February 23, 2024

Economix Blog: Casey B. Mulligan: Varieties of Not Working

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Today’s Economist

Perspectives from expert contributors.

Employment can be a better indicator of labor market activity than unemployment, because unemployment is not the only way that a person can be without work.

The blue series in the chart below shows the reduction in unemployment since March 2012, expressed as a percentage of the population (e.g., in a population of 100 million, 0.1 percentage points means 100,000 people and 0.5 percentage points means 500,000.) In order to correct for the movement of baby boomers into retirement, I used Bureau of Labor Statistics data only for people 25 to 54 years old (this group is about 124 million and has been falling a little). Over the subsequent year, and especially since mid-2012, unemployment was reduced significantly.

Bureau of Labor Statistics

But reduced unemployment is not the same as more employment, because the third labor force classification is “out of the labor force.” Neither the unemployed nor those out of the labor force have a job, but only the unemployed are actively looking for one.

The red series in the chart shows that the “out of the labor force” ranks have increased roughly as much as unemployment has been reduced, and the difference between the blue and the red series indicates the change in the fraction of the population that is employed. For the months when the blue series is above the red series, employment per capita has increased since March 2012.

Because the blue series hardly exceeds the red series, if at all, the large majority of the reduction in unemployment has been associated with offsetting increases in people out of the labor force.

While the reduction in unemployment and the growth in the out of the labor force more or less cancel each other out, jobs are at least being created fast enough to absorb the growth in the working-age population. That additional population increases demand, which contributes to the jobs being created.

Retirements and going to school could increase the number of people out of the labor force, but the data I’ve shown are for an age group in which retirement and schooling are rare. For the 25-to-54 age group, “out of the labor force” typically represents people who are finding ways to get by without working.

Some people moving out of the labor force devote their time to caring for their young children while their spouses obtain cash income for the family. That some of the growth in those out of the labor force has occurred among married people suggests that such specialization in the family could be part of the story. But the fact that this group is growing especially among unmarried people suggests that family specialization explains at best a minority of the aggregate changes.

Unemployment insurance benefits are paid only to people who report that they are actively looking for work. Some unemployed have long been skeptical that they can find a good job and are just going through the motions of job search to satisfy the unemployment program’s requirements (see this testimony to a House subcommittee by Stacey G. Reece, co-owner of a recruitment firm in Gainesville, Fla., who said he witnessed people “applying for jobs only to protect their status for unemployment insurance”).

When such a person’s unemployment benefits run out, he may look less actively for work, which changes his classification from unemployed to out of the labor force.

The termination of unemployment benefits can, and sometimes does, have the opposite effect, because the loss of income can make out-of-work people more seriously consider accepting a low-paying job. But unemployment insurance is by no means the only safety-net program. The Supplemental Nutrition Assistance Program (formerly known as food stamps) is a major and newly expanded safety-net program and does not require its beneficiaries to work or be looking for work. Curiously, SNAP has been expanding while the unemployment rate falls.

People without jobs increasingly take part in the disability insurance program, which does not require people to look for work because “disability” means that the person is unable to work. Medicaid is another major safety program that does not require its participants to work.

A significant part of the recent reductions in the unemployment rate may reflect movements of people between safety net programs rather than any significant change in their job-finding prospects.

Article source: http://economix.blogs.nytimes.com/2013/04/10/varieties-of-not-working/?partner=rss&emc=rss

You’re the Boss Blog: Do You Really Expect Your Business to Get You Through Retirement?

Creating Value

Are you getting the most out of your business?

I’ve been speaking with and working with private business owners for more than 15 years. Most owners have a dream of running their business for their working career, finding a buyer and then riding off into the sunset with no other planning.

Lately, I have been sensing that business is getting better, and I have been told that buyers are starting to make offers much richer than they were even last year. But before you decide to think about selling your business, you need to think through whether you can afford to sell your business. I encourage you to do the math carefully before you make the move to sell.

First, let’s consider some bracing statistics about private businesses that come from the Census Bureau.

  • There are approximately 6 million private businesses that employ people in the United States.
  • Only about 300,000 of these businesses do more than $ 5 million in sales.
  • Only about 150,000 of these businesses do more than $10 million in sales.
  • Private businesses on average sell for between three and six times their earnings before interest, taxes, depreciation and amortization, or Ebitda.
  • The average private business has an Ebitda that falls between 7 and 13 percent of annual revenue.

So, let’s run the numbers on a simplified example. Suppose we take a business that has $10 million in revenue and an Ebitda of $1 million, or 10 percent. If this company is put up for sale, the transaction might look something like this:

  • Revenue: $10 million.
  • Ebitda: $1 million.
  • Sale price of 4.5 times Ebitda: $4.5 million.
  • Taxes and expenses on sale (35 percent): $1.575 million.
  • Net proceeds from sale: $2.925 million.
  • Pretax annual income available at 4 percent of invested proceeds: $117,000.

And there you see the conundrum that many business owners face when contemplating the sale of their businesses. Keep in mind that in this example, the owner — before the sale — had been enjoying $1 million of annual cash flow before interest, loan principal payments, capital investments and taxes. And this is one of the lucky few businesses in America that have annual revenue of $10 million, one of the top 2.5 percent. Does your business create more than $1 million in Ebitda? Are you in the top 2.5 percent?

If not, and if you are hoping that you might one day be able to leave your business, you might want to consider the following strategies:

Start and fund a qualified retirement plan. I call this prefunding your buyout. While your business is creating significant cash flow, take $40,000 to $60,000 and put it in a qualified retirement plan. If you are able to get a 6 percent return and invest $50,000 a year for 20 years, you will generate a nest egg of approximately $1.8 million.

Qualified plans are complicated beasts. There is a great deal of customized design that can go into your plan. The people in the qualified plan world who are experts at plan designs are called third party administrators. You will want to find one who understands the various options. Your accountant or investment adviser should be able to point you in the right direction.

In many cases you can tell your adviser how much money you want to save, and he or she can put together a plan that fits those parameters. I’ve seen business owners who got a late start save as much as $200,000 a year in their plan.

Think about owning the real estate. If it’s possible for you to purchase the real estate where your business operates, you should strongly consider this. Many business owners who own their own real estate end up selling the business but keeping the real estate and collecting rent.

Like a qualified retirement plan, starting early with real estate is important. Many owners will buy their business’s real estate and pay rent to themselves for 15 years to pay off the mortgage. After the mortgage is paid off, the rent flows to the business owner. Sometimes, the income from the rent is more than the income from the principal on the sale of the business.

Do a financial plan first. I have seen business owners sell their businesses, think they are going to retire and then find out four or five years later that they have to go to work for someone else. These owners often wind up with seller’s remorse. They wish they didn’t sell their business after all.

Doing the financial plan can help you figure out your financial needs before you start to plan the sale of your business. And advanced planning while you have strong cash flow can help you avoid the mistake of assuming that selling your business, even for millions of dollars, will cover all of your retirement needs. Once you sell your business, you don’t want that assumption to come back and bite you.

Have you thought about what it’s going to take for you to leave your business?

Josh Patrick is a founder and Principal at Stage 2 Planning Partners where he works with private business owners on wealth management issues.

Article source: http://boss.blogs.nytimes.com/2012/09/20/do-you-really-expect-your-business-to-get-you-through-retirement/?partner=rss&emc=rss

Retirement


In Annuities, Better Rates Come With Complexity

Variable annuities, whose returns are tied to gains in financial markets, can offer higher income but are often expensive and tricky to understand.

Article source: http://feeds.nytimes.com/click.phdo?i=b77c65063f84d882853246b0d4e37eb9

Money Through the Ages: On the Eve of Retirement, Pondering Risks

FRANCES AND JIM LANGERFELD know exactly how much they spent as newlyweds in August 1968. Rent for their house: $115. Groceries at Publix: $12.26.  A suit for Mr. Langerfeld: $62.68.  It is all meticulously detailed in an orange budgeting book that Mrs. Langerfeld pulled from her garage one recent evening. She kept several others, which offer a window into their family’s financial life.

The ledgers show that the Langerfelds bought only three new cars over the last four decades, including a big white Dodge van that they drove for 300,000 miles, mostly to ferry their four children to choir, hockey and soccer tournaments. Their biggest expense over the years, beyond their home here, was private school and college.

Now that the children are grown, the Langerfelds — he is 64, she is 62 — are contemplating retiring as soon as next year. While they have lived frugally, amassing about $720,000 in savings, they have the same reservations that vex many Americans on the cusp of retirement. Can we really afford it? Will our standard of living fall? How much will we ultimately get for the house?

Mr. Langerfeld, an engineer for a construction company, said he still enjoyed his job — and would not mind working a bit longer. For his wife, however, retirement cannot come soon enough. “I don’t want to die in my cubicle,” said Mrs. Langerfeld, who survived advanced breast cancer nearly seven years ago.

But the Langerfelds said they might have an ideal solution: buying a 10-room motel on an idyllic island, just off Maine in New Brunswick, Canada, where they already own half of a vacation home with friends who want to sell their share. The motel, popular among bird watchers, typically generates about $25,000 in income a year after expenses.

Mr. Langerfeld, a master repairman, would keep busy maintaining the motel, while Mrs. Langerfeld, a fastidious record keeper, would handle the books.

“We figured it was a good investment and would give us something to do,” she said.

They discussed their situation with Kathleen Rehl, a financial planner and author in Land O’Lakes, Fla., who, as a 64-year-old widow, is thinking about phasing into retirement herself. She calculated their net worth at $1.2 million. Their only debts are $20,000 in education loans for a son and a $10,000 401(k) loan.

“Right now, they are standing at the abyss, and they have lots of risk in their life,” said Ms. Rehl, who said she had major reservations about the motel.

The Langerfelds do not know how much their house will fetch, but the motel would lock up at least $200,000. Then there is the business risk, though the couple has met with the motel owners and studied their finances. They must also run the motel for two years before they can apply for permanent resident status, which an immigration lawyer said they were likely, but not guaranteed, to get. And it could be tough to sell the motel if they needed to.

Though healthy now, the Langerfelds have had three cancers, heart bypass surgery and a minor stroke between them. Mr. Langerfeld would qualify for Medicare by the time they got there, and could easily go to Maine for treatment. But Mrs. Langerfeld would have to buy health insurance for the three months they said it would take them to get Canadian health care.

Ms. Rehl raised other questions: Can either of them run the motel alone? What is their exit strategy? The Langerfelds said the current owners ran the motel five months a year.

“Jumping into the motel business would be challenging,” Ms. Rehl said. Ideally, she would want Mr. Langerfeld to wait until full retirement age to collect Social Security, which would yield a bigger check, for him and for his wife, should she live longer.

Ms. Rehl suggested selling the Tampa house first, then renting for two years while they still worked. Mrs. Langerfeld did not dismiss that idea. Still, she expressed a sense of urgency if they were going to proceed with the motel. They said they were more likely to gain permanent residence status in Canada sooner than later. “We’re lucky to have the years that we have, after all the health scares,” she added. “I want to do something else.”

Here is what their income picture would look like: if they clear at least $400,000 from their Tampa home — it is worth $502,000, according to Zillow, the real estate Web site — and use the proceeds to buy the motel and their friends’ share of the home, their $720,000 would remain intact.

So Ms. Rehl estimated the Langerfelds would have $67,000 in income — $38,000 from Social Security and nearly $29,000 from savings, assuming a 4 percent withdrawal rate. Since the bulk of their retirement money is in traditional Individual Retirement Accounts and 401(k)s, she said they would owe about $2,000 in federal taxes on that income. But she suggested they speak with an expert in cross-border tax issues.

The motel income would be extra, and the Langerfelds said their cost of living in Canada would be much lower. Ms. Rehl said they spent $100,000 in 2009, excluding their savings, but the Langerfelds said it was an unusually expensive year because of their two sons’ weddings and Mrs. Langerfeld’s mother’s funeral. Ms. Rehl said if they downsized in Florida, they would have more money from which to draw. But the Langerfelds said their cost of living would be higher.

Then there is their portfolio, where stocks, precious metals and mining investments account for 72 percent of their money — far too risky for their age. “I had to take the risk because we didn’t have enough money to retire,” said Mrs. Langerfeld, who handles the investments. “It has been a successful ploy.”

But she knows her luck could turn quickly, and is ready to shift into something safer. In fact, she was not certain she wanted to put as much as 40 percent into stock index funds, which Ms. Rehl had suggested, since she predicts the market is headed for a fall.

For now, the Langerfelds are honest about the myriad risks of the motel and continue to do research. Mr. Langerfeld said it would ultimately be an emotional decision. “There are so many factors beyond our control,” he said, “that there is really no way to make a logical decision.”

Article source: http://feeds.nytimes.com/click.phdo?i=df932af8026197fd2132aa0b4abf4538

Bucks: The People Who Should Sell Stocks Now

The temptation to do something, anything, is overwhelming when stock prices are falling. Watching the market decline while you’re just standing there feels overwhelmingly foolish.

So ask yourself this: Why are you investing in stocks in the first place? The answer should give you a sense of whether you should stay or you should sell.

If you need the money soon, for a down payment on a house or living expenses in retirement, you shouldn’t have had much of that money in stocks in the first place. Selling now means locking in your losses, which will not feel so good if stock prices go up again in the next couple of months. Still, having most of your money in a savings account now would be better than having your stocks fall another 10 or 20 percent and then losing your cool and bailing out then.

If you can’t sleep at night or concentrate during the day, then that’s a sure sign that you did not belong in stocks in the first place. There is nothing like a quick market decline to provide a real-world test of risk tolerance. But so far, this is nowhere near as bad as what we experienced in late 2008 and early 2009. If you survived that, then you’ll probably endure whatever happens next.

Anyone else, however, is probably saving for a retirement that is a long way off. Some people look to accomplish this goal by investing every penny in their own business, and that works fine for some of them. Others are channeling everything they have into cheap real estate in the hopes of renting it out and becoming a land baron. Some people will get rich this way, without a doubt.

But for most people, it’s hard to imagine another investment with better odds of outpacing inflation and allowing for a decent retirement than stocks. True, few people would have chosen the do-it-yourself 401(k) system that has left each of us alone to make crucial decisions about our investments. In fact, it was for-profit employers that foisted it upon us because they didn’t want to bear the risk of old-fashioned pension plans.

You know who benefits from that move over the long haul though? Investors in the stocks of for-profit employers. And investing in stocks is a bet on capitalism. Even in the last few weeks, I haven’t seen any convincing evidence that there’s a better economic system out there.

What are you thinking as you watch the stock market fall?

Article source: http://feeds.nytimes.com/click.phdo?i=04bb0aad6f841537b4a0a22789aebc70

Preoccupations: Retired, but Doing the Work You Love

I NEVER planned on retiring early. I was deputy chief of operations for the Community Redevelopment Agency of the City of Los Angeles, and I felt I was doing important work. The agency enters communities where residents suffer from high levels of unemployment, overcrowding and crime. It acquires and demolishes unsafe buildings; finances, builds and rehabilitates housing; brings in commercial services like supermarkets; and provides jobs for local residents. I wasn’t prepared to walk away from that career.

The C.R.A. is financed by a share of property taxes from the communities in which it works, and tax revenues declined significantly because of the recession. Last year, the agency announced that it was reducing head count by 20 percent.

Retirement packages were offered according to people’s age and how long they had worked there. At 66, with 28 years in, I qualified. I would also receive my pension, and I had saved over the years.

The proposals to retire early were extremely generous, and if enough people didn’t take the offer, the agency was going to lay people off. I was fairly sure I wouldn’t be in that group if I stayed, but I didn’t want to take a chance.

I retired in December, but I wasn’t happy about it. I had planned to work longer. If you don’t like your job or are tired of working, it’s one thing. But if you’re passionate about what you do, the thought of leaving can be upsetting even if it makes the best sense financially. I talked with management about returning as a consultant, but I wasn’t offered anything definite before the retirement date.

As soon as I left, I started investigating other kinds of work. I developed a syllabus for a graduate class on urban planning and economic development that I might offer to a local university, and I looked into volunteering.

People facing retirement are dealing with a big life change. It’s helpful to have time before you retire to think about the future and what you will do. I found the decision difficult because I didn’t have that time.

About three weeks after I retired, the C.R.A. chief executive called and offered me a contract to return as a consultant for a year. Just over 40 employees had left the organization in December, and there hadn’t been enough time to train people in their new duties. The people who are left are highly skilled, but they don’t have the knowledge or the contacts in other departments and agencies that many of the retirees do. I’m helping to reorganize the remaining staff and to record the organization’s procedures for those who remain.

There are undoubtedly other organizations like mine that found it necessary to reduce head count but didn’t have time for a knowledge transfer. I doubt it’s intentional; I think time gets away from them.

Employees look at me differently since I’ve returned. For one thing, I can’t give directions to staff anymore. I still review documents that require approval from the agency’s board of commissioners, the city council or other city staff, just as I used to do. I ensure that they’re properly written so that they clearly and accurately reflect the agency’s intent and are legally and operationally sound. When I was on staff, I could just tell people what changes to make. Now I have to say, “Here are some suggestions about how this could be a better memo.”

Initially I had some trepidation about how I would feel returning to the organization in this capacity, and even after I started I wasn’t sure how I felt. But now that some time has passed, I like the freedom and the flexibility more than I thought I might.

I work 15 to 20 hours a week and can largely decide my own schedule. I’ve begun volunteering with the Los Angeles River Revitalization Corporation, an organization I helped create in 2009. I’m also talking to a community group that deals with environmental justice in Los Angeles about working with them either as a volunteer or a paid consultant.

IF I could return full time to my staff job, at this point I’m not sure I would. I’d have to think about it. I ended up having the best of both worlds — I can work part time at a job that helps the community and do similar work as a volunteer in my free time. That was my primary concern about leaving — whether I would be able to continue doing this type of work outside this agency.

The way it has worked out goes to show that you shouldn’t look at change as necessarily negative. You may find opportunities you weren’t expecting.

I don’t know what will happen when my contract is finished. I’d love to have another contract with the agency and to continue with my outside activities. The worst case would be to have neither. If I couldn’t be of service to communities, I’d feel I was left out in the cold.

As told to Patricia R. Olsen.
E-mail: preoccupations@nytimes.com.

Article source: http://feeds.nytimes.com/click.phdo?i=391d0d7a447d27b9c27ebe5bb612c2c7