The Curious Case of Mitt Romney and the (up to) $100 Million IRA

Mitt RomneyContradicting what I wrote in my previous post about IRAs being irrelevant to upper-middle class and wealthy people, we have the curious case of Mitt Romney, who reported in his 2010 tax returns an IRA worth between $20 million and $100 million.  At that level of assets, I must acknowledge he’s the exception to my rule of IRA irrelevancy for high income people.

An IRA at $20 million to $100 million has gone from humble and homely to something quite sexy and amazing.  In other words – as my wife would say – Mitt Romney’s IRA is Bradley Cooper in Silver Linings Playbook.

At first glance you may be tempted to shrug your shoulders at the size of Romney’s IRA.  After all, since he’s a wealthy and successful businessman, isn’t that kind of what you’d expect?  Ummmmmm, no.

It’s so incredibly unusual to amass that kind of wealth inside an IRA that I’m kind of hoping to crowd-source the answer to this mystery.  I mean, I can speculate below, and I will, but I would really love for someone more knowledgeable than me to guide me in the process.[1]

Here’s why it’s hard: throughout most of Romney’s working life, the individual IRA contribution limits were $1,500 to $2,000.  The limits jumped to $3,000, $4,000, and $5,000 in 2002, 2005 and 2008 respectively, but all of that is too recent to benefit from the real power of compound interest to get up above $20 million.

I am as aware of the incredible power of compound interest to grow humble seeds of capital into mighty oak trees as anyone, but the investment math involved here is not, let’s say, frequently observed.

A simple, but probably wrong, assumption

Assuming Romney was eligible to make the maximum IRA contributions from 1974 onward[2], and did so, he was eligible to contribute a total of $94,500 over the years 1974 to 2010, to his personal IRA.[3]

By applying a relentless 24.5% compounding return to each and every theoretical maximum Mitt Romney contribution from 1974 to 2010, we can in fact arrive at a total summed value of $21.5 Million.

 

YEAR CONTRIBUTION 2010 $VALUE #YEARS Age
1/1/1974 $1,500  $4,001,178 36 26.8
1/1/1975 $1,500  $3,213,798 35 27.8
1/1/1976 $1,500  $2,581,364 34 28.8
1/1/1977 $1,500  $2,073,385 33 29.8
1/1/1978 $1,500  $1,665,369 32 30.8
1/1/1979 $1,500  $1,337,646 31 31.8
1/1/1980 $1,500  $1,074,414 30 32.8
1/1/1981 $1,500  $862,983 29 33.8
1/1/1982 $2,000  $924,212 28 34.8
1/1/1983 $2,000  $742,339 27 35.8
1/1/1984 $2,000  $596,257 26 36.8
1/1/1985 $2,000  $478,921 25 37.8
1/1/1986 $2,000  $384,675 24 38.8
1/1/1987 $2,000  $308,976 23 39.8
1/1/1988 $2,000  $248,174 22 40.8
1/1/1989 $2,000  $199,336 21 41.8
1/1/1990 $2,000  $160,109 20 42.8
1/1/1991 $2,000  $128,602 19 43.8
1/1/1992 $2,000  $103,295 18 44.8
1/1/1993 $2,000  $82,968 17 45.8
1/1/1994 $2,000  $66,641 16 46.8
1/1/1995 $2,000  $53,527 15 47.8
1/1/1996 $2,000  $42,993 14 48.8
1/1/1997 $2,000  $34,533 13 49.8
1/1/1998 $2,000  $27,737 12 50.8
1/1/1999 $2,000  $22,279 11 51.8
1/1/2000 $2,000  $17,895 10 52.8
1/1/2001 $2,000  $14,373 9 53.8
1/1/2002 $3,000  $17,317 8 54.8
1/1/2003 $3,500  $16,228 7 55.8
1/1/2004 $3,500  $13,034 6 56.8
1/1/2005 $4,500  $13,460 5 57.8
1/1/2006 $5,000  $12,013 4 58.8
1/1/2007 $5,000  $9,649 3 59.8
1/1/2008 $6,000  $9,300 2 60.8
1/1/2009 $6,000  $7,470 1 61.8
1/1/2010 $6,000  $6,000 0 62.8
SUM TOTAL $94,500 $21,552,451

 

This is mathematically possible, but highly improbable in the real investing world.  Not every investment goes up in a rocky, volatile risky world.  And nobody relentlessly returns 24.5%, for 36 years, in the real world.  (Except, of course, Stephen A Cohen.)  Or 30.7%, the amount rate of return Romney would need to achieve a total IRA over $100 million.

A slightly more realistic picture of how Romney grew his IRA

Under a more realistic set of circumstances we would assume that Romney rolled over his employer-sponsored plan like the Bain Capital SEP-IRA, which allowed for average contributions of $30,000 per year.  If he regularly socked away $30,000 in his primary Bain Capital years, 1984 to 1999, he’d still have needed to average a 21% return over those 15 years to get above the minimum $20 million threshold, or over a 29% return, each and every year, to reach $100 million.

These returns are also extraordinary, but because they may have happened over a 15-year period rather than 36 year period, they become a tad more believable.  The years 1984 to 1999 also coincided with an incredible bull-market run in public equity markets, which while not directly related to the private markets in which Bain Capital specialized, would tend to buoy Bain Capital’s access to liquidity, leverage, investor confidence, and exit strategies over the 15 years.

Most importantly for the IRA discussion, however, is the key point that a SEP-IRA really isn’t the humble, homely individual IRA we started out discussing.  When you can contribute $30,000 per year it’s not a fair comparison to the traditional personal IRA, but rather more akin to a super-charged 401K plan.

So seemingly-homely Bradley Cooper, even when running in a black hefty trash bag and trying his best to look like the average, just out of psych lockup, slumpy, bipolar dude on lithium, was really sexy Bradley Cooper all along. (Again, the heavy editorial hand of my wife.)

But still, how could Romney earn 21 to 29% year after year after year for 15 years?

Ok fine, I’ll contribute to the speculation, which has to remain speculation because Romney never publicly explained his IRA success.

The Wall Street Journal offered a plausible explanation of Romney’s IRA success last year.

The Wall Street Journal article explains it the following way:

Bain Capital employees including Romney (as then CEO) apparently co-invested their SEP-IRAs alongside other Bain Capital funds, and probably received different classes of shares than did traditional Bain Capital investors.  The different classes of shares, the speculation goes, could have systematically low values because they represented junior, or riskier, pieces of Bain Capital investments.

These systematically low-priced share-classes of the Bain Capital co-investments frequently popped in value on successful investments.  When the investments worked, as they often did, these initially low-valued, risky shares offered much higher returns that we would normally find in public markets.

It sounds plausible, risky, legal, and not particularly replicable for ordinary investors.

But yes, under certain circumstances, the personal IRA can be a real cool investment vehicle.

Please see related posts on the IRA:

The Humble IRA

IRAs don’t matter to high income people

The magical Roth IRA and inter-generational wealth transfer

The 2012 IRA Contribution Infographic

The DIY Movement and the IRA

Angel Investing and the IRA

 



[1] I am, like all non-wealthy Americans, just a temporarily embarrassed millionaire.  If some helpful reader would share the Romney methods we would all be grateful, especially me.

[2] This assumption is unlikely to be true, since he was in a combined Harvard Law School and Harvard Business School program in 1974 and 1975 and might not have had any, or sufficient, income in those years as a student.  But it is possible, so I’ll give him the benefit of the doubt.

[3] This $94,500 includes the ‘catch-up’ amounts he became eligible for, starting in 2002, for being over age 50.

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Upper Income People Can’t Be Bothered With The IRA

cigar and moneyPlease see my earlier post on The Humble IRA.

 

Does the humble and homely Individual Retirement Arrangement (IRA) matter to well-paid people?

I remember being shocked in the late 1990s when my mentor Jim on the bond trading floor at Goldman declared “I don’t bother with IRAs because nobody’s getting rich investing through an IRA.”

I eagerly sought out wisdom on personal finance at the time, so I was struck that such a clear tax-advantaged vehicle could be overlooked by a financially savvy professional like Jim.

He was a Vice President at the time and made a good salary and bonus, with bright prospects.  He then became a partner about 6 years later, wholly and thoroughly justifying his scorn for the lowly IRA as a wealth-building vehicle.

His example stuck in my head over the years because – more than the stark irrelevance of an IRA for his own personal situation – I’ve realized that he’s basically right – upper income and wealthy people as a whole really have no use for the IRA.  It’s a waste of time for them.  This is true for a number of reasons.

1. The maximum tax deductibility limit of $5,000 doesn’t get you very far if you have many multiples of that amount to invest.  In the 1990s, when my mentor made his scornful statement about not getting rich from an IRA, contribution limits were stuck at $2,000 – making his scorn even more justifiable.  But even with the upward adjustment to $5,000 in 2012 and $5,500 in 2013, that still doesn’t provide much tax advantage.

2. Most highly compensated people have access to a 401K or a similar saving plan which offers many times the tax-advantaged contributions of an IRA.  If you own your own business, or if you work for a high-paying salary, you could put away at least $17,000 pre-tax in 2012, in addition to larger amounts through employer profit-sharing, leaving the homely and humble IRA in the dust.

3. If you have access to a much better, bigger employer retirement plan like a 401K, as most highly compensated people do, suddenly you’ve lost the $5,000 IRA tax deductibility if you make more than $68K individually, (or $112K if you file with your spouse.)

The end result: my mentor Jim was right.  Upper income people really can’t be bothered with the IRA, and I can’t fault their logic.

All of the above is particularly ironic to me because I’ve spent the past month arguing, pleading, berating, and otherwise pestering the undergraduates to whom I teach personal finance into opening and funding their first personal IRA.

I’ve taught them about the key building-block concepts of compound interest, and understanding wealth, and how to budget and save money.

I’ve argued that opening and funding their first IRA – which I assigned as mandatory homework to them this week – is a key culmination of everything I’ve taught them.

And I do believe in the value of the IRA for them in particular, as I assume they will not be highly paid in their first years out of college, nor will many of them have access to a 401K right away.  So an IRA makes a ton of sense for them.  At least for now.

What I haven’t told them is that as soon as they’re well-paid and wealthy they can forget all about the IRA, with my financial blessing.  But please don’t let them know this yet.

First they have to open the IRA, before they can forget all about it.

 

Please see related posts on the IRA:

The Humble IRA

IRAs don’t matter to high income people

A rebuttal: The curious case of Mitt Romney

The magical Roth IRA and inter-generational wealth transfer

The 2012 IRA Contribution Infographic

The DIY Movement and the IRA

Angel Investing and the IRA

 

 

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The Humble IRA

Ira GlassHey everybody exposed to some form of media of the Financial Infotainment Industrial Complex: there’s just a short time left until the April 15 deadline to contribute to your tax advantaged IRA for the previous tax year.  Which would be impossible not to know, at this point.

Oh, the humble, the homely IRA – is there a more over-hyped, under-delivering investment vehicle than this?

What more could be said that we don’t already know about the IRA?

Forthwith, I submit a few items:

Nitpicky trivia and history that for some reason I find interesting

  1. IRA is not short for “Individual Retirement Account.”  It’s actually “Individual Retirement Arrangement,” according to IRS language, which you can read here.  Who knew?
  2. IRAs date to 1974, originally open only to workers not covered by an employee sponsored retirement account – like a pension plan or 401K.  In 1981, IRAs become open to anyone under age 70.5, regardless of whether they were covered by an employer plan.  In 1986, the deductibility of IRAs became restricted, according to income limits if the worker was covered an employer plan.  Right now, deductibility limits make the IRA only minimally useful for people covered by employer plans.
  3. Contribution limits started at $1,500 from 1974 until 1980. Contribution limits rose to $2,000 from 1981 to 2001.  Since 2002 the contribution amounts have jumped steadily from $3000 in 2002 to $4,000 in 2005, to $5,000 in 2008.  The contribution limit goes up next year as well.

I’m going to post more interesting things about the IRA shortly, but on the off chance you live in a cave protected from the Financial Infotainment Industrial Complex, you’ve just got 2 weeks to go to make a 2012 contribution.  Go!  Quickly!

Please see related posts on the IRA:

IRAs don’t matter to high income people

A rebuttal: The curious case of Mitt Romney

The magical Roth IRA and inter-generational wealth transfer

The 2012 IRA Contribution Infographic

The DIY Movement and the IRA

Angel Investing and the IRA

 

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Financial Time Out – For Poetry

Mono PrintIn honor of the 4.5 years since Warren Buffett showed us all how its done, in the midst of the near-implosion of the financial universe, and in light of the announcement today about how he continues to reap the benefits of his investments, an oldy but goody, “If.”

If you can keep your head when all about you
    Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
    But make allowance for their doubting too;
If you can wait and not be tired by waiting,
    Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
    And yet don’t look too good, nor talk too wise:
If you can dream—and not make dreams your master;
    If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster
    And treat those two impostors just the same;
If you can bear to hear the truth you’ve spoken
    Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
    And stoop and build ’em up with worn-out tools:
If you can make one heap of all your winnings
    And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
    And never breathe a word about your loss;
If you can force your heart and nerve and sinew
    To serve your turn long after they are gone,
And so hold on when there is nothing in you
    Except the Will which says to them: ‘Hold on!’
If you can talk with crowds and keep your virtue,
    Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
    If all men count with you, but none too much;
If you can fill the unforgiving minute
    With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
    And—which is more—you’ll be a Man, my son!
By  Rudyard Kipling, 1865–1936

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Cyprus Bank Tax – The Big Picture

russian mobster

 

Over the weekend the European Union agreed to a 10 Billion euro bailout of member country Cyprus’ banking sector, but imposed as a condition of the bailout a 9.9% tax on all bank deposits above 100K Euros.[1]

On its face and in the abstract, this proposal is a horrible way to bail out a bank and an ailing economy, as it violates rule #1 of financial bailouts, namely “avoid bank runs.”

Not only does the proposal guarantee every Cypriot bank will suffer a run by all its depositors as soon as they open on Thursday, but every bank in Southern/peripheral/wobbly Europe – Spain, Portugal, Greece – has to wonder whether their depositors will do the same in anticipation of future similar bailout terms imposed by the European Union, and Germany in particular.

The fastest way to achieve a run on banks in weak countries is to suddenly punish depositors for leaving their money in the bank.  Even to threaten to do so can create a self-fulfilling fear, one that leads quickly to bank runs.

The proposal also violates rule #1 of dealing with distressed banks, which is that depositors get treated better than bondholders. The European Union’s proposal to punish depositors – while bondholders suffer no losses – upends the traditional order of payment priority of bank liabilities.

On the other hand, I can see why the European Union made this odd deposit tax proposal, as the specific situation of Cyprus boils down to the European Union vs. Russian oligarchs.

Cyprus is the Cayman Islands of Russia, a hub for vast quantities of Russian banking deposits.  Some may be savings of ‘ordinary’ Russians, but most people believe a combination of Russian Mafia, Russian oligarchs, and dirty money sloshes around the Cypriot financial sector.  Bailing out Cypriot banks, without confiscating what is perceived to be largely illegitimate Russian money, was too much for the German leadership of the EU to swallow.[2]

Which all reminds me that in a world of Plutocrats, in which huge aggregations of money are perceived to be illegitimate, it becomes much easier for policy-makers to engage in what would otherwise be horrible banking policy.

I don’t think it’s a stretch to wonder about the implications for the US.

The inequality here has reached a point where, if people actually knew how stratified we’ve become, the idea of a Cypriot bank tax in the US to confiscate wealth goes from being an Occupy Wall Street fantasy to becoming more normalized.

In the US we currently view our own plutocrats as superheroes.  But if they instead become morally equated with Russian oligarchs, then a confiscatory tax like the Cyprus proposal starts to almost look ‘fair.’

I think this is a nightmare scenario, but I also think structural inequality in the US sets the scene for this kind of nightmare.  It’s not unthinkable.



[1] Although the proposal keeps changing as of this morning.  Maybe it’ll be 15% for depositors over 500K Euro, and 3% for depositors below 100K Euro, and no tax for depositors below 20K Euro.  Also, maybe the Cypriot parliament will reject the whole deal and take their chances.

[2] The other interesting angle: If you’re a Cypriot parliamentarian, are you willing to vote for something that hurts the Russian mafia?  I mean, admittedly everything I know about the Russian mafia comes from Hollywood, so I don’t really have real life experience here.  But I’d be pretty nervous to vote for this bank tax and put a big fat Russian mafia target on my back.

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New Highs in the Dow Part III – What Should I Do?

2013-02-05 13.27.30Please see New Highs in the Dow Part I – Indifference and Inevitability

And New Highs in the Dow Part II – What’s going to happen?

———————————————

First, if you’re actually an investor1  in public securities2, take a moment to be sad about these past two weeks and all the new highs hit in the Dow Jones Industrial Average.

All that it means when an equity index hits a new high is that it costs you more to purchase shares in the equity markets.  If you’re an investor and you plan to buy stocks ever again – in your life – these new highs are not to be celebrated, but rather be lamented.

Unless of course you like paying more this week than you did last week for the exact same product.  I know I don’t.

After you recover from your sadness, do what you should always do under any circumstances, which is blindly and reflexively take the monthly surplus you can reasonably afford to dedicate to long-term investing, and purchase low-cost, diversified, stock mutual funds.

And never sell until you absolutely must have the money to cover your lifestyle costs.

And that’s pretty much it.

For 95%3 of individual investors, 99.5%4 of the time, the rest of what passes for investing advice amounts to noise.5

Please understand I’m saying this as a guy who

1. Is not an investment advisor and I’m not selling mutual funds.  I can’t benefit in the least from you taking my advice.

2. I’ve been a bond salesman of credit default swaps, CDOs, RMBS, CMBS, ABS, IOs, POs, Inverse IOs, calls, puts, swaps, and swaptions.  I’ve sold sovereign emerging market debt and corporate emerging market debt.  I started and ran a distressed debt hedge fund.  I’m a fiduciary for a school endowment invested in hedge funds and mutual funds.   I know the products out there.  They have their place and their usefulness in the institutional investing world, or the ultra-high net worth world.

I’m saying all of that sophistication – outside of low-cost, broadly diversified, long-only equity mutual funds – is mostly irrelevant to personal investing.

So, embrace the simplicity that’s beyond sophistication.  Be child-like in your humility about what and how you invest.

Again, take the monthly surplus you can reasonably afford to dedicate to long-term investing, and purchase low-cost, diversified, stock mutual funds.

Do this when the market goes down.  Do this when the market goes up.  Do this when the market goes sideways.

Do this with a Fox.

Do this with a Peacock.

Fox-Business-News-logo“But I would not, could not, with these stocks.

I would not, could not, with a Fox,

I would not, could not, with a Peacock,” you say.CNBC Logo

When Fox and Peacock like Charlie Gasparino and Jim Cramer tell you to do other things, just do this.

Just try it.  You’ll like it.  You’ll see.

greeneggsandham

Please see my previous posts in this series

New Highs in the Dow Part I – Indifference and Inevitability

And New Highs in the Dow Part II – What’s going to happen?

 


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  1. Just to be clear: my statement is aimed at people who intend to be investors in their life, in the future.  If you’re a retiree drawing down on investments rather than adding to them, you of course celebrate new equity index highs like we’ve seen in the past week.  But in that case, you’re not an “investor” in the sense I’m using the word.
  2. Another caveat: Plenty of successful, wealthy, investors ignore public securities and do just fine.  I’m really just talking about one’s involvement in purchasing stocks and bonds.  Essentially, the kind of people who care about the Dow.
  3. I rounded down to be conservative.
  4. Ditto
  5. For the fuller explanation from a great book on why this is all you need to know, read this review of Nick Murray’s Simple Wealth, Inevitable Wealth, and then go buy the book.