Feb 23 2014

4% Rule for Retirement Withdrawals is Nonsense. 4% rule plays off of massive consumption society.

A few weeks ago I happened to catch Suze Orman’s show on CNBC.  One caller had her case analyzed.  She had something like $1.5 million in assets and had her home paid off.  She is clearly in a very good position and puts her within the top 2 percent of households in the United States.  The response that was given shocked me.  She was told she did not have enough and had to keep on working for many years.  Now think about this.  At a 4% withdrawal rate she would be pulling $60,000 a year ($10,000 more than the median US household income).  Plus, she had her home paid off which is the biggest expense for most Americans.  This kind of logic is at the core of the issues we have with those giving out financial advice.  They never correct the expense column assuming it is locked in like a sunrise or having water in the ocean.

The 4% rule recently came under “scrutiny” that it was a good rule under better economic times.  As if we haven’t had our share of wars, recessions, and societal issues in the past?  The conclusion of some of those in the financial industry is that the new safe withdrawal rate is now something like 2.8% and therefore, you need more saved to retire.  Of course, the financial industry survives by fees generated on these balances so to say they are unbiased is an overwhelming understatement.  The problem as well is that this industry of experts never bothers to attack the expense side of the equation.

What is interesting is that most Americans never come anywhere close to saving $1 million in their nest egg.  Most will end up depending on a Social Security check to get by in their later years.  The fact that someone can tell a person with $1.5 million saved and a paid off house that they are far from retirement is amazing.  What should have been said is “how can you cut down your expenses to live on $60,000 a year when your house is paid off?”  Where is the rest of your money going?  Of course, the response is to keep on pumping more money into the financial sector so they can collect more fees along the way.  I’m sure you have caught on at this point that many in this consumption based society want to see you part with your money as fast as possible.

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Feb 13 2014

The bursting law school bubble: Cash cow law schools are facing 30 year lows in applications as applicants confront high tuition and low wages.

Law school is no cheap proposition.  To get into law school requires someone to take three years out of their life beyond the typical 4-year undergraduate experience followed by preparing for and scoring a solid number on the LSAT.  There is also the tiny issue that law school graduates will end up coming out with $100,000 or more in student debt and the employment prospects for graduates are grim to say the least.  As you would expect many aspiring attorneys do have a good head on their shoulders and they have put the pieces of the puzzle together.  Why go into massive debt when the return on the investment is unlikely to pay off?  There is a clear reason why law school applications are now down to 30 year lows even though the US has grown to over 300 million people.  Many law schools around the country will unlikely last beyond the current decade.  Even good programs will likely have to reduce class size or lower tuition to confront the new economic landscape.  Yet no school wants to be the first to reduce costs as to appear as an inferior product so they will likely throw aid at qualified applicants.

Employment market for law students

The employment market continues to get worse for new law school grads:

law school

Keep in mind that over this timeframe the economy has been getting better at least as measured by the stock market and also GDP.  Yet some areas are clearly in a deep contraction signaling that something else is going on.  What is astounding about the data above is that many are not working in fields that require a law degree.  Also, the overall unemployment rate for the class of 2011 is actually worse than the overall unemployment rate for the rest of the country.  It becomes much more apparent why law school applications are down to 30 year lows.

Yet another thing is the high cost of tuition.  It is one thing to go to law school at an affordable price and struggle in the market.  That is very understandable.  Yet going into the debt that many students are taking on just does not make sense given the above figures.

A big consolidation in the industry has come from places like LegalZoom and certainly the internet has made legal options much more affordable for basic needs and paperwork.  So it really doesn’t make any sense why tuition should continue to go up for law programs.  Schools are merely trying to get whatever the market can support and with easy financing for student debt, this unbalanced bubble continues to expand.  Yet this trend is appearing to hit a threshold.

Even the public is becoming more aware of this.  Take a look at the hive-mind of the world, the internet:

law school bubble

There is going to be some serious challenges ahead for law schools.

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Feb 5 2014

Grade Inflation in the United States: Has our university system made it easier for students to get higher grades?

I came across a report showing the increasingly higher grades reported at our nation’s public and private universities.  What happens when no one is average when it comes to grades?  Is it that students are all of a sudden more intelligent?  I think a large part of this grade inflation is also coming from instructors adapting to a crowd that is simply more intolerant to lower grades because of what they pay for college.  Parents have inflated the perception of the newer generation and sadly, the current economy is like a cold towel on the perception of many young Americans.  Also, you have to wonder if because of the internet, is cheating simply more rampant?  Obviously technology can be both a gift and a crutch for many students.  The grade inflation data is actually stunning though.  In the 1930s the average GPA at American colleges and universities was something like 2.35.  In the 1950s it was up to 2.52.  Where do things stand today?

The Great American Grade Inflation

It is rather clear where things have headed when it comes to grades:
Grade Inflation

Source:  Grade Inflation

In 1991-1992 the average GPA was at 2.93.  For the most recent set of data, it is now up to 3.11.  What is more interesting is that at private schools, the inflation figures have gone up more quickly.  Obviously with many of these private institutions now charging more than $50,000 per year, you wonder if universities are making sure they keep their clientele happy instead of truly measuring intelligence.  After all, if the average is a 3.3 (a solid B) then that means there really is no true average at the school.  The vast majority are above average.

The long-term trend also highlights this change:

Grading US

What was interesting in reading through the data is that grade inflation at community colleges was not pervasive.  These are the lower cost alternatives of the higher education system but this also makes you wonder if higher costs are somehow associated with higher grades.  One of the big reasons cited for this is:

“(Grade Inflation) The author believes that the resurgence of grade inflation in the 1980s principally was caused by the emergence of a consumer-based culture in higher education. Students are paying more for a product every year, and increasingly they want and get the reward of a good grade for their purchase. In this culture, professors are not only compelled to grade easier, but also to water down course content. Both intellectual rigor and grading standards have weakened. The evidence for this is not merely anecdotal. Students are highly disengaged from learning, are studying less than ever, and are less literate. Yet grades continue to rise.”

This is probably the main reason.  We have a culture that is paying a very high cost for education and because of this, more is included to appease the customer.  Think of the mulit-million dollar gyms and complexes that are built at universities.  There is little to believe this makes one smarter at math or science but it is a direct reason for higher costs.

We seem to live in a culture where inflation is present in many areas, including tuition and grades.

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