The cost of food

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It’s not easy to make money selling food. Dear daughter and I have been engaged in a summer long project of exploring an artisanal jam-making business and once you use those calculators to figure your retail price, well, let’s just say now I know why stuff at a farmer’s market costs so much. Once you add up the cost of top quality ingredients, transportation, packaging, etc., and do it on a small scale (so you don’t get the kind of wholesale discounts Wal-Mart can command), you come up with a pretty big price. On the other hand, you can also come up with a fresh and excellent product.

So, if I have to sell an excellent product for $9 a jar, how can these big companies make money selling for $4? Besides the economies of scale and bulk pricing, read the ingredients. As Michael  Pollan says, how many? Ones your great grandmother would recognize?

In his book In Defense of Food, Pollan describes how the food industry can and does make money. After all, it’s a somewhat inelastic market—even a dedicated trencherman can only eat so much. After we lick the plate at around 3,500 calories, most of us are way beyond caloric needs, and probably at as much capacity as our stomachs will hold. So how to make money? Repackage the plain stuff in ever more attractive ways—Go-gurt instead of the plain variety—using ever cheaper ingredients, otherwise known as high-fructose corn syrup, chemical flavorings, and value-added vitamins, fiber, or health ingredient of the moment (whether oat bran or Omega 3). You can charge more for the fruit leather than the amount of apples that might be in it, and individually packaged containers can make more money than a tub. A lot of it is fake, not very good for us, and high calorie.

Pollan, in his many books, blasts the food industry (organic is not spared!) but blasts us, too—our willingness to trade “convenience” for effort, our loss of taste in favor of a shot of sugar or salt, the demise of conviviality and unity represented by a sit down meal with friends or family.  It’s all a sad cycle. We grab a convenience dinner because we’re too tired after paying time and money to work out at the health club, we eat at a restaurant after a too-long day working to pay for that restaurant meal (the restaurant  spending is probably the single most outsized cost I see in budgets); we invest in family vacations because otherwise the only time we spend with our kids becomes driving them to after-school activities.

Yet, I can’t help feeling a certain utopian-ness to Pollan’s works. As anyone knows who has ever cooked primarily from scratch, day after day, it’s real work. And not only the cooking, but the shopping, and just plain thinking up what to eat, week after week, year after year. Add to that the cost of organic, of pasture raised meat, of the inevitable spoilage of some portion of the fresh vegetables, and you’re looking at a big bill.

If anything, Pollan’s books might slow up your buying a little, when you realize how long a chain is attached to any purchase decision you make—environmental, taste, time management, employment issues, government price support policy, nutritional bang for your buck.  I don’t have the right answers here, but he’s given me a lot of thought provoking questions.  The most pressing of which, for the moment, is whether I can wrap my mind around ordering a heritage turkey that will cost about what I normally spend on a week’s groceries.

College planning—this year’s version of what we’ve learned

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I’m the sort of person who mulls over mistakes, but it’s mostly to do better next time, or advise other people in a better way. There’s no point in it if it’s just to beat yourself up for something you can no longer fix. In all financial planning, you have to go forward from where you are. However, dear daughter is now a junior, and there’s nothing like continuing first-hand experience.

  1. Order it online. I strongly urge you not to buy a lot of stuff for the dorm room for your child’s first year. Dorm rooms can be shockingly small (maybe smaller than your master bath). Once you see it, you’ll be able to drive to the local Target or Bed, Bath, and Beyond and purchase identical items to what every other parent/child team is purchasing at the same time (wait until you see the lines during move-in week!) However, if you thought the dorm room purchases were then over, well, ha! Ha! Chances are your little darling will discover new stuff he or she needs every year. Do your looking at home, then order online and have it sent. The benefits? You get to curb what your kid is buying, they may deliver it for free (instead of you paying to send it), and in the case of Target they also give you 5% off—and another 5% if you wait for a one-day pharmacy rewards discount pass. Not a plug for Target, it’s just a card we have.
    Yes, I hate paying shipping. Particularly since it’s been 4 times a year—back to school, home for the month at winter break, back after winter break, home again for the summer. Oh wait, there’s that other season: the-stuff-I-forgot-on-the-first-shipment. Then there’s the care package season, the mom-misses-you season, the can’t-find-this-nearby season…
  2. The job on campus is sometimes better than any at home. Dear daughter has had more responsibility and learned more skills with her on-campus jobs than the few crappy jobs she’s landed during the summer. Don’t bank on the summer job—at least for DD, they’ve been really hard to land. And be sure your child looks hard for some good jobs on campus where they might actually learn something.
  3. Think carefully about choosing a school far from where you live. Although DD’s school has been perfect for her in many ways, we both wish she was in driving distance. I’ve blogged before about the cost of transportation and shipping, so I won’t hammer that again. However, even a prominent school’s best network may be in a fairly close radius to campus. Resources for internships, summer jobs, etc. may be best nearby. If your child wants to stay on either coast, that’s fine, but if she wants to return to the Midwest, not so much.
  4. Find a doctor near the school, but make sure they’re in your provider network. The farther away, the less likely your current doctor really knows anyone. Student health services can handle a lot (although they generally won’t bill insurance—have fun) but some events require real medical consultation. I hope you will never confront this, but be sure you understand the benefits available if your child needs emergency treatment or has any sort of psychological crisis. Mental health reimbursement varies greatly.
  5. If your child has the option of taking classes among several different schools, find out how they’ll get there. It’s a trend lately for nearby schools to form consortiums which allows schools to tout 5,000 classes available through our consortium. Okay, this is dumb but be sure to ask what transportation is available. Is there a dedicated van? How often does it run? How long a trip? (really affects scheduling of other classes) How can the student meet with the prof on another campus (particularly those who are, ahem! somewhat cavalier about office hours). If there’s no van and it’s a lab class, it might meet 4 times a week x $8 for the train and it can really add up over a semester.
  6. What will the school do if the student needs a class that’s not offered at the school? Now we know that every single child knows exactly what they will major in and want to do in life at the point where they enter college. And they’ll never, ever change their minds or develop other interests, right? Okay, I have the only one. But let’s say your child discovers that they want to go into a medical field after choosing the school based on the archaeology department. Will the school help your child find an Anatomy Lab? Any extra cost on that one? If you have to pay thousands for them to snag the class over the summer at another school, well, you’re not going to get any financial aid for that one.
    This requires some pretty close scrutiny if it happens. After all, the child who has to take a summer class isn’t going to be earning money, she’s going to be costing more. It’s probably only going to result in “extra credits”, not a reduction in tuition at the primary school. If the primary school arranges the class at a nearby school, check to find out if the academic calendars mesh—we had already booked the return-to-campus flight when we found out the other school started a week earlier.
  7. Make sure your child checks into what other people are giving away. You absolutely cannot believe what kids throw out. DD’s school has a “free box” system at every dorm. I think a kid could make a business selling on eBay what they can scrounge from these boxes. Some of DD’s major finds: bags of unopened pistachios, a new pair of Ugg boots, countless t-shirts and tops, and a $300 pair of Bose noise-cancelling headphones that were still under warranty and which Bose replaced for $97. (Then again, there was the container of Jello shots.) If your child’s school doesn’t have a free box, encourage them to suggest starting one. If you have some means to store the stuff, check out what’s dumped the week before graduation—refrigerators, coffee makers, bookshelves. I’d have a heart attack if I were the parent that paid for this stuff.

We’ve got one more year after this one. I can’t wait to see more surprise costs—I bet they’re still out there.

IRAs, Roths, and the AARP

Three-legged joined stool

One of the benefits of reaching 50 is that you get to join AARP. No, I’m not talking about the endless promos you will then begin to receive for dubious insurance, but their magazine and Bulletin, which offer some of the most sensible consumer financial and health advice around. Even if you’re not over 50, it’s worth taking a look at the September Bulletin’s Retirement Guide, which offers an excellent primer on most of the issues. I do have a few comments on their Step 4: Avoid a Nasty Tax Surprise.

It’s a pretty good discussion of the benefits of choosing a Roth or Roth 401k over contributing to a Traditional IRA or a regular 401k. I heartily agree that retirees can find themselves in quite a predicament when they discover that their required minimum distributions (RMD) from the regular 401k or Trad IRA don’t come free—you’re going to pay ordinary income tax on that, and the RMD even has the possibility to kick you up into a higher tax bracket. So that withdrawal is definitely not going to be all spendable income, ouch.

Honestly, I’ve only recommended a client favor contributing to a Trad IRA once this year. In nearly every other circumstance, the better choice is a Roth (and Roth 401k, if your company offers it). Ask yourself:

  1. Is your income over $60K (single) or $95K (couple)? You’re probably not going to get the deduction anyway. You can contribute to a Roth without phase-out until $114K (single) or $181K (couple). (Regular 401k limits apply to Roth 401ks.)
  2. Do you think taxes are going down? Most people, according to the article, stay in the same tax bracket when they retire. But it’s probably a safe bet that taxes will be higher in 10, 20, or 30 years so you’ll be paying more on that Trad IRA/401k, plus being taxed fully on increases produced by the investment.
  3. Does the deduction really help that much? Here, probably the answer is yes in the 401k and no for the Trad IRA. So split it up.
  4. Could you withdraw money in such a way that in at least some years your taxable income will be low enough so that you won’t pay tax on your Social Security benefits? This is a pretty complex question, so you probably need to give me a call to work through that possibility.
  5. Any chance you won’t need all your possible income at 70, or maybe at all? With no RMD, you can leave that money invested to grow longer, or leave it to your heirs. Or take it all out at once if you need to pay for long-term care, without incurring more income taxes.

Although the article suggests that you should be at least ten years from retirement to select a Roth, I’m not so sure. Some of these reasons make a Roth desirable even for people much closer to retirement, and in the case of some earners, worthwhile because of the income eligibility limits on the Trad IRA. If you didn’t save from your very first job, and are trying to power-save now, a Roth might still be the right answer.

The old concept of the three legged retirement stool is one I love: no matter a little shortfall or instability in one area, the whole can provide a steady seat.

  1. Regular taxable investments—at least right now, tax savvy allocation can produce taxation at the capital gains rate rather than at the usually higher ordinary income rate
  2. Pensions, Social Security, and other guaranteed income, so you have a solid floor.
  3. Retirement funds—nice if you can manipulate them so that they’re all tax-free coming out (pay attention, those not yet old enough to join AARP). Older workers—don’t beat yourself up! Roths have only been available since 1997.

No, you’re probably not going to be able to dodge the tax man entirely, but paying attention to tax requirements and thoughtful asset location can loosen his hoary grip.