Reality Check Q&A #12

Gary North

Oct. 20, 2009

REAL ESTATE

What steps should we ($43,600/year salary, no savings, first-time home buyers, excellent credit) take to purchase a home in the Chicago southwest suburbs about a year from now?

First, read at least two of John Schaub's books. www.JohnSchaub.com

Second, take his seminar, "Making It Big on Little Deals."

Third, look at a minimum of 50 houses in the part of town you are interested in. Get a sense of what constitutes a bargain.

Fourth, you will have to wait two years to get a nice house that someone with your income can afford, unless you hit a fabulous deal. But you might.

RETIREMENT

Age: 70
Location: Carson City, Nevada
Occupation: Retired physicist and registered patent agent Retirement year: 2006
Annual income: About $80K (incl. Social Security, rents, dividends, interest, minimal consulting)
Net worth (not home): $2.6M (IRA $950K; Stocks etc $900K; Cash $400K; Real estate $350K) No debt whatsoever.
Home equity: $480K
Your #1 goal: Return to calling (basic physics research shelved many years ago because of requirements to obtain federal funding, a practice against my libertarian principles)
Deadline: Infirmity or death
Your #1 fear: Erosion of assets due to inflation and market instabilities.
Your plan to deal with it: Substantial fraction of assets in cash or equivalents, hard currency fund, foreign bond funds. Value investing in stocks (25% of assets or less)

Can I now reasonably follow my calling, no income, or should I develop an income stream using patent expertise acquired with retirement income in mind?

You have a big percentage of your net worth in your house. Is this wise? The equity in your house could easily fall another 20%. Can you stand this? You could sell it, buy a used double-wide mobile home at $25/square foot, and use the money to fund your business.

Pursue the business idea. Get counseling from www.Score.org. Consult with a good CPA who understands start-ups.

The goal here has more to do with your sense of calling and accomplishment than your immediate finances.

U.S. FUTURE

Age: 40
Location: Georgia
Occupation: Software Engineer
Retirement year: Not planning on retiring
Annual income: $100K
Net worth (not home): $150K
Home equity: $100K
Your #1 goal: Have my own successful business(es)
Deadline: 10 years
Your #1 fear: Lose my good name
Your plan to deal with it: Try to stay humble

What future role will the US play economically and politically when it will no longer have the dominant superpower status?

First, the dollar will fall.

Second, imported goods will get more costly.

Third, the U.S. will play a major role, because it is a large nation with great entrepreneurship. But it will not keep pace with Asia. Its rate of growth will be less. It will go though some very hard times economically, as will the rest of the world.

Get those businesses started.

SELLING GOLD

I am 57, live in Los Angeles, and own a small import business.

My business is part of my calling, which is funding entrepreneurs and family-owned businesses through micro-loans in Asia and Latin America, and providing occasional scholarships to exceptional students.

I am in excellent health and have no plan to retire while I am alive. My annual income is $60,000 - $80,000.

I have no debts, including my home - valued at $850,000 and sinking fast.

My investment portfolio is about $1.5 million, divided between precious metals in my possession, mining and energy stocks, and rental real estate both within and outside California. One adult child is on his own and financially successful.

My #1 goal is to provide micro-loans to enough people to have a significant positive impact in the areas I have targeted.

My greatest fear is of remaining in place as economic / financial / social conditions deteriorate in my area and civil strife increases -- of not getting out while the getting is good. I know that I have almost waited too long. My question: How will I know if and when it's time to convert my precious metals into another currency and how will I invest the proceeds for income?

You are doing very well. Your home will continue to fall in value, I think. You had way, way, WAY too much money tied up in your home. But you know that.

Never make this mistake again. Worry about selling your gold after you sell your house.

Some gold should be sold after the next wave of monetary inflation produces prices so high that the government establishes price/wage controls, or else the FED stops inflation, Banks stop lending, and an inverted yield curve appears: 90-day T-bills above 30-year T-bonds. That is many years away.

Do not sell gold unless you put the proceeds into foreign currencies, preferably Asian.

SAVING

Financially, you are future-oriented. But the US dollar, and the other world currencies, are just shaky promises made by shady politicians. Eventually, all paper currencies become worthless. Why bother saving?

Because you will get old.

Because you don't want to be a burden to your children.

Because you want mobility.

Because you need capital to start a business.

Because you need foreign currencies.

RETIREMENT

I'm a 50 year old with 27 years in the CSRS (federal government). In your opinion, will the federal government renege on their promise to pay out social security and the federal retirement system at the same time, or will one go before the other?

They will default together. The form of the default will be increasing inflation. When the government imposes price controls, this will freeze the cost-of-living escalator. The government will not increase payments. Shortages will be blamed on speculators and hoarders.

RETIREMENT

I'm 62, and live in Mass. I'm a software engineer, and have been doing this for about 40 years. I haven't thought about retirement, since I don't mind working, and cannot think of what I would do with all the spare time, most likely get into some sort of trouble. I make about $110,000 per year. Net worth is about $750,000; and home equity is around 400,000. Right now, my number 1 goal is to see my 2 children through college (1 is still in high school). I like your idea about charities, but haven't been able to hone in on which ones. My fear is that the future of the US isn't too promising. And this relates to my question.

I have an IRA. How can I make my IRA more diversified, i.e. move some of it into foreign investments?

Contact Rob Clayton at www.RobClayton.com. He can help you set up a self-directed IRA.

BALANCED LIFE

Age 39

Location Small town East TN (Halfway between Knoxville and Chattanooga) Moved to be closer to aging parents and help take care of them.

Occupation: Chem Eng degree, Marketing Manager, Currently unemployed due to recent layoff, Tax planning and economics student

Retirement year: Never

Annual income was $109,000 now sporadic from contract tax support and part time preaching

Net worth (not home) Self-directed IRA $105,000 invested in Private loan @9%, 401k $50k Money Markets, IRA $30k - Currently learning to use Iron condors to maximize returns, Bank account $15k, rental home $5k equity, cash flow neutral, long term renters. 35% ownership of partnership operating tax preparation business - Break even this year, 3rd year in existence. Revenue $310k grew 40% this year, $10k in silver coins and bars. Credit card debt (locked in long term at interest rates below 6%) $45k - Had been steadily decreasing over the years. $6,800 company pension at age 65.

Home equity: Home appraised last year $185k, debt $163k. Bought 1 year ago. Currently painting to prepare to sell if unemployment continues. Will move back in with parents if needed.

Your #1 goal Develop a financial education website and financial coaching business. Currently studying to pass CFP test. Have been studying finance, economics, etc for the last three years.

Deadline: 1 Year

Your #1 fear: How to survive the fundamental changes that will happen in our country due to increasing energy costs (suburbia is not built to handle increasing cost of transportation), the increasing levels of socialism (fear always causes people to retreat to the mistaken belief that the government can protect them), the continued decline of the fiat dollar and growing federal debt.

Your plan to deal with it Develop my #1 goal to help people to be prepared for their future while providing income that is not restricted by geography and determine acceptable overseas locations to relocate if conditions in our country decline dramatically.

Question: How do you balance the needs of your aging parents, raising a teenage son and developing your vocation to educate others to help them grow their wealth?

You are doing very well.

Unemployment will rise.

You must develop a time-management program. Basic: 40 hours/week on the job, 2 hours a day with a side business, an hour a day with your children. Saturdays: half with your family, preferably developing more self-sufficiency, one-quarter business development, one-quarter recreation with family. Sunday afternoon for visiting parents.

If your side bsiness can involve your son, that is a major advantage.

DEBT

Age: 45
Location: Fort Lauderdale
Occupation: Self-employed: screen printing on clothing
Retirement Year: 2029
Annual Income: $125,000 (Household)
Net Worth: $1,000,000
Home Equity: $400,000
#1 One Goal: To raise self-sufficient children who can survive whatever challenges life presents
Deadline: 8 more years
# One Fear: To not have the resources to live a comfortable (simple) life and be self-sufficient through old age
Plan: I am trying my hardest to create ways to generate passive income or set aside savings, problem is that inflation impacts savings negatively.

My question: With the current inflationary climate, is it a good idea to take on constructive debt such as mortgages on investment properties and pay it off with less valuable future dollars?

You should have sold your home three years ago. Yoiu probably know this. It is likely to fall even more.

Buy real estate as an investor. Buy from desperate sellers. Imitate John Schaub: www.JohnSchaub.com.

Sell your home and use the money to buy rentals and a smaller home.

Get out of Ft. Lauderdale as your primary residence. Your kids will not learn self-sufficiency there. Buy a place 25 miles out.