March 2, 2024 | 401k Loans, Hype Investing, US Farmland and is Long-Term Care Insurance Worth it

401k Loans

It was nice to see that retirement assets saw a nice increase in 2023. According to Fidelity, the average 401k was up 14% from a year earlier to $118,600 and the average IRA was up 12% to $116,600. While it is good to see this progress, balances are still short of the year end 2021 levels when the average 401k reached $136k and the average IRA stood at $131k. I was somewhat surprised but happy to see the average 401k contribution rate, including employer and employee now stands at 13.9%. With the decline in companies offering pensions, employees really need to make sure they are saving at least 10% of their pay to achieve an enjoyable retirement. On the other side of the equation, I was disappointed to see the percentage of workers who took a loan from their 401k, including for hardship reasons, increased to 8.9% from 7.8% at the end of 2022. Many times, people believe 401k loans are great option, but it costs you greatly when you consider the loss of compounding and the tax inefficiency. They are better than mounting high interest credit card debt, but they should only be used as a last resort rather than a tool to fund a vacation or buy a new toy.

Hype Investing

At Wilsey Asset Management we avoid hype investing. From time to time, we attempt to give evidence of how long-term, hype investing can destroy your portfolio. Here’s another example, in 2021, you may recall the hype around electric vehicles, people made it sound as if an internal combustion engine vehicles would never be sold again and we would all be driving electric vehicles. Well, the hype of the stock price matched that excitement, two examples are Lucid and Rivian automotive. The all-time high a couple years ago for Lucid was $35, recently it has fallen to under three dollars a share, a 91% decline. The other example is Rivian, in late 2021, it hit an all-time high of $146 per share and has recently fallen under $11 a share, a 92.5% decline. It is possible for these companies to turnaround and may do well in years to come, the massive decline in stock price is the reason we will not invest in a company which does not have earnings, and we will not pay more than 10 to maybe 12 times for those earnings going forward. We may miss out on some highfliers. but I’d rather take it slow and steady than try and hit the home run and lose 80 to 90% on an investment. For Lucid to get back to $35 a share that would be over a 1000% return.

US Farmland

Farmland in the United States has been on quite the ride for the past 26 years. Back in 1997, the average price per acre for farmland in the US was $1,270. It has now increased by over 430% to $5,500 per acre. Now before you people in San Diego think that is not that good because of the appreciation you’ve seen on your house, remember this is nationwide and a 400% plus return is very good on real estate. The question is, will it continue? Over the last 20 years, farm acreage has declined by about 50,000,000 acres to just under 900,000,000 acres nationwide. Development has been taking away some of the agricultural land which could drive prices higher. That could encourage farmers to take advantage of their high value real estate and retire. That would not be a good thing for our agricultural needs going forward.

Is Long-Term Care Insurance Worth it?

Most people know that elder care can be expensive later in life which begs the question, “Is long-term care insurance a viable solution?”. The long-term care insurance industry has evolved a lot over the last four decades. In the 80’s, 90’s and early 2000’s there were policies available that were affordable and provided more coverage, such as lifetime benefits. However, over time the insurance companies came to realize they weren’t making money because more people were filing claims than expected. As a result, most insurance companies have stopped selling this type of insurance all together, and the ones that remain have substantially reduced benefits and increased premiums on new and existing policyholders. Therefore, the cost/benefit ratio for long-term care insurance is not nearly as attractive as it once was and retirees are typically better off exploring other ways to pay for elder care.