Wednesday, November 13, 2013

Figure out your retirement number

1. Take your salary
2. * 0.8
3. * 1.03 ^ number of years til you retire
4. - any social security you expect to get
5. * 20.

The answer is how much you need to save.  The method is pretty simple but it should give you a ball park idea.

A brief discussion:

Step 2.
The 0.8 is pretty arbitrary - but is trying to get at what amount of your current salary you could live off - hopefully the kids will have left home and your house is paid off.  So this number could be 0.7 or less -but don't kid yourself here.

Step 3.
This is to try to get a handle on inflation.  Most forecasts (from long term bonds etc) peg inflation as being pretty low in the future.  So 3% should take account of any increases in your cost of living.

Step 4.
Social Security. You can got the Social Security website and they'll tell you what your benefit is going to be.

Step 5.
This has nothing to do with you living for 20 years.  By multiplying by 20 you are creating a lump sum that could yield 5% income per year that would be enough for you to live on.   So this step assumes that you invest your retirement portfolio in an account that earns at least 5%.

If you already have some money saved then you can add the following steps:

6. Take dollar amount you have saved *1.05 ^ number of years.

This will give you an estimate of how much your current money will grow to.

2. Subtract this from the answer from #5 above.  This is the new amount you need to save.

3. To find out the amount you need per month, enter this formula in to excel  =PMT(0.05/12,12*years,0,amount needed).

This should give you the amount that you need to be saving each month for the rest of your working life assuming 5% return on your investments.  Arguably this is a little conservative as your income and amount saved will be going up.

Salary = 100,000, and 20 years to retire.
$200,000 saved currently.
$1,500 SS benefit per month = 18,000 per year.
Assume investment portfolio earns 5% a year.

80% = 80,000

- 18,000 = 62,000

62,000*1.03^20 = $130,000

130,000*20 = $1.44 Million.

Looking at current save money:
200,000*1.05^20 = 530,000

Amount to save = 1.44 M - 530,000 = 910,000

Using excel formula:

=PMT(0.05/12,240,0,910000) = 2,213 per month for the next 20 years (or about 22 % of your gross income).

Tuesday, November 12, 2013

Junk Bonds to fund Noah's Ark?

Unbelievable, but true.

The bonds will have no secondary market, are callable at any point, have no guarantee by the issuer and pay about 5% interest.  Oh, and they are going to pay for a museum called "Ark Encounter".  

What could go wrong?

Masters of Supply Chain and Engineering Management

If you are interested in getting a 1 year masters in Supply Chain with  an emphasis on the engineering side of things - check out this new program that is joint with my department and Industrial Engineering at NC State.

Thursday, November 7, 2013

NC State Professional MBA ranked number 20 in US

Big news for our MBA program - we were just ranked number 20 in the US by BusinessWeek.

My colleague Steve Allen has some of the details.

D'oh! Wrong Tweeter.

Amazingly, people were trading Tweeter Ent Symbol:TWTRQ recently thinking that they were getting a head start on Twitter.

As Finra points out, the Q at the end of the symbol often indicates bankruptcy status.   So this isn't the Twitter you are looking for.  The stock now trades as THEGQ.

Money left on the table at Twitter.

Twitter [TWTR] went public today.  The asking price was $26, but the stock immediately traded up and is now trading at close to $50.

So is this good news or bad news?   

The answer, of course depends on who you are asking.

From Twitter's point of view, they sold the stock cheap - very cheap.  The stock was underpriced by about $45-26 = $19 per share.  As they sold about 70 million shares today, the total underpricing was roughly $1.3 Billion.   This is sometimes called the "Money left on the table" and by any measure, this is a pretty big sum.   Jay Ritter of the University of Florida, keeps track of these things and has a nice summary of past IPO underpricings.  In 2012, the total left on the table for all IPOs was about $2.78 Bn, but this is dwarfed by the height of the tech bubble in 1999 when the total was $36 Bn.

From the people who bought the IPO - this turned out great.  And we're not talking about people trading the IPO this morning - we're talking about those who were allocated shares by the Investment Banks.   These investors saw a huge one day return.   But there is a dark side here - as there is plenty of evidence that Investment Banks give allocations of these desirable IPOs to their best clients.  So Twitter's shareholders have given up a huge chunk of cash to so that the IBs can provide a nice present to their clients (beats a set of golf clubs or Frozen turkey for Christmas).  This practice (giving your clients IPO allocations) is called spinning.   Prof Ritter writes about it here.   

So by my counting, the score card is Twitter 0, IBs and their clients $1.3Bn

The next question then is how much is TWTR worth?

At $26, twitter has raised about 1.82 Bn.  But the company has about 575 million shares outstanding (most of which are not part of the initial IPO.   So Twitter has only sold about 12% of the company to the public at this point.   The valuation at IPO was about $26*575M = $15Bn.  But at the price above, the valuation is closer to $49*575M = $28Bn.  It is likely that Twitter will conduct further equity issuances over the coming months, gradually increasing the amount of shares held by the public, and raising more cash as it does.

Finally, what about those traders who bought the IPO at the higher price today?  

What does the future hold for them?    Of course we can't predict what TWTR stock will do, but the evidence shows that buying an IPO stock at the first day closing price is a terrible investment.   On average they underperform the market over the next 3 years by 19% per year.  But larger IPOs do fair better, so there may be some hope (Facebook is doing pretty well).   That said, I will stick with my Index Funds.

Friday, November 1, 2013

Rising interest rates can hurt alternatives as well...

So says Andy Silton.   Alternatives (PE, Hedge funds etc) rely heavily on cheap debt to juice up returns.  So it's not just bonds that get hurt in a rising interest rate environment.