Are the Obamas Financially Savvy?

June 21, 2016

 

The Obamas have chosen to stay in Washington, DC after Mr. President leaves office. They will reportedly stay in the upscale Kalorama neighborhood, renting a 9-bedroom home at $22,000 per month!

 

How smart is President Obama and first lady Michelle Obama when it comes to their own money? Let’s take a look.

 

According to their 2014 Public Financial Disclosure Report, they hold assets totaling somewhere between $1.9 million and $6.9 million, comprised of:

  • $52,000 to $130,000 in cash (checking & savings accounts)

  • $1,000 to $15,000 in a universal life insurance

  • $200,000 to $400,000 in college funds for Sasha/Malia (via Illinois’ 529 Plan)

  • $1.6 million to $6.3 million in retirement savings.

The Obamas have an outstanding 30-year fixed mortgage (5.625% interest rate, since 2005) ranging from $500,000 to a million.

 

Observations

 

1)     Their emergency fund is low. They have about $50,000 to $100,000 in cash, which is likely only about 1-2 months’ worth of their expenses. After November 2016, their monthly expenses may be close to $50,000 per month ($22,000 to rent the DC Kalorama mansion, $4,000 mortgage, $3,333 Sasha’s Sidwell tuition, and $15,000 in travel and living expenses).

 

However, they may not need that much emergency money, since Obama need not fear of becoming unemployed. Former U.S. presidents get a pension of about $200,000 a year!

 

2)     Their retirement funds are too conservative. Over 85% of their retirement savings are in very conservative investments – U.S. Treasury Bills and Notes, earning them less than 2% a year. I can think of five reasons on why this is so:

 

a.     They anticipate a huge stock market crash. Unlikely. Obama is not a pessimist.

 

b.     They are trying to avoid an appearance of conflict of interest, if they invest in stocks. Also unlikely, since they own funds that are invested in 500 U.S. stocks.

 

c.      They are risk-averse. Maybe?

 

d.     They believe their retirement income is already secure, and thus do not see the need to take risk. Possibly, given President Obama’s $200,000 pension, and anticipated royalties and speaking fees. Michelle Obama has a high earnings potential – she made more than $300,000 in 2005 handling community affairs for the University of Chicago Medical Center.

 

e.     They do not have a financial planner. Mr. President, our firm offers a free initial consultation!

 

3)     They chose stock funds that have ultra-low fees. Smart! Close to 15% of their retirement funds are invested in Vanguard index funds that track the performance of the S&P 500 (large U.S. companies). And the fees are only 0.04%, about 18x cheaper than a typical U.S. stock fund. Less fees mean more return for the Obamas. As John Oliver artfully said in his recent retirement planning segment, “Think of fees like termites – they’re tiny, they’re barely noticeable, and they can eat away your ******* future.”

 

4)     College savings for Sasha & Malia are too aggressive. Half are still in more volatile stocks, but Sasha is only a few years away college. Malia is going next year.

 

Four Recommendations

 

Mr. President and Madam First Lady, I suggest making these four changes to your portfolio. These should help reduce risk, increase your potential return, and generate savings for your family.

 

1)     Add international stock funds in your retirement portfolio. I applaud your belief in the U.S. economy. I too am optimistic. But international stocks (especially emerging markets) are currently poised to grow more over the long-term.

 

2)     Diversify into other types of investments, such as emerging market debt and high yield bonds, which can give you a 6-10% yield even if the markets remain flat for the next years.

 

3)     Switch to 100% bonds in your 529 college savings. You will soon need to withdraw these, when Sasha and Malia go to college. It is best to lock in your gains, and place them in a safer instrument.

 

4)     Refinance your mortgage into a 15-year fixed loan. You can potentially save more than $100,000 in lower interest payments!

 

In summary, President Obama and first lady Michelle Obama’s finances are in pretty good shape. I’m impressed by the amount of savings they have set aside for their future, and their knowledge of low-cost investing. But if they follow our four recommendations above, they’ll be in better shape!

 

Above photo "MG_0727" by David is licensed under CC By 2.0

 

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