investment you don’t understand.
And forget 65. It’s an arbitrary line drawn 50 years ago when people didn’t expect to live past 70. If you save hard and invest well for 10 years — and the markets and inflation, forces over which you have absolutely no control, are good to you — you may be able to live off the savings you generate. On the other hand, maybe you see how good an investor you are and decide: 1) your health is good 2) you like to work and 3) you want a higher standard of living than your savings will provide. Some people who retire find they get antsy without work. If you live to be 90, that’s a long time to sit around doing nothing.
Can you tell me whether I should start building a bond ladder?
— Martha, Dover, N.H.
The idea of a bond ladder is to try to smooth out the ups and downs of interest rates by spreading out your savings among bonds that mature a little at a time into the future. By doing so, you eliminate some of the risk that your bonds all mature when rates are low, when rolling them over means locking in those lower rates.
Bond laddering is probably most appropriate for people who are looking to generate a steady income from their savings and avoid locking in the extremes of interest rates ups and downs. But with rates relatively low, this may not be the best time to lock in your savings for the long term.
And bonds aren’t necessarily the best way to grow a long-term savings account. A lot depends on how much risk you feel comfortable with. By investing too heavily in bonds, especially during a period when rates are relatively low, you may miss the long-term potential of other investments like stocks. If you have a long time horizon, your risk of getting hurt in the stock market is diminished somewhat by your ability to ride out a downturn before you have to start relying on the money for income.
So you may want to get some more information and advice from a financial advisor before deciding how to set up a long-term investment plan. The problem with this route is that there’s lots of “free” advice — from people who are trying to sell you a specific investment (because they get a commission) that may or may not be right for you. Financial advisors that work for you will charge you a fixed fee.
Ask lots of questions; make sure you fully understand all the risks before moving ahead. (If you don’t get answers you like, try another advisor.) In the end, you really need to understand where you money is invested and how that investment works — even if you have someone else manage it for you.