Bach interview
GEOFF COLVIN: America's retirement crisis is getting worse by the day -- corporate pension funds going belly up, Social Security reform going nowhere, and personal savings rates going down to the lowest levels ever recorded. That's a big problem, but it's been an opportunity for David Bach, who’s written a raft of mega-selling books telling people how to climb out of their financial hole -- Start Late, Finish Rich; The Automatic Millionaire; Smart Women Finish Rich; Smart Couples Finish Rich -- with more than 3 million copies in print he has obviously tapped into a deep American anxiety.
David, as I said, personal savings rates, lowest level ever. This is a big phenomenon, a society-wide phenomenon. It's affecting not just individuals, but companies and government. What is behind it? Why don’t people save anymore?
DAVID BACH: Well, it's really a handful of simple things. The number one thing I can tell you about Americans is that Americans are not lazy. The challenge Americans have right now more than ever before is they’re busy, and because they’re busy they don't have time to deal with their money. I mean it's just the simple truth. They’ve got the time to spend it, but they haven't come up with the time to figure out how to save their money. And so what's happened is Americans have a lot of questions but they don’t have the answers, and so what they're doing right now is nothing when it comes to savings.
COLVIN: What you have said in some of your books is that when people make more money they generally don't save more money. What's going on there?
BACH: We know for a fact that if a person makes $50,000 a year and they’re living paycheck to paycheck, when they get a raise, when their income goes from $50,000 to $55,000 the next year, they simply spend the excess money. This is what we do. And so the solution that I've been coaching Americans on, and really all over the world now, is very simple. Throw out the budget. You've been given bad advice.
Budgeting doesn't work. We know you're not going to do it. We know you're not going to set one up. We know you're not going to stick to one. Instead what I suggest to Americans is this. Pay yourself first, one hour a day of your income, but don't do that yourself. Don't write a check every two weeks. I want you to take that money and move it automatically. The book I wrote called The Automatic Millionaire was all about save automatically. Don't think about this. Do exactly what the government does. The government takes your money out of your paycheck for taxes automatically.
COLVIN: Withholds taxes, yeah.
BACH: It works for them. If you save automatically yourself, it will work for you. The average American today who works a 40-hour work week believe it or not, Geoff, saves less than 10 minutes a day of their income.
COLVIN: Well, I find it easy to believe, because savings rates are so incredibly ... What you're saying first of all is that what may be the number one New Year's resolution, which is I'm going to make a budget, is not the way to go.
BACH: Here's the thing. There’s no stupid questions when it comes to money. What there is is there's stupid advice, and so for 50 years people come on these shows and, you know, new year, new you, go get a budget. Nobody does this in the real world. But in January if you get somebody to sign up for their 401(k) plan, save one hour a day of their income, then as their income goes up, they’re still saving that same percentage, and that's what makes Americans on ordinary incomes wealthy.
COLVIN: So is it fair to say that the biggest mistake people make is not finding a way to save their money automatically?
BACH: There's no question. When we look at ordinary Americans who have built wealth, not inherited, not won the lottery, but really built wealth, all they did when they got their first job is they signed up for a savings plan. Now in the old days people literally used the government's savings bond programs, and those have low returns, but guess what? It forced Americans to save money. Anything that you can do to get yourself to save automatically, even if you're saving for college, makes it easier for you to get ahead.
COLVIN: I've seen some research showing that the number one definition of financial success for an awful lot of Americans surprised me, getting out of credit card debt. What has happened here?
BACH: What has happened here, and Start Late, Finish Rich starts off with credit card debt, because what we've seen is that the average American today, statistics say the average American family has about $10,000 in credit card debt. If you pay the minimum on that credit card debt, it will take you 37 years to get out of that credit card debt.
So here's how you get $10,000 in credit card debt in a matter of a couple of years: You just spend an extra $10 a day and you put it on your credit cards. What's happened is, the industry has become what's called a micro-dollar industry. So today you go to Starbucks and you can use your credit card. You go to McDonald's and you can use your credit card. And so we're not thinking about how we're spending small amounts of money in little ways.
And what I can tell you is this. There's two ways to get out of credit card debt fast. One, renegotiate your interest rate. We're in a low interest rate environment. You call your credit card company and you renegotiate. Either you get your rate lower from 20 percent down to zero, or you move your credit card debt to one of those people who just offered you zero percent interest for a year...
COLVIN: Right, because you're getting those offers in the mail twice a day generally.
BACH: We were out of town last week, and we got nine credit card offers. So everybody's getting them. Take advantage of that. Then your payments are paying down the principal, and if you add $10 a day to $10,000 in credit card debt, you’ll be out in less than two years.
COLVIN: Okay, so let's suppose that people take your advice, they set aside a few dollars a day, whatever it is, this is what you famously call the Latte Factor.
BACH: The Latte Factor, yes.
COLVIN: Right, don't buy the latte, take the money and save it.
BACH: Important to say we're not picking on coffee drinkers. The Latte Factor is a metaphor. It could be bottled water, cigarettes, could be cable TV where the reality is you could watch public television for virtually free instead of having 200 channels where you're paying $90 a month.
COLVIN: A good policy.
BACH: You know, I call it the Double Latte Factor, Geoff, in this book, because we’ve got $90 a month, as an example, cable television, where if we lowered it down to, say, $20 a month, the average American could save over $800 a year just on that one bill.
COLVIN: Okay, so let's suppose people get it together to do that one way or another, whatever it is, what should they be putting that money in? Stocks? Should they be picking stocks? Should they be doing something else?
BACH: No, you don't want to guess between one thing or the other. I call it the perfect pie approach. You take all of your investable dollars and your net worth, for that matter, whatever you're worth, one third of your money should go into what's called fixed income, guaranteed investments.
COLVIN: Bonds.
BACH: CDs, Treasury bills, anything guaranteed. One third of your assets should be in real estate. That can include your home. That can include REITs, rental properties. And one third of your investments should go into a diversified stock portfolio, not individual stocks, but diversified. If you have one third, one third, and one third, you will double your money realistically about every seven years. You’ll outpace inflation, and you will be able to sleep well at night. It's a boring approach to wealth that almost all your viewers could use and not have to worry.
COLVIN: Doubling your money in seven years assumes a 10 percent annual return, more or less. There are experts who say that isn't realistic anymore. Warren Buffett says that for the stock market he doesn't think it's realistic. Is it over promising?
BACH: I think the stock market, realistically, I would guess, lower than 10 percent over the next 10 years annually, but when you factor in real estate, which we all know has been going up at over 20 percent a year, and you factor in the fact that interest rate are going up, I think we're going to see 30-year bonds again back up to 7 percent, so I think that, yes, you can get a blended return of right around 10 percent. The key is people who do what I call rearview mirror investing or lane change. You know when you get in a lane and the lane slows down and you switch lanes...
COLVIN: Right, and it slows down.
BACH: And then it slows down, well, that's what people did. You know, the stock market was hot. They got in that lane. Then as soon as they got in, the lane stopped. Now they’re all going into real estate. Instead of guessing, you just do all three things.
COLVIN: It's generally good advice, I think, but you have raised a very important point that I know is on a lot of people's minds, which is: Is real estate still a good place to put your money? It has gone up so much, so high for so long it has become almost conventional wisdom now that it can't last much longer.
BACH: I think you have a really good case right now that real estate is becoming what the stock market was in 1999. The question is, and this is in the stock market, are you investing or are you speculating? Now if you own a home and you're going to live there for the next 10 years, it's a phenomenal investment. You have to live somewhere, so it should be a great investment for you. If you're one of these people that's going down to Miami and you're buying sight unseen a condo that's being built in two years and you're putting 10 percent down on that condo so that you can just flip out of it, I think those days are coming to an end. You guys just had a big article about this.
COLVIN: We did.
BACH: So that gets me frightened right now when you read those articles.
COLVIN: Well, and yet you do advocate in many of your books investing in real estate as a really good way to build wealth.
BACH: There is no better way to build wealth than real estate, period. And the secret to real estate is very simple. It's cash flow. So if you rent a property and your renter, say if you buy a property, your renter who is paying the rent, that rent covers your mortgage, your taxes and the maintenance fees. Now you’ve got somebody paying for your home. That home's ultimately going to go up in value, and you may even have positive cash flow. As long as you’ve got that positive cash flow, you can't go wrong in real estate. The problem is it's people who leverage themselves and buy real estate simply on the speculation the price will go up. It's like the stock market all over again.
COLVIN: When I saw your latest book called Start Late, Finish Rich, my thought was this makes a whole lot of sense because there are millions and millions of baby boomers turning 50 who haven't saved enough. They're going to love this book. What I gather you're finding is that the book of course has sold enormously well, but that hasn't exactly been the audience?
BACH: What's been surprising to me is that a lot of readers who are buying this book are in their 30s and their 40s, because they feel like they’re starting late. And what's exciting is to see the people in their 30s and their 40s who are starting, they haven't given up hope. They just want to know what to do.
What we see when we talk to people in their 50s and their 60s, and that's really why I wrote this book, is that a lot of them have just given up hope entirely. They say it's just too late for me, there’s no point. And I have to tell you the book starts off with a story about a woman who goes and gets a financial plan done, and the advisor tells her -- she's 52 -- well, you need to save $2,700 a month in order to retire, and she's only making $3,500 a month. She says that's all my paycheck. I couldn't do it.
COLVIN: She can't do it.
BACH: So she does nothing.
COLVIN: She's so discouraged she gives up.
BACH: She's so discouraged, she pays $500 for a financial plan and does nothing. And when I met her I said, "Can you save $10 a day?" And she said "Yeah." I go "Can you get your husband to do it?" She said, "Well, I don't know." Then she said "No, I can get him to do it." I said "Well, that's a great start, because that's over $7,000 a year, and if you and your husband do this, and just go use your 401(k) plan, don't pay me to put you in any investments, you just go do your 401(k) plan, which is free, you do that where your employer matches it, by the time you reach your late 60s or early 70s, you’ll have over half a million dollars in savings." And the first thing she said to me is "Why didn't my financial planner tell me that?" And again it goes back to there are no stupid questions, there's just stupid advice.
COLVIN: That gets to another point, which is your books in their titles all feature the words rich or millionaire.
BACH: Smart, too.
COLVIN: Yeah, smart also, but rich or millionaire. I mean is it realistic? Is it over promising? Can an ordinary American really count on being able to get rich?
BACH: Well, we meet them all the time. You know, I was on Oprah, and Oprah said "Can anyone become an automatic millionaire?" And I said, “No, because first of all you have to want to.” But I think if somebody who is watching public television who is intelligent really wants to take charge of their finances, you can change your entire life financially in a decade.
People are doing it in less than a decade, but if you really got serious, you can get yourself out of credit card debt in a year, you can get a savings plan started immediately. I mean we meet these people. Our web site is loaded with success stories. At finishrich.com we have thousands of people who have sent us their stories about I just took the simple advice and used it and now I’m starting to see the results.
COLVIN: Should people count on getting rich? Is that prudent?
BACH: I think the most important thing to count on is getting yourself free, and when I say free, 70 percent of Americans are living paycheck to paycheck. So my first goal is to get Americans to at least get a year’s worth of expenses saved, because if you get a year’s worth of expenses saved, if you hate your job, you can afford to leave it. And I think one of the things we see is so many people that are living lives in quiet desperation.
The reason they’re living a life of quiet desperation is that they literally are living paycheck to paycheck and so they don't feel like they can make a change. And so my first goal is to free you financially, and then ultimately as you build more wealth and get more confidence, I think most people that want to be rich can be.
COLVIN: David Bach, it's an inspiring message, and I wish you all the success in the world with it because the nation needs it.
BACH: Thank you, great to be here.
Assisted living
KAREN GIBBS: Well, let's move a little closer to home. Baby boomers are often called the sandwich generation because they are sandwiched in between their children and their parents. Just when we thought we might have college tuition and retirement all planned for, comes yet another challenge -- caring for aging parents. More than 30 million Americans are caring for an elderly parent, and helping with that challenge has become big business, one that Wall Street is certainly taking notice of. We asked contributor Michael Farr to take us inside that industry. Michael.
MICHAEL FARR: Karen, this increasing portion of the population presents a business opportunity. The real question is how do you sell these services? How do you provide these services? So we went to Sunrise Assisted Living to figure out how they do it and to whom they're selling.
Taped package begins
FARR: Julia Faust is in her 40s and recently made the difficult decision to move her mother into a Sunrise Assisted Living residence. For Julia this was more a decision of the heart than of the pocketbook, and appearances counted for a lot.
JULIA FAUST: When you drive up, it's a Victorian type house look, which I think is lovely. So it looks more like a home than a facility, number one. Number two, you have the concierge right there. They're very friendly, very nice, wonderful people, and you have the dog, Anya the dog. My mother loves dogs, and there you get back again to this feeling of a home and not a facility. Went to her room, showed her her room, beautiful view of the woods, just a very nice bright room. And by putting one's parent into assisted living, a child is not abdicating their responsibility to the parent, that, you know, it's not as if, well, here you go; I'm never going to see you again, wham. It's where she's going to sleep, she's going to eat, she's going to have her needs met. But you know, it's still like an apartment.
FARR: What was important to you when you were looking for an assisted living facility for your mother?
FAUST: The general environment. It's an environment where people are friendly. She can go downstairs. She can go to the bistro, have coffee, talk to people. It's a nice environment. Your first impression anytime you walk into a place, it's going to have an impact, either positive or negative. It's a home-like environment. It's also very clean. It's not cluttered, and I think it's reminiscent to a lot of people of a better and more simpler time, so I think the older people like that and I like it even at my age. So I think we all can appreciate that.
FARR: Julia's positive impressions of the Sunrise residence didn't happen by accident. Sunrise CEO Paul Klaassen explains that they know who really makes this crucial decision for mom and dad.
PAUL KLAASSEN: People think about seniors are the consumer. The senior comes and lives in an assisted living community. But very, very important to us is the relationship we have with the family members, because it's typically a 45-to-64 year old son or daughter, I have to say more often daughters and daughters-in-law, that are concerned about how is Mom or how is Mother-in-law doing? Is she getting the services she needs? And they are really in many ways the decision-maker or certainly the decision-influencer as to where Mother or Mother-in-law is going to live. So they are equally our customer.
FARR: If you're normally marketing to this 45-to-64 year old daughter, what do you do to make your community more appealing?
KLAASSEN: The quality of our buildings is a very important part of our outreach to the community. We build our buildings in usually highly trafficked areas, so they are quite visible. That's important because our residents want to feel that they are still part of the community. And the architecture is also very important, so we use iconic architecture. Here on the East Coast it's usually a little more Victorian-looking with turrets and big porches and steeply gabled roofs. We blend into what the vernacular of the architecture is in that region, but it has to be really a beautiful building. Then word of mouth is incredibly important. Nothing is more efficient also for us then to gain residents through happy customers. We don't have to spend much money then on media advertising, and we don't. We are really interested in establishing in the zip code in the neighborhood. We tend to draw almost all of our family members and residents from about a 5-mile ring right around the Sunrise community where it is located. The setting is important, and in our case that means a very residential, no fluorescent lights, no institutional finishes, and combined with that is services delivered in a way that really honor the senior. Ultimately the family member has to have confidence that that quality of life that they are looking for for their loved one can occur in this setting.
FAUST: I come here almost every day. I have lunch with her. I spend a few hours with her. It's not unlike living in my home to a certain extent. It's just that I'm not doing the everyday functions of bringing her breakfast or changing her bed or vacuuming the carpet, that kind of thing. It's really quality time, and I think that's very important.
(Taped package ends)
FARR: And Karen, these assisted living companies and senior care companies are a lot more than just sort of feel-good, pretty houses, let's-make-everybody-feel-good-inside and pretty décor. They're serious businesses with serious marketing strategies. Sunrise knows that they're going to market and sell to that 45-to-55 year old woman, that daughter or daughter-in-law -- be nice to your daughter-in-law, because she could be making that decision for you. They want to make sure that the décor appeals to the daughter-in-law, so that they provide some kind of guilt-free, or very low guilt on the scale, opportunity for that decision to place Mom in assisted living. Mom, the octogenarian, isn't going to like it. She's going to walk through and say, "I don't like it. I want to go home." You know, so they are very effective marketers. They market in magazines that are going to be read by 45-to-55 year old women. They go to local hospitals and churches and say, "Here we are. Come visit." But it's a real strategy, and they're very good at it.
GIBBS: Well, let's talk about this industry. We're also joined by Jerry Doctrow who follows these trends for Legg Mason. Jerry, is this Sunrise facility that we just saw representative of senior housing?
JERRY DOCTROW: It's representative I think of one type of senior housing. These would all be called assisted living facilities, which are really designed for, you know, a frail senior, but there's a range of facilities around that. Independent living would be a facility that has larger apartment units, probably a little less services, designed for a slightly more active senior. That's another alternative. There are what are called continuing care retirement communities, CCRCs, which do independent, assisted, and nursing on the same level, as well as the more traditional nursing home. But even there I think the facilities are probably changed from what you might have seen five or 10 years ago. They've gotten a lot more I think customer friendly, driven by changes like what you've seen at Sunrise Assisted Living.
GIBBS: What's behind this demand now for senior housing?
DOCTROW: There was a large group of people born in the 1920s that are now passing 85. That's the group that's driving demand for senior housing. The Klaassens, the founders of Sunrise, really were instrumental in developing sort of a more residential-oriented, more customer-friendly type of senior housing that I think provided options that the old nursing home just didn't.
FARR: What can I buy now? You have any picks, any companies that we could invest in now?
DOCTROW: I think one of the things that's important about its investment theme is that the aging of this population, the old, elderly population, is driving demand for a number of services, both assisted living, but also nursing care. The company in that space we like the best right now is a company called Kindred Healthcare. KND is the ticker. Again, just below a $1 billion market cap company. We think it's attractively valued and has upside. There's a little uncertainty in reimbursement in nursing care where the government does pay, you know, early next year, but we think in Kindred's case that's priced into the stock. Some of the other opportunities we see are in home nursing. There's a company, Gentiva, GTIV is the ticker. A smaller market cap, only about $400 million. It provides home nursing care, announced a program just the other day to do more cardiac care for people, post-cardiac care in the home. I think that's an interesting model.
And the final company we like is a company called Apria, AHG, which is in the home respiratory business, providing home oxygen, medications for lung function. And that also, there's been some issues about reimbursement. We think they're well positioned and for a more managed care environment and attractively priced.
FARR: How big a company is Apria?
DOCTROW: Apria is about $1.5 billion. So these are small-cap companies by Wall Street standards. I think that's the nature of the industry, but I think they have significant growth potential in our opinion.
GIBBS: Well, with the numbers of baby boomers increasing, those elderly citizens, whether they're the Roaring Twenties boomers or the ones just beneath that growing, are we now going to see a rise in say maybe housing, REITs for seniors?
DOCTROW: The boomers, of which I'm included, are starting to drive demand for general healthcare use, but are certainly a long way away from sort of senior housing. But both of them are having an influence. Some of the other companies I follow are healthcare REITs, real estate investment trusts, that own nursing homes, own assisted living, may own medical office buildings as well. That's another alternative for I think an investor that believes in some of these trends we've been talking about, but maybe looking for more of an income stock to purchase.
I think on the REIT side, again REITs have had a couple of very strong years here, so it's harder to find great values. I think a couple of the names that we like probably best in that space again are also small-cap. There's a company called LTC Properties out of California, LTC is the ticker, that's, you know, a mid-6 percent dividend yield and I think has some good earnings growth potential and also some good dividend growth potential. Ventas, VTR, is another one. They're very closely tied to Kindred, so there's some interrelationships there. That's less of a value play as there are some specific things about that stock that we think are attractive.
GIBBS: A fascinating and very timely discussion. Jerry Doctrow, Michael Farr, thank you very much.
FARR: Thank you.
DOCTROW: Thank you.
Next week: Is Wall Street still fixed? |
