The Broken Economics of Long Distance Moving

Picture of packed boxes in the center of an apartment

Jilted by the Long-Distance Mover

At the end of April, I had a chance to take a leadership role with a state-of-the-art automotive infotainment software development project in the Columbus, Ohio area. I jumped at the chance. As soon as the paperwork was confirmed, Tomoko and I stuffed my Chevy Volt with some pots, pans, blankets, and bare basics for an apartment and took off. We drove North to Dallas and then headed Northeast through the wilderness to the Ohio border. Along the way, we encountered some of the most stupendously filthy restrooms on the planet – and I make that comment coming from a wealth of experience of appallingly primitive restrooms in desolate places.

The Nightmare

While we thoroughly enjoyed that delightful adventure, we decided that once in a lifetime was quite sufficient. Tomoko would fly back to Austin and spend about two months planning to move the ship the other car and the rest of our possessions from Austin to our new apartment in Dublin, Ohio. And so she did. Tomoko researched meticulously, and lined everything up around the expiration of our apartment lease on the 29th of June.

Not that it was easy. Her first calls to the major moving companies (Allied, United, Mayflower, et al) were met with the information that these exalted organizations could not be bothered to do businesses with lowly cockroaches like us. If you were not moving a small palace of at least 30,000 square feet of floor space, they did not want to waste time talking with you.

Having been rebuffed by the majors, she continued to dig and identified an outfit called Fine Line Relocation out of Dallas, that as of May 20th seemed to have at least a few happy customers…as well as a few furious and dissatisfied customers. Fine Line quoted us a flat fee of $1400 for the 1244 mile move and collected a $140 deposit with a scheduled pickup date of 6/28/2016 – the day before our scheduled final walkthrough of our apartment. Tomoko began discarding, organizing, and packing. On 6/26/2016 I flew back to Austin to help. We spent all of 6/27/2016 furiously packing…until around 5PM. At 5PM of the afternoon before the scheduled move, Fine Line called: “By the way, we aren’t coming.” After 15 minutes or so of Tomoko trying politely to get some sort of sensible plan out of the Fine Line dispatcher, I got on the phone. I was less polite. The dispatcher did not like that. She transferred us to her supervisor who tried to explain to us that it was our fault. We should simply understand that the trucking industry is just like that. Stuff happens. A heated discussion ensued with him telling me that he was refunding our $140 deposit immediately (which he did) and had no interest in doing business with idiots like us.

Tomoko standing with two movers in front of our storage unit

Tomoko with Corey Washington and Roosevelt of Two Men and a Truck

Very nice. We were stuck without a mover, with a ticking clock, during the craziest, busiest time of year. We tried all sorts of alternatives. Pods and Upack were booked solid until the end of July. Fortunately, we still had Junk Busters scheduled. The local North Austin franchise of Two Men and a Truck scrambled to get us a crew for a local move on 6/29/2016. The apartment agreed to a one-day delay. We shifted strategy. We had Junk Busters haul away almost all of our heavy furniture items. We kept only our dining table and mattress. The extremely effective crew from Two Men and a Truck moved the remaining stuff and help us repack our existing storage unit to get it all stuffed in.

Honda Fit in the middle of Jollyville Rd behind a tractor trailer

Honda Fit Being Loaded

That got us out of our apartment. The remaining problem was getting our car shipped to Ohio. Tomoko had carefully made a reservation with a company called Ship a Car Direct It all looked very clear and official and was arranged for 6/30/2016. On 6/28/2016, having heard nothing further from Ship a Car Direct she called them. They had no idea who was coming or when but told her “not to worry”. Naturally, that information made her worry more. The next day, the information improved somewhat. We were given the name of a company in Ohio that had a truck driving around Texas picking up cars. The truck finally showed up on 7/1/2016 (one day late). The driver was very friendly and polite. However, we had to get a cashiers check for the shipping fee. No credit cards or personal checks accepted.

The Economics

After the Honda Fit was loaded, I received a follow-up call from Two Men and a Truck. I gave their guys a good review and asked about long distance moving. That question led to me being transferred to their local long-distance moving guy who spent quite a bit of time with me explaining the ins and outs of the industry. It goes something like this:

  1. They definitely do provide long distance moving. They will have a crew come pack your belongings, and drive them across the country for you. The same crew will unpack at the destination – which does wonders for accountability, effectiveness, etc… That same crew will then drive the truck back. There are some variations, but this is the basic deluxe plan.
  2. In order to understand the price, we have to understand that there are two seasons: “Summer” and “Not Summer”.
  3. During the Summer season, the company can keep their trucks 100% busy with local moves. During this season, they book each truck for $150/hour perhaps 8 hours per day.
  4. Having a truck drive long distance to deliver a customer’s shipment to a distant state represents an opportunity loss compared to the business that the truck could have been doing in local moves during the trip.
  5. For a 1244 mile move, they would expect:
    • 1 day to pack
    • 2 days to drive
    • 1 day to unpack
    • 2 days to drive the truck back
  6. That makes 6 days.
  7. The opportunity cost of having the truck unavailable for local moves for 6 days is cost = 6 * 8 * 150 = $7200
  8. Add to that the wear-and-tear and gasoline costs of about $1/mile. The total distance is 1244 * 2 = 2488 miles. On the other hand, the truck would have driven a little locally…so add $2400 for the mileage cost for the truck.
  9. Round it out with 5 days of hotel and meal costs for the crew
  10. and you are at $10k

Indeed, this number was in the ballpark quoted by all more serious movers that we contacted, with some wanting as much as $15k. If you move during “Not Summer” the price comes down a little because the opportunity cost is lower. If you are lucky enough that the mover can find another customer to share the truck, and it is during “Not Summer” you might get down into the range of $5k.

So what was going on with Fine Line‘s $1400 price quote? Basically, they are opportunistically hoping to find a truck driving back empty in the correct general direction. Apparently, the industry rule of thumb is that the driver/owner will be happy to have the $1/mile running cost of the truck. Naturally, these empty trucks are very hard to schedule accurately. Basically, the morning before the move, Fine Line sends someone out to stand next to the nearest freeway exit with a cardboard sign reading “LOOKING FOR EMPTY TRUCK HEADED TOWARD OHIO”. As we discovered, this process is really unpredictable. Also, there is no guarantee that the (randomly selected) truck that picks your stuff up will be the same truck that delivers it. Your stuff may get trans-loaded multiple times. It may spend several weeks sitting in someone’s warehouse, next to the bales of cannabis waiting for the next leg transportation.

Apparently, there are also a lot of games with the estimates. One common trick seems to be the seemingly convenient over-the-phone estimate, during which they low ball the weight estimate. Once the truckers pick up your stuff, they take it somewhere and weigh it and discover – Surprise! – your stuff is three times heavier than they had guessed. At that point, they hold your stuff for ransom and triple the price.

What to Do?

At these prices, shipping heavy furniture makes no economic sense at all. Unless you are fabulously wealthy and have exotic antiques, you can definitely buy an entirely new set of furniture for less than it will cost to ship an existing set. The long-distance guy at Two Men and a Truck was laughing a little telling me about customers who wanted him to ship furniture **TO** North Carolina. North Carolina is the furniture manufacturing center of the universe. Shipping heavy furniture across the country into the heart of furniture manufacturing is really silly.

One of the other interesting things we did is stop at the local Fedex Office store and ask about ground shipping rates. A 20lb box from Austin to Dublin, OH would be about $50, depending on shape and a few other things. In other words, the Fedex Ground rate on that route would be roughly $2.50/pound. On the other hand, the “Not Summer” quote we discussed above was about $7000 for about 2000 lbs of stuff – also in the vicinity of $2.50/pound. Hmmm….

The other thing we have noticed is that there seems to be almost no market for used furniture. In theory, one can advertise furniture on Craigslist. In practice, we have had mixed success getting rid of stuff this way, even when we gave it away free. The problem is worse if you are in a second floor apartment. Almost no one on Craigslist will come get heavy furniture from a second floor apartment. Buying furniture is really easy. Getting rid of it is really difficult.

What about renting? 30 years ago when I was single, I rented furniture for an apartment from CORT Furniture Rental for an apartment for a year. It was great. Painless to acquire. Painless to dispose of. CORT is still around. From my preliminary check, I can minimally equip our apartment with the key heavy furniture pieces from CORT for around $200-$300 per month. This is the direction I am headed in currently.

The really problem here is our current wobbly-as-jello economy in which there seems to be no such thing as a “permanent” job. We are now thinking carefully about how to play this game in which the constant turbulence in the economy forces us to move every year. It looks something like this:

  1. Ruthlessly eliminate the last vestiges of paper-based anything. We just closed our safe deposit box. We will be moving our wills to a cloud-based specialty service soon.
  2. Rent any piece of furniture heavier than 20 lbs. The rental service delivers and installs it. When it is time to move to the next spot, the rental service comes and takes it away.
  3. Buy smaller furniture pieces locally, as cheaply as possible. Walmart has amazing stuff in this category. I just purchased two very nice LED desk lamps for $7 each at Walmart.
  4. Rent a storage locker somewhere and never move it. This becomes your “home”. Ship precious memory stuff to that locker and keep it there. At the start of each temporary assignment, select a few small sentimental items from the museum (your storage locker) and ship them UPS or Fedex to the new apartment to enjoy and give a little warmth to the environment.
  5. Move things like clothing around in 20lb boxes. Ship them by UPS, Fedex, or USPS. The cost is about the same as the moving company would charge and you will have full electronic tracking and better control of delivery.
  6. Ship cars, but be prepared to have a several day window in which they get picked up. Rent cars while permanent cars are being transported.
  7. Make judicious use of the two luggage pieces that most airlines will allow for a reasonable baggage fee.

Overall, the challenge here is to simply have a lot less stuff. That is, we have to get used to having a lot less stuff until the miracle occurs in which we end up with the $4m or so currently needed to be basically financially independent in the United States. Until that time, we have to be on a very agile footing and ready to move at a moment’s notice.

Funding Your Company

The Myth of the Self-Directed IRA

Funding Your Company

You resigned from the big company. You spent a few weeks relaxing. You unscrambled the insurance mess. Now you are ready to start your own company!

Of course there are many models of funding a venture with other people’s money.  You can find angel investors. You can look into small business loans. However, each of these approaches leaves you working for somebody else. If possible, it is much cleaner to fund the business with your own assets.

However, if you have spent most of your career working for a large company, chances are good that most of your liquid assets are tied up in IRAs and 401K accounts.  These have a complicated set of rules about withdrawals and taxes. What is the best way to move the money out of those accounts and into your new business?

As you start to scratch your head and think about that problem, you hear a noise: “Poof!” There is a bright flash, and a salesman is standing in front of you telling you all about the wonders of the “Self-Directed IRA”.  What exactly is he talking about?

Legitimate Self-Directed IRAs

Some people simply don’t trust the people on Wall Street. These consumers resent being forced to let some guy on Wall Street pick the stocks that their retirement fund will invest in. They feel that they can do a better job of identifying promising stocks than the guys on Wall Street. Self-Directed IRAs provide a legitimate and legal avenue for such consumers to have more of a say in how their retirement funds are being invested.

To address the needs of such consumers, financial institutions like Merrill Lynch provide a fiduciary service. Just as with a normal IRA, the fiduciary still holds the investment assets such as stocks, bonds or real-estate titles on behalf of the consumer. The consumer, however, gets to direct the fiduciary in selecting which assets to invest in.

Not surprisingly, without some strict legal limitations, such an arrangement could easily be abused. For example, I could direct the fiduciary running my retirement fund to invest in real estate by purchasing my home. Such a maneuver would be little else than a tax cheat. I would be abusing a law intended to incent people to save for retirement. Instead of saving for retirement, I would simply be avoiding paying tax on the portion of my salary needed to buy my home.

In order to prevent such abuse, the law has numerous arms-length restrictions concerning “prohibited transactions” and “prohibited persons”. If your Self-Directed IRA violates one of these restrictions the IRS can simply declare your entire Self-Directed IRA to be a taxable distribution and make you pay the 10% penalty and outstanding federal tax on all of it.

The Business Funding Grey Area

Not surprisingly, there are any number of individuals and businesses that chafe at the restrictions, even though the restrictions clearly support the intent of the law. Following a single court case in which the plaintiff Swanson managed to win a judgement against the IRS, a small industry has sprung up around using Self-Directed IRAs to fund your own business. Companies dealing in this sort of Self-Directed IRA typically have a sales pitch that includes a diagram that looks something like this:

Avoiding the 10% tax penalty

Typical Self Directed IRA Business Funding Concept

 

The general idea is as follows:

  1. The financial service company creates a new company on your behalf. This new company is probably a normal C-Corporation. S-Corporations and most LLCs will be too closely associated with you to pass the IRS requirements.
  2. The financial services company creates a Self-Directed IRA for you.
  3. The Self-Directed IRA buys stock in the new C-Corporation as an investment.
  4. The new C-Corporation hires you and pays you a salary.

The financial services companies claim that this sort of arrangement is acceptable and point to the single court case as proof. In the specific court case, an individual won a judgement against the IRS after the IRS pursued him over an arrangement somewhat like the one described above.  However, this legal implications of the actual case are controversial. See the Swanson Decision. It certainly doesn’t look like a closed topic to me. On the contrary, it looks like this sort of maneuver is simply asking to be the next test case for the IRS legal steamroller. My preference is to focus my energy on building my business, not on picking a fight with the IRS.

Taking a Closer Look at the Costs

Even if you accept that such arrangements are legal, the financial results are not necessarily as attractive as one might think.  In my case, almost all of the cost of running my business for the next year will simply be the need to cover my own living and household expenses.

Let us assume for the moment, that my household and living expenses for the moment will be $75,000. How much money will I need to withdraw from my 401K account in order to have that much money available after all taxes and other expenses?  I have prepared a side-by-side comparison below:

The Self Directed IRA is Actually More Expensive

Model of How Much You Would Need to Withdraw to Have $75k of Cash

The money that routes through the Self-Directed IRA and the C-Corporation is subject to Social Security and Medicare taxes. These total 13.3% for 2011 and will total 15.3% for other years. The money which simply comes out of the 401K fund and goes into my bank account is subject to a 10% penalty. In either case, I end up paying income tax on the money. As shown above, simply paying the penalty ends up being slightly cheaper and you and up with a less cumbersome business structure as well.

On the other hand, if you have a significant need to fund non-salary business expenses, the picture looks a little different. Let us assume that in addition to the $75,000 of cash you need for living expenses, you also need $100,000 of non-salary business expense money as well. A common example would be the fit up of a new fast food franchise restaurant. The revised calculation looks like this:

Significant business expenses make the Self-Directed concept more attractive

Model of How Much You Withdraw With Business Expenses

Clearly, the Self-Directed IRA approach looks more attractive in this case. If you have such a need, you might want to consider risking a battle with the IRS and go ahead and use one of these service companies.

I do not have such a need and it makes neither financial nor legal sense to risk battling with the IRS. I will simply do things the old-fashioned way: withdraw the money, pay the penalty, pay the taxes, and start my business.

Glossary for Overseas Readers

  • IRS – Internal Revenue Service. This is the department of the United States government that collects taxes.
  • IRA – Individual Retirement Account. This is a type of savings account that allows taxes on interest and capital gains to be deferred until the owner of the account retires. There are a number of rules surrounding such accounts including a 10% penalty for withdrawing funds before you reach retirement age.
  • 401K – A retirement fund similar to an IRA except that it is setup by your employer and your employer is allowed to match your contributions to the fund.

The Price of Your Seat on the Planet

How much insurance does a middle-aged couple need to buy?

The Price of Your Seat on the Planet

Some societies have a strong social consensus that everyone will take care of each other. The United States is not one of these societies. No, we are all rugged individualists, each out on the frontier with his six-shooter and axe, hewing an independent living from the wilderness. Or something. Problems? The free market solves all problems!

While I am a big enthusiast of the free market, some problems – like needing extended care in a skilled nursing facility – are not easily solvable with a six-shooter and an axe. For these problems we need to purchase insurance. The key question is: how many different kinds of insurance does it take to patch together a reasonable semblance of the missing social consensus and how much will these different insurance policies cost?

First a Word About What Insurance is and Is Not

The original concept of insurance was brilliant: identify a problem with low probability of occurrence, but with devastating impact to an individual, pool resources over a large number of individuals and cut the financial impact of the problem down to a manageable size for any one individual.

Unfortunately, over time the American public has lost site of the original concept and in many cases come to think of insurance as something that is “free” and “pays for everything”.  For example, I would love to have “Martini Insurance” just in case I happen to feel the urgent need for a martini on any given Saturday evening. Unfortunately, this sort of product would be financially ridiculous. Putting an insurance company between me and my Martini would only add lots of paperwork and drive up the cost of the Martini.

Curiously, we also have financial products that actually are insurance being marketed as something other than insurance. The best example of such a product are the so-called “extended service agreements” that major electronics retailers offer for product such as televisions, vacuum cleaners and stereos. These retailers have absolutely no intention of “servicing” your product. If you show up with a broken television, it goes directly into the trash bin and they provide you with a new television. This sort of service agreement is actually simply a product failure insurance policy based on a straight actuarial risk calculation.

Insuring the Middle of the Risk Probability Curve

Reasonable risk reduction for a reasonable price.

The Personal Insurance Sweet Spot

With this clarification of the purpose in mind, we set out to identify useful insurance policies that protect against devastating financial impact for relatively unlikely occurrences. However, we also need to recognize that we don’t want to spend either the time or the money chasing the most obscure risks to the far corners of the planet.

Examining the diagram to the right, we don’t want to try to use insurance to cover risks on the left side of the chart that are almost certain to occur. For these cases, we will either want to simply pay the costs as they come up or perhaps look for some sort of bulk purchase agreement or discount payment plan.

Likewise, we don’t want to try too hard to cover risks on the right hand of the chart that are extremely unlikely to occur. Generally we can identify such risks by noting which risks the insurance companies refuse to cover with normal consumer insurance policies. I think that the reasons that insurance companies avoid covering these risks (acts of war for example) are many:

  1. It is very hard for them to make a reasonable actuarial estimate of what the actual risk is.
  2. The number of clients who would pay for the coverage is small.
  3. If the event happens (war for example) both the clients and the insurance company would have so many bigger problems that the insurance policy would become irrelevant or meaningless.

Note that these “mega risks” represent a definite hole in the “free market solves all problems” theory. One one of these huge problems occurs (The present Japan earthquake,  tsunami, and nuclear disaster is a good example) there is simply no choice but for the rest of society to pitch in and try to help the people affected

The Different Flavors of Insurance Required

Part of the “stepping off the cliff” problem is that several of the risks that we need to consider (disability for example) are typically covered by the large employer and the employee may not even be aware of the coverage.

As you step off the cliff, you really need to take a fresh look at the entire problem. I have just completed such a fresh-look audit. Here is a list of the types of insurance that seem to be needed and my recent experience with either confirming the coverage or buying new coverage.

1 – Medical
Medical insurance is the biggest problem. Health care is the one risk for which it is not unusual for individual impact to quickly reach into the hundreds of thousands of dollars. Even though I am personally very interested in the subject, I am not going to attempt here to discuss the current U.S. healthcare mess in general. I am likewise not going to delve into the merits and weaknesses of Democratic and Republican party thinking on the matter. For those who are interested in a fascinating comparison of how all the major countries in the world are grappling with this problem, I recommend the highly engaging and readable book  The Healing of America by T.R. Reid.

Following the philosophy outlined above, I went looking for a “High Deductible HSA Policy”. The policy we selected assumes that we cover the first $11,900 of family medical expenses. After that, the policy pretty much covers everything else. (There is a higher deductible if you use out-of-network physicians or facilities). The policy is compatible with the use of a Health Savings Account but does not require you to use one. The monthly cost for a middle-aged couple in good, but not perfect health is just under $400 – not too bad.

I also confirmed that our existing family doctor (who we absolutely love!)  is a registered provider for this plan. In fact, when I was comparing plans, I figured out that he is a registered provider for every plan known to man, which simply reflects his strong commitment to family medicine and providing excellent service and value to real world patients.

2 – Dental
Dental Insurance is one of the misnomers mentioned above. Really, such policies are a dental services payment plan with a group discount. In fact, the plan we selected is formally called “Dental HMO Payment Plan”. We considered not purchasing anything at all, but observed that the list price of the dental services we had been receiving has averaged $1,000-$2,000 per year for the last several years.  The DMHO price was $29 per month for two of us and should at least put a significant dent in this amount.

3 – Long Term Care
What if you end up in a nursing home? Opps! Did we forget to mention that health insurance doesn’t cover nursing care? Nursing home care is quite expensive. One web site I visited while doing this research quoted an average figure of $78,000 per year.

Actually, we have been paying for Long Term Care Insurance since 1990. I went back and looked at my records and massaged the numbers a bit to correct inflation out of the numbers. The figure below shows what you can expect to pay in constant dollars for the coverage shown.

Inflation Adjusted Monthly Price of Long Term Care Insurance

Interestingly, coverage for women is more expensive than coverage for men. It starts out 35-40% more expensive and the price climbs more rapidly with age. My guess is that this price difference reflects an actuarial reality wherein men either never make it to the nursing home in the first place or die more rapidly once they get there. Women are survivors; it seems they can last indefinitely in a nursing home.

I should also mention that long term care is one of the areas in which the industry excludes part of the statistical right hand long tail. Coverage is limited to five years. My wife and I discussed this limit and decided that the risk of living in a nursing home for more than five years was small enough that we would live with it.

4 – Disability
What if you are rendered completely unable to work? One family in our circle of close friends suffered the tragedy of the father being afflicted with Huntington’s Disease a genetic neural disorder. A highly skilled semiconductor design engineer, he was rendered completely incapable of working in his mid 40s.  It can happen to anyone. While medical and long term care insurance may take care of the medical costs, who is going to replace the lost income for the rest of the family?  Disability Insurance covers this sort of risk.

Purchasing such insurance is not cheap. For me, the price seems to be about $2600 per year.

5 – Catastrophic Disability
One might think that purchasing Disability Insurance would cover the problem. Unfortunately, there is some additional complexity to disability insurance. It appears that the maximum coverage limits are tied to government limits for Worker’s Compensation plans. The maximum available benefit is $6500 per month.  This number probably has not been updated in 30-40 years or more.

Unfortunately, $6500 per month is no longer the enormous number it was 40 years ago. Your existing household expenses may be greater than this number. Furthermore, if you are disabled, you may incur new expenses for things such as professional lawn mowing or other services that you are no longer physically able to handle.

Catastrophic Disability insurance covers the gap between Worker’s Compensation or Regular Disability insurance and reality. Fortunately, the extra coverage is quite inexpensive. In my case, the additional coverage only costs around $160 per year.

6 – Life
What if I die? Who is going to take care of my spouse?

Many major employers provide life insurance as a fringe benefit. When you are young and have children, the general recommendation is to purchase additional term life insurance so that the combination of the extra insurance and your employer’s plan is enough to take care of your children’s education through college and your spouse’s living expenses forever.

When you are young, it also may make some sense to carry some additional life insurance for a full-time homemaker spouse. If that spouse dies and leaves you with three small children, not only are you going to be emotionally devastated, you are also going to have some significant financial impacts as you scramble to replace that spouse with purchased services such as day care, house cleaning, counseling, concierge services and so on.

Life Insurance companies tend to want to sell fancy policies that offer complex savings benefits. These are not recommended by most financial analysts. You are better off investing in a low-fee mutual fund for savings and buying only the risk insurance from the insurance company. This sort of “risk only” policy is known as term insurance.

In our case, we had several term insurance policies in addition to the life insurance provided by my former employer.  We also carried some insurance on my wife Tomoko. For this review, we sat down and discussed the contingency plans. Our children are all grown and pretty much set in terms of education. We discussed and decided as follows:

  • If I die, Tomoko will wrap up affairs, sell the house, and return to Japan. She is still a Japanese citizen and Japan is one of those countries that has a strong take-care-of-each-other social consensus. We decided to retain the cheapest ($810k) policy on my life and cancel the others.
  • If Tomoko dies, I will be emotionally crushed, but the financial impact will no longer be significant. We agreed to cancel the term insurance on her life.

That remaining term insurance costs $1,150 per year.

7 – Auto Regular
We have two cars that we purchased new in the Summer of 2001 when we returned from our last assignment in Japan. We have a fairly high deductible ($500) with high liability limits which in turn connect to an umbrella liability policy (See item 12 below) to provide even more coverage. The cost of covering these two cars for Tomoko and me is $1,665 per year.

8 – Auto Uninsured Motorist
This insurance is actually rolled into the auto insurance mentioned in item 7 above. However, I have broken it out for the moment because the philosophical implications are interesting. As mentioned at the beginning of this post, we have little or no social consensus that we will take care of each other when bad things happen. That is why we have to purchase so many different kinds of insurance. Interestingly, however, the government requires us to purchase insurance to cover the risk that some other moron causes an accident and also is breaking the law by not carrying his own insurance. This insurance is not optional and it costs us an additional $302 per year.

9 – Home Owner’s
The Texas basic form HOA home owner’s insurance is very good. The policy is written in clear, easy to understand language and there are very few things that it doesn’t cover in terms of potential damage to your house. We pay $959 per year for home owner’s insurance.

10 – Flood
Flood damage is one of the few risks excluded from the basic home owner’s insurance policy. We pay $284 per year for flood insurance.

11 – Earthquake
Earthquakes are not covered by the Texas home owner’s insurance policy and apparently the state of Texas does not allow anyone to sell earthquake insurance in Texas. The legislators in Austin sat around the campfire one night playing harmonicas and roasting marshmallows. One of them stuck a toothpick in his teeth and asked if any of the others could remember an earthquake happening in Texas and none of them could rightly remember any such thing. The issue was settled; they decided that earthquakes did not exist and forbid anyone from selling insurance policies to cover them.

All of which is fascinating, because the tour guide at Inner Space Caverns in Georgetown just North of Austin spends considerable time showing the earthquake fault in the strata in the rock and discussing the effects of the last one to hit the area.

Oh well, I guess we just have to trust the cowpokes, I mean “legislators” in Austin and hope that earthquakes in Texas really are legitimately are part of that right hand tail of very low risk events mentioned above.

Needless to say, if you live anywhere on the West Coast of the U.S. or in Japan, earthquake insurance needs to be a key item in your insurance portfolio.

12 – Umbrella Liability
The umbrella liability policy rides on top of your home owner’s and auto insurance policies and extends their coverage limits to several million dollars. The umbrella policy also covers problems like a neighborhood child wandering onto your property unsupervised and hurting themselves.

Some other societies would probably consider that the fault was with the parents who did not supervise their child. In the U.S., however, the property owner can be held responsible and the umbrella insurance policy protects you from such claims.

Summary of the Costs

Putting it all together, the picture looks like this:

How much does a middle-aged couple need to spend?

Overview of Personal Insurance Costs

We need to spend just under $14,000 per year to cobble together a semblance of a replacement for the missing societal consensus to take care of each other.

As mentioned above, we are also covering a portion of the risk ourselves. Adding up the deductibles gives something that mathematicians would describe as a measure of the magnitude of the problem. However, the specific number $17,850 shown about does not imply much more than this measure of the scale of the problem. The health insurance is a maximum per year. The other deductibles, however, tend to be a maximum per event. It is possible to have multiple events in a single year.

The other thing I have calculated is how much income you need to bring in as a self-employed entrepreneur to have enough cash available after taxes to cover the $14,000 of insurance. As an entrepreneur you have to pay a 15.3% self-employment tax. (There is a slight discount for 2011 only which I have ignored since it is temporary).  Insurance is also not the only thing you need to provide for. Therefore, I have assumed that overall you are in at least the 25% marginal federal tax bracket. From these assumptions we can calculate that you need to produce about $23,500 of income just to cover the price of your seat on the planet.