Cutting Edge Insights
with Dr. Lee

Twinkies and Your Retirement

In 2012, Hostess Brands filed for bankruptcy protection.

No big deal, right?  Companies, big and small, go under all the time.

Except that this was the second time it had happened – the first time was in 2004.

Ultimately, 15,000 jobs were lost but fortunately the iconic American “cylinder of sucrose” survived as the former company liquidated its assets to other organizations.

As of 12/31/2020, Hostess employed 1,350.

Q:  What does this have to do with real estate investing and your usual topics?

A:  Hold on; we’ll get there.

In March 2021, Mary Beth Franklin, a longtime financial journalist, said:

“Well, it’s official. The three-legged stool of retirement income — pensions, Social Security, and personal savings — is dead.”

She was referring to a (then) newly-released federal report that included data on the average American’s preparedness for retirement (item #3 of the “stool” above) as well as new projections for Social Security benefits (#2 above) going forward.

In the article, there wasn’t much mention of item #1, pensions, other than the history that 60% of private-sector workers had a pension plan in 1980 yet only 4% did in 2020.

Q:  Are you going down the DB versus DC rabbit hole?

A:  No, Robert Kiyosaki (author of Rich Dad, Poor Dad) does it better than anyone.  If I can paraphrase him, the gradual shift from defined benefit (DB) plans to defined contribution (DC) plans in the American workforce was one of the biggest cash heists in the history of our country.

Q:  Are you saying that pensions are good, or that pensions are bad?

A:  I’m saying neither.  I’m saying that people need to know where their money is going.

Q:  Doesn’t the Pension Benefit Guarantee Corporation (PBGC) underwrite the solvency of pensions in this country?

A:  Yes.  And as of its recent report summarizing 2019 data, its multi-employer program contained assets of $3.144 billion that were exponentially offset by liabilities of $66.893 billion.  How would you like that for your balance sheet numbers?  With liabilities twenty-two times the size of your assets, you may not even qualify for a credit card.

Q:  Then are you saying that the DC plans are better?

A:  Nope.  I always say, I give ideas, not advice.  Hopefully, I give ideas that stimulate my readers to think about these things.  DC plans make no guarantee about any actual benefit and instead one’s return is subject to the whims and caprices of the overall equities market.

Q:  Do you mean fake assets?

A:  Well, if you own a share of a company, then you really own a share of a company, but owning 100 or 1,000 shares of Apple won’t make its board of directors seek your advice on how to run the company.  And you would have to own a plethora of shares of most companies to be able to live passively on the dividends.  For example, the average S&P stock pays a dividend of 1.6%.  That means you’d have to amass $5,000,000 in aggregate value in order to live passively on $80,000 per year without killing the goose laying the golden eggs, if you consider $80K on $5M golden eggs.

Now, “fake assets”, that’s kind of harsh, right?  Well, not if I compare a mutual fund to a collateralized debt obligation, the kind that played a role in the great recession.

Q:  Pension plans hardly exist, Social Security benefits are getting redefined, and the average American’s personal savings may be insufficient to weather a financial storm or even live comfortably in retirement. I assume you’re going to recommend that people invest in real estate instead.

A:  Instead, or in addition to, your choice.  Be mindful that:

1. Investopedia mentions a 2015 report from the Government Accountability Office (GAO) that found that the median retirement savings for Americans between age 55 and 64 was $104,000. The GAO notes this sum would only translate into a $310 monthly payment if invested in a product such as an annuity. (As an aside, the same $104,000 would purchase $520,000 worth of investment real estate likely leading to a monthly cash flow of at least $2,000…but it’s easy to digress). More importantly, this $104,000 figure INCLUDES DC plans – 401Ks, IRAs, etc., and is not likely a true representation of someone’s savings outside of any such qualified plan.

2.  You don’t have to own $5M worth of real estate to derive $80K of annual passive income.  The number is probably more like $800K to $1M worth of real estate.  More on that later, if there’s interest.

There is an absolute glut of references this week – sorry about that – I found them interesting.

As you think about that,

Pass the Twinkies.

Until next time,

Dr. Lee Newton

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