Friday, July 19, 2013

My Motor City Example

This week is somewhat of a monumental day in the world of public debt. The city of Detroit filed for bankruptcy protection yesterday, which is this country’s largest ever municipal bankruptcy filing. The facts and figures are astounding to boot: $18 Billion in liabilities, a population decline of 300,000 people from 2000 to 2012, and expenditures that exceeded income by $100 million every year since 2008. Needless to say owners *cough* suckers *cough* of this debt, as well as city workers and retirees for that matter, are up in arms over what may result in reductions or even cuts to benefits.

I could use this as an opportunity to issue a strongly worded message that says things along the lines of: Socialism is great until you run out of other people’s money, Government and Union leaders can’t do math, this is the road that liberal leadership ends at, etc. But I will refrain from saying such mean things.

Instead I kind of want to focus on two points lumped into one. I recently traveled out to Detroit for the first time in my life a few weeks back to lend a hand for my wife's family company in a marketing effort. And what I walked away with was the impression that the people I met whom make up the Detroit area have an unbelievable amount of perseverance and are some of the best Michiganders I have probably ever met (aside from those in the Southwest corner of the Mitt). They are entrepreneurs, incredibly hard workers, innovators and genuinely good and wholesome people.

I had my misguided perceptions of what the Detroit area would be like, and I was happy to be proven wrong. With the US auto industry having gone through what it has gone through over the last 60 years, and Detroit being at the center of it all, it was inspiring to see a city and its people not letting perceptions dictate their outlook. With that said it is a shame that city leadership has brought that place to bankruptcy. As the population fled, tax revenues dropped and demands/needs (reader’s choice) for benefits increased, the city’s leadership failed to live within their means. And this bankruptcy filing is the result of decades upon decades of mismanagement.

So let this topic, as it spreads throughout the media over the next few days, serve as a talking point on the difference between a 401k and a pension, as well as the need for each household out there to get their own personal finances in order. With a 401k, if the entity you work for files bankruptcy, your 401k money is yours and you don’t lose a penny. A 401k is not on a company’s balance sheet and you own every red cent. A pension on the other hand is an asset of the entity. If the entity goes down, so does your pension.

In my current work situation my employer offers a pension. But like Social (in)Security I don’t count on a penny of that pension making it into my pocket at retirement. Although (certain) private companies are more stable than government entities (see Detroit) and others in the private sector, the truth of the matter is anything can happen to my employer’s financial stability over the coming decades. So I have taken the well calculated and careful risk of saving and investing for retirement through a 401k and a ROTH IRA. Should Social (in)Security and pension checks make their way into my mailbox when I turn 70, then great, I will have extra money to give away. But relying solely on outside entities for retirement security exposes one to incredible amounts of risk in a loss or cut of expected benefits, unfortunately like many might be facing following Detroit’s bankruptcy filing.

My best advice, do the exact opposite of what government entities do. Get out and stay out of debt, and live below your means. 

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